Monday 20 May 2019

Hope will turn to anger as reality of our spending power hits home

New EU rules will limit how much the next Government can spend - it's a lot less than we think

Why the long face: If Michael Noonan believes his own spin then there's little for the finance minister or his government colleagues to worry about Photo Steve Humphreys
Why the long face: If Michael Noonan believes his own spin then there's little for the finance minister or his government colleagues to worry about Photo Steve Humphreys
Dan O'Brien

Dan O'Brien

Government coffers are not swelling by as much as the spin would have you believe. Most politicians appear unaware of how limited they will be in the future to spend more money. These two points were driven home forcefully over the past week.

Let's start with the gushing talk about cash pouring into the vaults of the Department of Finance.

In the early days of every month, the department publishes the "exchequer returns", often to great fanfare. When the latest returns came out at the beginning of the month, you might have been forgiven for believing that all our fiscal problems had been solved, such was the upbeat reaction of ministers and many commentators.

Alas, these 'exchequer' figures are rubbish. On the spending side they are utterly worthless, telling very little about what is really going on across the public sector. They are, ironically, compiled in such an archaic accounting manner that if a private company filed its tax returns in the same way, the Revenue Commissioners would not accept them.

The income side is a bit better. It gives details of the tax revenues that the Department of Finance receives. But because billions of euro in revenues (both tax and non-tax) raised by the State do not go to the exchequer, the figures only give a partial picture of what is coming in (the PRSI that is taken out of pay packets every month, for instance, flows to the Department of Social Protection on the north side of the Liffey, not the Department of Finance in the leafier environs of Dublin's southside).

So why does the Government still publish these nearly useless numbers? The answer seems to be inertia, as it so often is in matters of governance in Ireland.

When this columnist first attended a briefing by bureaucrats on the exchequer returns half a decade ago, I asked when the department first started publishing the figures. Nobody knew the answer, and that is because generations of mandarins in Merrion St have simply continued doing what has always been done.

They are, to be fair, producing better sets of figures. But ministers and we in the media focus on the old, clapped-out exchequer numbers, which, rather than improve public understanding of the budgetary position, actually confuses it. As such, it would be a good day's work if officialdom simply stopped publishing them and started emphasising the better sets of budgetary figures that are available.

On Tuesday, just such a set of rigorously compiled numbers was published by the State's statisticians. They showed that in the first nine months of last year, the total revenue of the State was up 4pc on the same period in the previous year. That was far below the 9.5pc the much narrower exchequer tax revenue figures showed.

An increase of 4pc is not a stellar rate of growth for an economy that is supposedly expanding more rapidly than any other in the developed world, and is far below the rates of increase recorded in the decade before the crash. Moreover, the trend has not been upwards, but downwards. Over the seven quarters to the third quarter of last year, revenue growth actually slowed.

As if that was not enough to put a dampener on things, consider that more than half of the 4pc increase in total government revenue came from a mysterious surge in taxes paid by companies on their profits. The eye-catching jump in corporation tax revenue will be sustained only if profits remain at levels that warm the cockles of capitalists' hearts. The Government feels confident that they will. Others are more sceptical. Just last week, the European Commission said this in its latest extensive report on the economy: "Whilst the Irish authorities are of the view that the extra revenues are sustainable, the specific factors underlying the strong corporate tax revenue performance in 2015 still need to be clarified."

Only a few short years ago, revenues that the previous government so confidently predicted were sustainable disappeared in a puff of smoke. Lessons don't seem to have been learnt, and all parties are again making spending commitments on the basis of uncertain sources of revenue.

If the state of public finances in the recent past has been subject to premature celebration, issues around future budgetary constraints appear to be as poorly understood. It is not at all clear that the political class in general has fully digested one of the most important aspects of the many new budget rules that have been introduced for eurozone countries in the wake of the Greek fiasco (the new rules are, in fairness, hideously complicated).

Probably the most relevant new rule for politicians whose instinct is to splurge is called the "expenditure benchmark". While it is unlikely to be much mentioned during the election campaign, it will become frequently used in political discourse in the years ahead.

The expenditure benchmark kicks in this year for the first time. In essence, it places severe and unprecedented constraints on how much governments can increase spending. And that is the case no matter how much revenue gushes into the public coffers. It eases somewhat when government debt is low, but because Ireland's public debt will be high for the foreseeable future, the expenditure benchmark will severely constrain whoever is in power for years ahead.

The Irish Fiscal Advisory Council has put some hard numbers on this. The watchdog estimates that increases in total government spending in cash terms will be limited to a mere 2pc annually over the remainder of the decade. If a government allows spending to overshoot those rates, it will find itself in conflict with Brussels.

And to see how low those increases are, one need only consider that in the run-up to the 2002 election - the most egregious example of a government trying to buy off the electorate in recent times - spending growth peaked at 20pc, or 10 times that which will be permitted in 2017, 2018 and 2019.

Because of the Greek fiasco, which came about because governments in Athens found ways of getting around the old rules, the new rules are much tighter and more comprehensive. For instance, they insist that additional revenues which arise owing to any kind of windfall be used to cut debt and it is set in stone that the only way spending growth can exceed the very low benchmark level is if new taxes are imposed to cover all of the additional costs.

So, and in a nutshell, even if the Irish economy had a period of explosive growth similar to the 1995-2000 (real) Celtic Tiger period, spending growth will still have to be kept below 2pc annually unless taxes are hiked.

As the election comes closer, politicians aren't talking much about the expenditure benchmark or about debt and deficit reduction. On the contrary, given the way that they are busily engaged in old-style auction politics, one wonders if they are very much aware of it at all.

Perhaps many of the promises that are currently being made are kites being flown - a way to test the market before firm manifesto commitments are made. That is the optimistic interpretation. A more negative interpretation is that this election will be like most before it, with the sun, moon and stars being promised.

If that is the case and voters' expectations soar, there will be a great deal of anger in the coming years when the harsh new realities become clearer.

Sunday Independent

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