Sunday 16 June 2019

Shane Coleman: We've travelled down this dangerous road before - and it didn't have a happy ending

Finance Minister Charlie McCreevy with his ‘giveaway’ budget in 2001. Photo: Ferran Peredes
Finance Minister Charlie McCreevy with his ‘giveaway’ budget in 2001. Photo: Ferran Peredes

Shane Coleman

What's so different about yesterday's Budget and the ones introduced by Charlie McCreevy during the boom years?

Fine Gael never misses an opportunity to tell us if it had been in power back then, things would have been very different. The party's innate probity and responsibility would have ensured a much more measured budgetary approach than the reckless and dangerous policies of Fianna Fáil.

The past couple of Budgets have surely stripped such claims of any credibility.

Last year, the Government found a few hundred million stuffed down the back of the couch in the Department of Finance to bypass the EU fiscal rules. And yesterday's version was straight from the McCreevy mantra: "When I have it, I spend it."

OK, the scale is more modest. Increases in current spending are far less than they were during the Celtic Tiger; it's 'only' a €1.2bn giveaway, tempered by tax-raising measures elsewhere. But, let's be honest, that's only because the Government had to. The fiscal rules required we had to take from Peter to pay Paul. But Paschal Donohoe pushed the envelope as far as he possibly could in that regard.

One of the big lessons of the 2008 crash, supposedly, was the importance of so-called counter-cyclical budgetary policy.

In Scandinavia, when the economy is growing strongly, governments run budget surpluses of up to 5pc of GDP. That not only draws some of the heat from the economy, it allows them to build up resources to help fire the economy when it's slowing down. It's a prudent and sensible approach - the exact opposite of "when I have it, I spend it".

We've never done that here. We spend big during boomtime and cut big during recession, thereby exacerbating the economic cycle on the way up and on the way down.

Despite promises to steer the country away from the continuous boom-bust cycle, that's what the Finance Minister did again yesterday.

We've the strongest-growing economy in Europe. And the coalition - backed by Fianna Fáil it should be said - further pump-primed the economy by as much as it could get away with.

For that, it's only right it be judged in the same way as McCreevy and Brian Cowen were for their Budgets - Budgets that hindsight has shown to be irresponsible.

On some level, what has happened is understandable. After the austerity years, the pressure to 'reverse the cuts'/'splash the cash' was enormous.

In Ireland, budgets are rated almost exclusively on how much they increase the punter's take-home pay. Unfortunately, sound economic and financial management are, at very best, secondary considerations.

The crash was supposed to change all that. But yesterday, electoral politics, yet again, triumphed over sound economics.

Fine Gael, we can now say with certainty, is no better than Fianna Fáil when it comes to withstanding such pressures.

All the boxes - tax cuts, USC reductions, welfare increases, pensioners, childcare, extra gardaí, more health spending - were ticked, just like in the good old days.

Which begs the question: if Fine Gael could not resist such pressures - with the Celtic Tiger mistakes still fresh in the memory - how can it plausibly claim it would have done so back in the early noughties, when it was still possible to believe in economic miracles?

The worry is that there is far bigger spending to come. The highly complex EU fiscal rules limited the Government's room for manoeuvre this year somewhat. But with the budget finally in balance next year, those rules become significantly less tight.

Experts reckon the 'fiscal space' in next year's Budget will be somewhere between €2bn and €3bn, up to nine times this year's. If the Government is still in office then the pressure to "give something back" to voters in advance of a likely election in 2019 will be almost impossible to resist.

Certainly, the last two Budgets offer zero hope the Government will be able to do so. Given the huge momentum in the economy, if even half that fiscal space is used - say €1.5bn - there is a very real potential for significant overheating.

If you think that unnecessarily alarmist, just consider for a moment where the economy is at right now.

We're close to full employment. Interest rates are lower than they would be if they were being set in Ireland. We're embarking on a massive house-building programme.

That programme is absolutely necessary but, given the investment required and how labour-intensive it'll be, it will seriously fuel an economy already running close to capacity.

In these circumstances, and armed with the benefit of hindsight from the economic crash, the Government needs to be taking money out of the economy, not adding it.

It's incredible that just a decade after that crash devastated our nation, we could even be talking about facing into such risks again.

The Taoiseach, Leo Varadkar, has sought to present this year's Budget as prudent. Perhaps, as he claimed, there weren't "fireworks" or a "big bonanza".

But that's only because of the fiscal rules, rules that will be considerably less stringent next year.

Varadkar portrayed the Budget as a 'small, sustainable step' in the right direction. Next year will tell us for sure, but right now the signs are that we're already well along a dangerous road we travelled once before.

That time it was in blissful ignorance. This time nobody can say they weren't warned.

Shane Coleman presents 'Newstalk Breakfast' weekdays from 7am

Irish Independent

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