Tuesday 16 July 2019

Colm McCarthy: 'Finance watchdog pulls no punches: Paschal's forecast simply 'not credible''

The Government has been accused of fiscal irresponsibility by its own advisers, writes Colm McCarthy

Little leeway: Minister for Finance and Public Expenditure Paschal Donohoe speaking on the IFAC Fiscal Assesment Report last Tuesday. Photo: Gareth Chaney
Little leeway: Minister for Finance and Public Expenditure Paschal Donohoe speaking on the IFAC Fiscal Assesment Report last Tuesday. Photo: Gareth Chaney

Last week's report from the Government's fiscal advisory council is devastating. They have accused the Government, and not even obliquely, of fiscal irresponsibility. Each EU member state is nowadays required to maintain an independent body of experts to pronounce from time to time on the conduct of budgetary policy. The Irish Government's council, IFAC, is headed by Seamus Coffey from the economics department at University College Cork and he has not been pulling his punches in broadcast appearances over recent days.

The report describes the Government's budget forecasts, in simple English, as 'not credible', coincidentally the same phrase used by the Department of Public Expenditure about a cost-benefit study from the consultants PwC on the €3bn broadband plan. The Cabinet chose, in an unprecedented move, to endorse publicly the PwC cost-benefit study over the explicit contrary advice of their in-house experts.

The strictures from the fiscal advisory council follow a series of expansionary budgets back to 2016, as well as the huge cost over-run on the National Children's Hospital and the six-fold increase in the cost of the broadband scheme. Coffey and his colleagues on the fiscal council believe the Irish Government should have been running small budget surpluses since the economic recovery became established, commencing the task of reducing the €205bn Exchequer debt to safer levels.

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In this they have echoed the views expressed repeatedly for several years by the current and former governors of the Central Bank, the Economic and Social Research Institute, the OECD think-tank in Paris, the International Monetary Fund and various other economists and commentators.

The 173-page IFAC report goes beyond exhortation. It documents the pattern of within-the-year overshoots in current spending which have been occurring, most notably in the department of health, for several years past. The amounts spent have exceeded what had been budgeted and approved by Dail Eireann and were covered by supplementary estimates after the event, and despite increased initial allocations solemnly agreed by the legislature.

Last year the overshoots were offset by an unexpected windfall of extra corporation tax receipts, permitting the Government to announce that budget balance had been achieved after 11 straight years of heavy deficits. It was achieved by accident, not firm policy, and IFAC are nervous that corporation tax is a volatile revenue source which cannot be relied on to finance ongoing expenditure. Ireland's low corporate tax regime is also under threat from international demands for harmonisation.

IFAC list other reasons to be nervous. The Irish economy has seen six successive years of economic recovery. Unemployment has fallen from 16pc to the most recent CSO figure of just 4.4pc. Economic recoveries come to a natural end - you can only recover once and the spare capacity in Ireland, especially in the labour force, has thankfully been used up. The international outlook is clouded with continued sluggish performance in Europe and Donald Trump has embarked on a trade war with China. He has also been picking on other rising superpowers which threaten America - Mexico and Canada, would you believe, and has threatened a trade spat with the European Union. Should there be trade disruption between the USA and the EU, Ireland is exposed more than any other EU member, both directly through export dependence and indirectly through the dominance of US firms in inward investment.

Then there is Brexit. The leading candidates for the Tory leadership have been competing to demonstrate their fearlessness in the face of a no-deal crash-out. The likely winner, Boris Johnson, bears a heavy personal responsibility for propagating the central delusion of Brexit: that it is simple and straightforward. The risk of no-deal, the most damaging outcome for Ireland, has risen sharply.

Economists have been urging caution in budgetary policy for a reason. In Ireland's circumstances, with no currency of its own and a heavy sovereign debt overhang, there is limited capacity to stabilise the economy in the next downturn, whatever its source. The Central Bank of Ireland cannot create liquidity for the Government and there is no exchange rate to be adjusted downwards. The only source of leeway is the ability to borrow in the markets, freely available recently but not guaranteed when things get difficult. The markets can turn against indebted countries quickly and the opportunity to bolster state solvency and improve the credit rating has been spurned. The cost is the increased risk of an enforced return of austerity if the Eurozone bond markets begin to fragment again.

Two events subsequent to the release of the IFAC report last Monday should help to underscore its central message. Last Thursday The Irish Times reported that the Department of Health has again lost control of its operating budget, an allocation for 2019 which was increased by the Dail on top of the higher than planned out-turn for 2018. Overshoots in health are rewarded through an expanded baseline for the following year and the sorry pattern looks set to be repeated yet again.

On a smaller scale, but significant nonetheless, Transport Minister Shane Ross announced that he had secured approval for Exchequer support to the airport at Waterford, where the last commercial flight took to the skies three years ago. The airport staff have been retained and the money is to help fund a longer runway, in the expectation of attracting airlines with bigger aircraft. A cost-benefit study, not available to the public, has been prepared and the project was given the thumbs-up. Unfortunately, the consultants who prepared the study were our good friends from PwC. And, you guessed it, the Department of Public Expenditure did not like the consultants' homework any more than they liked their favourable verdict on the broadband plan. The PwC study on Waterford Airport was commissioned and paid for by, ahem, Waterford Airport.

Airports with 20 or even 30 departing flights per day struggle to meet their running costs and Shannon has had to be cross-subsidised from the rent-roll of the former Shannon Free Airport Development Company. Europe is littered with ghost airports (Google 'ghost airports'), some foolishly grant-aided by the European Commission, and both Galway and Sligo were endowed with uneconomic airports since closed down. It is wildly unlikely that Waterford will ever generate enough commercial traffic to pay its way, however long the runway.

The city of Waterford is connected to Dublin by the M9 motorway, built to full specification south of Carlow against the advice of road engineers who felt the traffic volumes did not justify a full motorway. They were over-ruled since the transport minister at the time hailed from Waterford. The M9 offers such hassle-free journeys that a Waterford traveller can make Dublin airport in 90 minutes with average luck.

The city again has the good fortune to have a full Cabinet minister in residence, hence the double-dip into the bottomless pit of the public capital programme. Tullamore, 60 minutes from Dublin airport, does not have a full cabinet minister but does have a live project for a brand-new airport. Should the next Taoiseach consider in advance the likely Exchequer cost of a Cabinet minister from Tullamore?

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