Current spending policy is dangerously unsustainable 

When in government with Fine Gael, Labour did exactly what it promised it would not do and there was no sign of it standing up to Frankfurt and its orthodox economists.

When asked about the difference between the promises Labour made and what it actually did, Pat Rabbitte, a Labour minister in that government, commented: “Isn’t this the kind of thing you tend to do during an election campaign?”

It was what Fine Gael did in the 2016 election. By then we were all talking about “fiscal space”, and Fine Gael started making promises on the basis of a number it made up. It promised tax cuts, free GP visits, increases in pensions, more teachers, more gardaí… more, more.

But it didn’t quite work. The giveaway was at odds with Fine Gael’s core message: Only we can be trusted with the economy. Back in government after 2016, Fine Gael was predictably ‘responsible’ again.

So, in response to the demands of an election parties offer spending, but once in government they behave responsibly.

Labour’s defeat in 2016, and Fine Gael’s drop in support in 2020, might temper politicians from making promises they can’t keep, but history suggests they can’t help themselves. Faced with electoral oblivion, the urge to spend — or at least promise spending — is irresistible.

Now this Government, still at the start of its journey, is at risk of making promises that it either can’t keep or if it does keep then these could be dangerous for Ireland.

The Irish Fiscal Advisory Council’s (IFAC) intervention in the 2016 election was to remind politicians that there wasn’t that much money in the kitty. Last week it was doing the same.

The IFAC doesn’t question the Government’s decision to borrow and spend heavily during Covid-19 crisis.

That decision was what it regards as a rare example of countercyclical fiscal policy — spending in a downturn. It’s pretty upbeat about the prospects for the Irish economy, and expects a big rebound in the second half of the year.  

However, the IFAC pointed out in its Fiscal Assessment Report, published last week, that during Covid the Government has added large permanent increases to Government spending, which will limit its ability to make any new spending commitments unless it adds revenue through new or higher taxes.

Almost 18,000 public sector jobs were added in the crisis, and these entail long-term spending commitments that can’t just be reset after the Covid crisis passes. Its report warns that the ageing population is adding €850m a year extra, every year, through pensions and health spending.

In the 2020 election one of the issues that kick-started Sinn Féin’s successful campaign was the promise to revert the pension age to 65. The Government effectively did that, and deferred the planned rise in the pension age. Last year, when asked about how to pay for that policy, Mary Lou McDonald told the leaders’ debate that “the demographics will look after themselves”.

If she hoped the Irish people would start having babies, she will be disappointed to learn the birth rate continues to decline at an alarming rate, while we have added 10 years to our life expectancy in the time since 65 was set as the retirement age.

The current policy is clearly unsustainable, but there is no party in or outside Government campaigning to rein in its spending.

The mantra is that we can spend our way out of any trouble.

So the housing crisis can be solved by pouring money into it, ditto the health service. But as the IFAC points out, Sláintecare is going to cost a lot of money and the Government has no clear plan on how that will be paid for in the medium term.

No matter. Money is cheap now so we can borrow. It is cheap and available, but it still needs to be spent wisely on investments that deliver a return for taxpayers.  

As should be pointed out continuously until someone listens, putting money into dysfunctional services such as health doesn’t make them work better.

And doesn’t it still need to be paid back? Well, we can grow our economy out of debt, as happened in the 1990s, so borrowing doesn’t have to be the burden it is usually thought of.

But politicians who are unconcerned about debt will soon find themselves overborrowing.

Ireland can borrow cheaply in part because everyone knows that Ireland will pay them back.

If we spend money like water, then they mightn’t believe that anymore. The hard part is figuring out when that point will come.

If we start saying yes to every spending demand, we will soon find that money is no longer cheap.

But once you start spending you cannot just switch it off like a tap — because today’s spending decisions entail lifelong commitments.

If we promise to keep the pension age at 65, someone will have to pay. People like to think that ‘someone’ will be someone else.

But with corporation tax receipts more uncertain due to the Biden Plan, taxes might have to be raised elsewhere.

That will probably involve income taxes, which means those who will be asked to pay will be the young, who might start to wonder if the continued subsidy of the old is fair on them.

However, these are discussions that no party is willing to have right now.

If the economy picks up then we will have eliminated the deficit by 2025, around the time of the next scheduled election.

Expect more promises from parties — every little helps.