Sunday 22 September 2019

David Chance: 'Overruns in State spending see 'rainy day' fund drying up'

  

Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins
Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins

David Chance

The spirit of Charlie McCreevy's "When I have it, I spend it" lives on in the current administration, despite all its protestations of prudence.

Instead of using one-off bumper receipts from multinationals to cut debt, it is being used to finance continued overruns in State spending. The size of a "rainy day" fund has been halved and plans to runs a budget surplus kicked some time into the future - or at least until after an election.

A look at the sources of revenue coming into the Exchequer provides a sobering assessment of Ireland's finances and suggests the country is vulnerable to an economic shock.

That's not how Finance Minister Paschal Donohoe sees it, of course. When Ireland's debt was upgraded in December last year, he pledged "sensible and sustainable policies".

It appears, however, that he is failing badly on the latter promise.

Of the €15bn in increased government revenues from 2014-18, cyclical income accounted for €3bn and excess corporation tax receipts €3.5bn. If corporation tax receipts so far this year keep up, they will account for a record 17.4pc of government revenues, leaving us exposed to shocks.

On the expenditure side, some assumptions in the budget plans appear to massively understate the real costs.

The pay of government employees is pencilled in to rise by just 1pc in 2021 and 0.1pc in both 2022 and 2023. The Fiscal Council says this is simply unrealistic and it notes that based on current settlements and private sector wage deals, there is likely to be an additional cost of €600m a year.

Some items are simply missing. The Christmas bonus for long-term welfare recipients and pensioners has not been included in the 2019 Budget.

Mr Donohoe has also taken advantage of a sharp drop in the cost of interest payments, budgeted at close to €8.5bn in 2015 and which now look set to come in at just over €5.5bn.

The current red-hot levels of economic growth - 8.1pc of GNI this year and 6pc in 2019 - will of course paper over the cracks.

However, a reduction in GNI growth which lopped 1.5pc points off the budget forecasts through to 2023 would mean public finances remained in deficit through 2021 and debt would remain around current levels of around 90.7pc of gross national income.

That scenario, the council notes, is not out of the question, given that forecasting errors in national income growth are close to two percentage points.

If there were a combination of a shock to growth, the budget balance outcomes and an interest rate shock, then debt could balloon out to 138pc of GNI by 2023 versus the 84.5pc forecast.

To be sure, Ireland is no Italy at present with slow growth compounding the impact of high debts. But in 2017, Italy ran a budget surplus before interest payments of 1.7pc of GDP.

Irish Independent

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