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Watchdog on spending flags real dangers


More than 60,000 people are expected to bring Dublin to a standstill on Wednesday. Photo: Tony Gavin

More than 60,000 people are expected to bring Dublin to a standstill on Wednesday. Photo: Tony Gavin

More than 60,000 people are expected to bring Dublin to a standstill on Wednesday. Photo: Tony Gavin

'If economists were to run the country we might have a strong economy but I'm not sure we'd have a very happy country". So said the Minister for Agriculture Simon Coveney last Friday. He was referring to criticism by those in the dismal science who have warned about the risks of returning to give-away politics at a time when the Government plans to spend €5,000m more next year than it expects to earn in revenue.

The latest critique of the Government's budgetary stance by economists came early last week from the independent budgetary watchdog set up in 2011. The five wise men (one woman and four men, actually) of the Fiscal Advisory Council, supported by a small team of analysts, are tasked with puncturing the sort of group-think that contributed to the economy crashing so badly.

Their job is to assess the Government's budget plans and the economic forecasts underpinning them. If they believe that the sums don't add up, or that the Government is making too-rosy assumptions about the economy (and hence the likely amount of tax revenue), they are obliged to say so.

That is exactly what they did last week - comprehensively and convincingly. But before examining their assessment in more detail, consider the role of economists generally and the Government's reaction to the fiscal council economists specifically.

Economists make the case for the most efficient allocation of resources. While efficiency is not the only consideration in public policy, it must be the baseline upon which other considerations are added.

In the cacophony of public debate, most voices are looking for something for themselves or the groups they represent. If economists don't speak up for the best measurable use of resources and value for money, nobody else will.

Economists as individuals and groups get it wrong, and the discipline is very far from perfect, but alone and in entities like the Fiscal Council they provide some rationale for assessing where taxpayers' money might be best spent. With legions of interest groups jostling to be first in the line to make their case for government largesse as the economy recovers, more input into the debate by independent economists is one of the few hopes there are that a return to the buying-off of the most powerful and vociferous vested interests will not happen.

If Coveney's effort to paint economists as kill-joy miserabalists was disappointing, Michael Noonan's comments on the Fiscal Council's views were depressing.

Speaking on the same day and on the same radio station as Coveney, the Finance Minister said a number of eyebrow-raising things.

He stated that the Fiscal Council is obliged to a take a different stance from the Government. This is simply not the case. If the body had agreed with the Government's stance it would have said so, as it has done in the past. To dismiss the council with a it-would-say-that-wouldn't-it put-down, undermines an institution that has the potential to become a bulwark against a return to this country's appalling budgetary record of the past four decades.

In response to a question about the dangers highlighted by the council, Noonan said that if he worried about every risk he would never make any decisions. That is nonsense. Assessing risk and building one's decisions around them does not make for less effective decision-making. Quite the opposite, in fact. The decision to insure one's home against the very low risk of it burning down doesn't amount to "jumping at every shadow", as he put it. It is merely prudent.

For Noonan to make such a comment is perplexing. One of the Government's more laudable initiatives since taking office has been its annual National Risk Assessment study. At its launch, Taoiseach Enda Kenny said this: "We must identify the risks that Ireland faces and therefore ensure appropriate prevention . . . Never again should dissenting voices be silenced when warning of risks up ahead."

While Noonan, and the Government more widely, have not sought to silence those who warn of risks, they are sticking to their narrative that everything will turn out for the best in the years to come.

They are not wrong to believe that. With good news on jobs growth last week (an accompanying column in the Business section of this newspaper analyses last week's figures in more detail) the short-term outlook for the economy remains strong.

But the prospect of Ireland enjoying up to 10 years of annual economic growth of 3-4pc, as Noonan suggested last Friday, are low, not least because economies work in cycles and it is all but inevitable that there will be at least a period of slowdown, if not worse, over the remainder of the decade.

The Fiscal Council's report published last week was more realistic than Noonan. It quite rightly highlighted the still fragile nature of Ireland's position given its high levels of public debt, which, as it happens are among the highest in the world. It again criticised the October Budget for not creating "a larger buffer" so that the public finances could be moved closer to a "zone of safety".

It also put the scale of the challenge still to be faced in the context of "the historic pattern of fiscal policy mistakes".

These mistakes were not simply bad luck - very few peer countries have ended up being bailed out and even fewer have had two enormous fiscal crises in a generation.

Among the most worrying developments highlighted in last week's report were signs of a return to bad old ways of making promises without budgeting for them. As the council notes, the Government's tax revenue projections for the years ahead are based on no cuts in taxes, yet hardly a day passes without promises that the modest cuts in October's Budget are just the beginning of bigger reductions.

On the spending side, the council finds even more to be concerned about. In order to break the vice of ultra short-termism in the way in which spending has traditionally been planned, the Government earlier in its term of office committed itself to longer-term expenditure ceilings. But already there are signs that these are having little effect in practice.

"The almost continuous raising of the Government's expenditure ceilings undermines the purpose of multi-annual expenditure planning, which is designed to protect against the type of pro-cyclical trend in government spending observed in the run-up to the crisis."

The council focuses solely on economic challenges and risks, as it is mandated to do. There are, of course, political risks too, the greatest of which is a premature collapse of the current Coalition followed by a general election that produces a Dail but not a government.

Given this risk, the Government was - on balance - right to end prematurely efforts to borrow less. But the manner in which politicians in the Coalition have downplayed the challenges that remain, thereby raising expectations and encouraging interest groups to lobby for handouts, has got out of control. With each passing week it appears as if lessons from the trauma of the past six years have not been learnt.

Sunday Independent