Cliff Taylor: New politics reinforcing old approach to budget day

Paschal Donohoe risks finding boom and bust a hard habit to break

Minister for Finance Paschal Donohoe: promised in his budget speech to “do this differently” in future. Photograph: Brian Lawless/PA Wire

Minister for Finance Paschal Donohoe: promised in his budget speech to “do this differently” in future. Photograph: Brian Lawless/PA Wire

 

Boom and bust. That has been the recent history of the Irish economy. The Government is promising to break the cycle and to set growth on a sustainable course. We will, Minister for Finance Paschal Donohoe promised in his budget speech, “do this differently” in future. The next year will tell a lot about whether the Government he is part of is really serious about this.

No previous administration in recent times has managed to break the mould. Look at our growth figures. Over the past 20 years annual GDP growth has only been within a range of 2 to 4 per cent – what you might consider a normal, sustainable rate – on just three occasions.

Now our GDP figures are messed up by multinational activity, for sure, and much of the growth in the early 1990s was a welcome catch-up from previous underperformance. But the figures tell a story, nonetheless. The peculiar interaction of economics and politics in this country means we just don’t “do” middle-of the-road. We move from hairshirt to hoopla. We can’t seem to manage the gentle tick-tock of gradual, sustainable progress.

Cycle reinforced

Budget policy is almost always the opposite of what economic theory would suggest it should be, as governments shovel money in via spending and tax cuts when times are good and are then forced to do the opposite when a slowdown hits. And thus the cycle is reinforced.

“When you have it, you spend it,” as former minister for finance Charlie McCreevy famously declared, though he did go on to say that “the mistake is to try to spend it when you haven’t got it.”

The real test for Leo Varadkar’s government will, if it lasts, come in a year’s time, when the figures suggest that there may be over €3 billion of leeway in the budget, 10 times this year’s space, even if some of this is eaten up by inevitable spending demands. The fall in our borrowing to what the Brussels judges to be a sustainable position in 2018 will loosen the shackles of European Union rules in future . But if the economy is still flying this time next year, injecting that amount of cash might well risk overheating.

This week’s budget was hemmed in by the EU rules. The sums of money involved were so small that the Government cannot be criticised for throwing money around. The net addition to borrowing was just over €300 million.

A few hundred million is neither here nor there in the context of a €60 billion budget. But the pace of improvement in the public finances has slowed markedly since 2015, despite strong growth. Ideally we would be further ahead, have the budget in surplus, not be adding to our cash debt level and have left ourselves more leeway for the years ahead. And this year, Donohoe could have given the shortest budget speech in history: “ With the risk of Brexit approaching, I propose to make no changes next year. I commend this budget to the House.”

There are good reasons for Government action in a few places.We clearly need to invest in sectors such as housing, even if the top of the growth cycle may not be the ideal time to do this .Where will we find builders to construct all the new houses, roads and Metro North?

New fiscal space

And this bring us right back to the question of boom and bust. There could be €10 billion scope for new tax and spending measures – fiscal space – in the next three budgets, on current estimates. This is based on growth slowing to the sustainable 2.5 to 3.5 per cent per annum range and holding there, the trick we have found impossible to achieve in the past.

If the economy continues to steam ahead, then there will be a real question of the impact of adding in all this extra cash via higher spending and lower taxes over the next few years. And if growth slows, of course, the money won’t be there in the first place.

Either way, by this time next year we will presumably have a better fix on Brexit, the extent of the potential economic shock and when it might happen. Brexit illustrates the kind of unpredictability which makes budgeting difficult. This kind of uncertainty raises the real question of whether we can afford more investment as well as lower taxes and more day-to-day spending, as the political discourse assumes.

Trying to have it all may risk not only overinflating the economy, but also undermining the public finances. Experience has taught us to be careful and to put a priority on having leeway in the budget, rather than approaching each year on the basis of spending every last free cent on things dressed up as “ giveaways”. When Brexit, or whatever, causes the next slowdown, the last thing we want to have to do is to increase taxes or cut spending and make things worse.

We need to find a new way to talk about the budget each year. Successive governments have spoken about reforming the budget process and breaking the old cycle of boom to bust and back. The new EU rules have helped, as has much better planning and control of spending, and the new rainy-day fund is a good plan.

But our new politics is reinforcing the old approach to budget day. All the different parties supporting the Government need to have their slice. When we have it, we spend it. This year it didn’t do much harm, given the squeeze on cash. But next year it could turn into a damaging bun fight, fuelled by the likely approach of the next general election.

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