Vote Yes to Brussels and end decades of Irish fiscal ineptitude

Fri, May 25, 2012, 01:00

ECONOMICS: TWO WEEKS ago this column explored the risks of voting No to the fiscal treaty. With the probability of Greece being ejected from the euro zone having risen considerably since, the risks for Ireland, and all weaker peripherals, have become much greater.

Lessening the many risks to national wellbeing is among the best reasons for backing the treaty next week.

But there are also straightforward gains. With little discussion in the debate of the benefits of the rules contained in the treaty, it is worth setting out why stronger budget rules and greater external oversight of budgetary policy should be embraced enthusiastically.

This State has a lamentably long record of appalling fiscal mismanagement. This is no accident. It is the result of a political system that is incapable of steering a large modern State in a fast-changing globalised world.

No parliament anywhere in democratic Europe is weaker than the Oireachtas – in both its lawmaking and holding-to-account functions.

The executive branch of government is as weak. It is peopled by part-time amateurs who are usually inexpert in their ministerial briefs, rarely pro-active and, more often than not, more interested in constituency affairs than effectively managing their departments.

With such a system it is little wonder fiscal policy is conducted on an If-I-have-it-I’ll- spend-it basis. The decades-long history of fiscal ineptitude is deeply depressing. But it is essential to recount in order to demonstrate the need for greater checks and balances in how politicians manage the public finances.

In the late 1970s Fianna Fáil splurged. A Fine Gael-Labour coalition then squabbled and dithered. The upshot was that Ireland, by 1984, became the first OECD country to run up a central government debt in excess of 100 per cent of GDP. It was not until the mid-1990s that debt returned to safe levels.

One might have thought such an extended trauma would have engendered an ultra- cautiousness in all those with a hand on the public purse strings. But it didn’t. Within an electoral cycle they were at it again.

In the two years leading up to the 2002 election, the FF-PD coalition embarked on an unprecedented pre-election spending binge. Nominal general government spending rose by almost 30 per cent between 2000 and 2002 – three times the euro area average. Ireland’s headline budget balance underwent the largest deterioration of any euro area country at that time. When the European Commission raised concerns, it was told to shove off.

As luck would have it, the international downturn then was much shallower than that of the late 1970s and early 1980s. But had the slump turned to deep recession, deficits and debt would have run out of control.

That is exactly what happened in 2007-08. Although taking on bank debts has since made matters worse, the disaster is mostly fiscal in its origins (one quarter of outstanding public debt is attributable to bank costs).

The main reason for the current public debt crisis is much reduced tax revenues – something that was not just a risk during the boom times, but always likely to happen. The accompanying chart shows that by 2006 almost 18 per cent of revenues came from taxes on property market transactions alone (this does not include other revenues associated with the property frenzy, such as the income taxes and PRSI paid by 270,000 construction industry employees).

Even if there had been a soft landing, these revenues would have fallen sharply. A crash landing was guaranteed to vaporise them. Despite the fact that these revenues would not last and the considerable risk they would disappear completely, complacency and hubris among politicians and civil servants prevailed. Had there been a greater focus on the underlying fiscal position, these windfall revenues would have been treated as such. If that had happened, the situation now would be infinitely better.

The “structural deficit” rule contained in the fiscal treaty is designed to measure the underlying fiscal position. The ceiling of 0.5 per cent of GDP makes good sense and only deficit-spending addicts could portray it as unreasonably austere.

The treaty says the European Commission will measure the structural deficit. The Brussels bureaucrats may not always get it right, but they offer a better chance of protecting Irish citizens from those who have proven themselves incapable of even moderately prudent fiscal management.

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