Spring statement: assumption nothing goes askew

50:50 split of spending increases and tax cuts, ensures no bonanza for State’s employees

The reservation of scope for between €1.2 billion and €1.5 billion indicates the Government will indeed have some money to spend in its final budget before the election.

The reservation of scope for between €1.2 billion and €1.5 billion indicates the Government will indeed have some money to spend in its final budget before the election.

 

The spring statement can be seen as a political exercise in which Fine Gael and Labour adopt a common fiscal plan for the election campaign to come.

But do the economics stack up? The central point to note here is that the entire edifice is predicated on the achievement of strong growth in each of the next five years. This assumes the nascent recovery is not blown off course by any internal or external shock. That’s a big if, but it was ever thus.

In the nearer term, the Government has adopted a modest upgrade in its forecast for economic growth this year. Having predicted a 3.9 per cent GDP expansion in the October budget, Minister for Finance Michael Noonan now says growth will reach 4 per cent. While some analysts believe growth in 2015 will easily surpass that rate, Noonan is reluctant to go further for fear of encouraging the gathering clamour for recovery dividends.

Still, the clamour is unlikely to abate, the out-turn at the end of the day could well be higher if current trends continue.

The reservation of scope for between €1.2 billion and €1.5 billion indicates the Government will indeed have some money to spend in its final budget before the election. Yet, the demands on such funds are very intensive already.

No surprise there.

Having retrenched by close to €30 billion in the hard years that followed the crash, there is no end of claims on the largesse now available. The list of demands is as long as it is varied, with ardent public sector pay claims and equally forceful claims for income tax clemency at the very top.

By adopting a 50:50 split of the available leeway between spending increases and tax cuts, the Government has essentially placed a big curtailment on the funds available for a pay hike and ringfenced the pool directed at a tax cut. The limitation on any new pay round is all the greater when considered alongside parallel demands to boost the health and education budgets. There will be no bonanza for the State’s employees.

There is more.

Given that a long series of “austerity” budgets were weighted 60:40 in favour of spending cuts over tax increases, the new 50:50 split means tax will be reduced at a quicker rate than expediture is restored. This, again, is a deeply political decision, but it understores an acute necessity to demonstrate that the benefits of recovery should go beyond the civil and public service.

If the 2015 budget was the first expansionary plan for years, Noonan held out the prospect of another five expansionary budgets if conditions allow. Given the current growth trajectory, the Government believes it can still embark down such a path and balance the books by 2018. But this too is political. For the Government to avoid a fiscal expansion at this stage would be the economic and political cycle would be akin to signing its own electoral death warrant.

Critics might argue, however, that the better course would be to target a surplus sooner. True, Noonan says this afternoon that the fiscal approach adopted is part of a “much broader strategy to manage the economy for growth and job creation”.

Yet, the Economic and Social Research Institute is already on record saying the “optimal” course next year is to aim for a “neutral” budget with no net change in tax or spending.

While this is not going to happen, it shows that political choice is always a factor in economic management. At the same time, the deficit is forecast to come down steadily, reaching 2.3 per cent of GDP this year, 1.7 per cent in 2016 and 0.9 per cent in 2017. While this is in contrast to the the sky-high deficits seen at the height of crisis, the State is still saddled with the legacy of crisis in the form of a massive national debt. If the message today is that the current rate of growth is sufficient sufficient to make inroads into the debt, it still presumes growth will continue without interruption for the rest of the decade.

Remember, also, the external dimension. Ireland’s recovery, aided by the turnaound of the American and British economies, was held back for years by the parlous state of the euro zone economy. While European conditions have improved since the ECB said it would buy up sovereign bonds, the uncertain outlook for Greece still stands as a major risk. This is to say nothing of the volatile situation in the Middle East and ever-increasing rancour between the western powers and Russia over its incursions in Ukraine.

The spring statement assumes nothing goes further askew on any of these fronts to disrupt Ireland’s turnaround.

By setting joint economic targets now for years to come, Fine Gael and Labour are seeking to set to parameters of the looming election debate.

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