The merits of staying the hard fiscal course
The Irish Fiscal Advisory Council (IFAC) has strongly advised the Government to resist the temptation to make tax and spending adjustments of less than €2 billion when it presents the 2015 budget next October. Finance Minister Michael Noonan has in recent months frequently hinted that tax cuts may yet be possible – assuming the Government can meet its fiscal deficit targets, and that its growth forecast for the economy is not revised downwards.
However the IFAC, in its fiscal assessment report, is unimpressed and is critical of this approach. It remains concerned about the high debt levels and uncertain growth prospects of the domestic economy. Instead the council has suggested the Government keep its word and fully implement €2 billion of additional adjustments in the budget. The council gives three reasons why the Government should not alter course now .
First, the Government would clearly signal its determination to achieve debt sustainability. And it would be doing so when Ireland’s public debt – over 120 per cent of GDP – is very high and remains vulnerable to adverse economic developments. Second, a €2 billion adjustment in 2015 would make it easier to achieve a budget deficit below 3 per cent of GDP next year – a key goal. And third, the Government, by making the agreed adjustment, would also be protecting and enhancing Ireland’s hard-won credibility in successfully implementing austerity measures.
In other words, having come so far and achieved so much, why hesitate now, and risk undermining what – at great cost and huge public sacrifice – has been achieved since the onset of the financial crisis? Between 2008 and 2014, as the report points out, some €32 billion in spending cuts and tax rises, or one-fifth of national output, will have been taken out of the economy. Few other developed economies have experienced such a huge transformation in so short a time. And it has taken its toll.
The economic imperative has been clearly outlined by the IFAC. The political imperative, following the major setbacks for the Coalition parties in the local and European elections, and with the election shortly of a new leader of the Labour party, may well be to ignore the council’s advice. The Government did so last year. But that would be wrong.
The role of a fiscal council is not just to provide an independent assessment of the Government’s budgetary plans but also to ensure the public is well informed of the choices the Government faces, and the potential economic consequences of decisions it may taken. The council attempts to speak truth – economic truth – to political power. Often, as now, this is an inconvenient truth, and one that governments under siege – like the Coalition – are frequently reluctant to recognise.