ESRI cautions against pre-election spending spree

Analysis: Now that the economy is booming, economists say high spending in the run-up to an election isn't wise, writes Marc Coleman, Economics Editor

You can have your cake but you can't eat it.

That appears to be the message coming from the Economic and Social Research Institute's latest comment on the economy.

Releasing billions of euro into the economy between May 2006 and May 2007 was questionable enough in terms of motive.

The period coincides with the 12 months running up to the election.

But plans to top this with a 13 per cent increase in public spending are too much, the ESRI has said.

Or at least that's the message one gets when reading between the lines of its latest Quarterly Economic Commentary.

Noting how the SSIA's will boost growth in 2006 and 2007, the ESRI now fears that the political business cycle is 'out of synchronisation' with the business cycle.

Far from being what John Gormley uses to travel to work, the electoral cycle refers to the phenomenon whereby elections affect economic policies.

Wanting to get elected, politicians concentrate high spending in pre-election years when they think voters are paying most attention to the economy.

But if, as now, the economy is booming, it constitutes one of the seven deadly sins of economic mismanagement, 'procyclicality'.

Perhaps the best description of procyclicality was given by former Finance Minister Charlie McCreevy when boasting about his tendency to spend in good times: "When I have money I spend it, and when I don't I don't." Procyclical policies tend to be inflationary.

After the last bout of pre-election spending largesse six years ago inflation ramped up to rates of around 5 per cent and stayed there long enough to create Rip Off Ireland.

The ESRI has a feeling of déjà vu - once again the economy is growing strongly and once again the Government appears set to boost it even further.

As well as being inflationary, pro-cyclical policies increase volatility in the economy.

Like taking drugs, they make us feel great afterwards at the cost of feeling rotten later.

According to the ESRI, SSIAs will create 43,000 extra jobs in the economy and add €2 billion to the exchequer. But what then?

Whatever government is elected next year will have little incentive to keep the money rolling in until the following election is much closer, say in or about 2011.

If anything, they will want to cut back on government spending in 2008 to build up a pre-election war chest.

From an artificial high of private sector credit and SSIAs in 2006 and 2007, the economy could enter a depressing low in 2008.

As ESRI Alan Barrett said when referring to the expected growth rate for 2008: "The one thing I will say is that I bet you it will be lower."

The Government has one policy lever left to avert this scenario.

Instead of increasing public spending by 13 per cent this year as planned, it could defer spending until 2008.

Or as Alan Barrett put it: "This all points to the need for the orderly roll-out of public spending because the scope to boost domestic demand in 2008 could prove to be very useful."