Coalition in troika's icy grip on budget framework

ANALYSIS:In the summer of 2008, more than a year after the property bubble began bursting, the then government and the Department of Finance belatedly realised that the public finances had run out of control.

In the winter of 2010 that government lost office shortly after the consequences of its earlier recklessness and complacency led to an international bailout and a considerable loss of economic sovereignty.

Now, two years on again and more than a half-decade after the crash began, the constraints on the current administration remain severe.

Nowhere is it more constrained than in its framing of budgets. The extreme and multidimensional nature of the economic crisis; the terms of the EU-IMF bailout; and new and stronger budgetary rules governing all EU governments mean that these constraints will not ease until 2016, at the earliest.

Limited freedom

The size of each annual budget package out to and including 2015 was set down two years ago. That happened in the context of the bailout and under the terms of the EU’s “excessive deficit procedure”, which limits a government’s freedom of budgetary manoeuvre when it is running imbalances between spending and revenues of more than 3 per cent of gross domestic product.

At more than 8 per cent of GDP this year, Ireland continues to run the largest budget deficit among the 27 members of the EU. Illustrative of the scale of the deficit-reduction effort still to come is that among the 21 EU members currently in the excessive deficit procedure, Ireland is the only one to have three more years in which to bring its imbalance below the 3 per cent of GDP ceiling.

And this despite the enormous size of the combined adjustments to date. Since the first emergency budgetary measures were introduced in August 2008, Irish citizens have swallowed a bigger dose of austerity than any developed economy (more even than the people of Greece), according to the Organisation for Economic Co-operation and Development.

On top of the €24 billion in cuts and new taxes that have been introduced since the crisis began, and the coming €3.5 billion slated for 2013 – the details of which will be unveiled on Wednesday – a €3.1 billion package must be introduced in 2014 and one of €2 billion in 2015.

If the Government is tightly constrained on the size of each budget adjustment over the medium term, it has much more freedom to determine the composition of budgets. While some measures, such as a property tax, must be introduced under the bailout terms, the detail of most new tax and spending measures is for the Coalition to decide.

This freedom gives the Government choices. But in times like these, all choices are hard ones. This has generated inevitable tensions within the Cabinet.

But the extent of conflict has been contained by constraints the partners have imposed on themselves. In the programme for government it was agreed that two-thirds of the cumulative budget adjustments up to 2015 would be achieved by spending cuts and one-third by additional revenue-raising measures.