Election 2016: Fiscal space for manoeuvre limited in budget deal talks

In the uncertain aftermath of an inconclusive election, one thing is clear: no matter who forms the next government, it will face a defining test in the autumn. At issue is whether it can pass a budget for 2017. The fractured political landscape only intensifies the challenge. Money is just as tight as the new Dáil arithmetic.

On the face of it, there is plenty of time. On the first day of March, indeed, it might seem a little previous to discuss a budget due in mid-October. But that is not the case at all. Any move to break the political stalemate in coming weeks will bring forward debate on the fiscal plan for 2017.

If Fine Gael pursues a minority government option or seeks an unlikely coalition deal with Fianna Fáil, the discussion will go nowhere without some kind of budget deal. In either case it is not too much of a stretch to say that any new arrangement will stand or fall on the fiscal plan. Any failure to reach a preliminary agreement would hasten steps towards a second election.

In one sense, tackling the budget question will be an act of political necessity. In another, the task presents something of a bargaining chip. But it is a pretty small chip at that. True, the election campaign itself was dominated by heady “fiscal space” promises quantified in billions of euro. In the glaring light of the morning after, however, ambition will have to be curtailed. Any fiscal wriggle room in 2017 will be quantified in millions, not billions.

This is no surprise. Each of the larger parties recognised in their manifestos that the emergent scope for any tax concessions or new spending plans would be rather modest at first.

Projections

Quite how modest can be gauged from Department of Finance projections. On budget day last October the department estimated that €487 million would be available in 2017 for new tax or spending measures. This came after allocating €320 million for public pay agreements under the Lansdowne Road deal and another €400 million for pre-existing commitments in respect of demographic pressures and so forth. A further €140 million was required for capital expenditure and committed spending in respect of the EU budget.

As a result of all that, the scope to make promises to ensure smooth passage of a budget will be rather limited. This would be all the more so in a scenario where a variety of groups have a clear incentive to name their political price to maintain their support for a minority government.

The case of the Social Democrats, who campaigned against tax cuts, illustrates the point. In the first instance, it seems likely that their upfront demands would be at variance with Fine Gael’s tax-cutting agenda.

Take note, too, that any failure to pass a budget in the autumn would lead inexorably to a new election.

The fiscal picture will become clearer in April when the department issues a new economic forecast to Brussels. The October budget was predicated on the achievement of 6.2 per cent gross domestic product growth in 2015 and 4.3 per cent growth in 2016. However, the department is under legal obligation to present a revised 2016 forecast and provide a forecast for 2017 in an annual “stability programme update” for the European Commission.

In essence, this document sets in motion discussions on the budget for the following year. Two further points are worth noting, however.

Targets

First, the document assumes compliance with stringent budget laws vis-a-vis targets for the reduction of the budget deficit and the national debt. Following the fiscal treaty referendum in 2012, these rules are enshrined in domestic and European legislation. It is only after such targets are met that any scope would emerge to ease the tax burden or introduce new spending measures.

The second point centres on the actual economic forecasts in the “stability programme update” for 2016, 2017 and beyond. These figures have a crucial bearing on the department’s estimation of the amount of money that may be available for new tax and spending measures.

At one level, an assumption that Ireland’s rapid economic growth continues this year and next would provide fiscal grease in the political negotiation to come. At another, however, any deterioration in the domestic outlook would curtail the scope for budgetary largesse. The key question here is whether turmoil in the international economy is forecast to dim Ireland’s prospects.

No small point. Worries about the slowdown in China and other emerging markets have not gone away. Moreover, the Brexit referendum in Britain next June presents an abundance of risks in the Irish setting.

There will no hiding away from any of that during the haggling over the next budget.