‘Fiscal space’, the final foggy frontier

Parties are vying to plan the spending of money the economy may not even earn

The election campaign has opened with copious argument and no little bluster over the allocation of money which may become available in coming years for tax cuts and spending increases. In many ways, it’s a false debate.

The money in question is described as “fiscal space”, which is an estimate of the sum that might become available to the next government if it complies with stringent budget rules set out in Irish and EU law.

Distaste for this expression is as considerable as the confusion over its meaning. Indeed, Tánaiste Joan Burton has been moved to describe “fiscal space” as a “new kind of F-word”. The irony is that the notion is supposed to be a positive one, appealing for voters, in that it reflects potential to ease the tax burden and boost spending on cash-starved services.

But clarity is absent. To one extent or another, parties are working off Department of Finance assessments as to the amount of largesse which may become available in the next five years if all goes to plan. Still, many of the most crucial considerations are lost in rhetoric.

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For one thing, all “fiscal space” numbers are but forecasts of the amount of money that might be in play years from now and no more than that.

Argument still surrounds the validity of figures deployed by particular parties but there is nothing to stop them setting out whatever "fiscal space" they wish. Far more important than the amount of "fiscal space" per se is the credibility and quality of the policies designed to free up the money in question.

This is absolutely crucial. If budget rules are not kept, for example, “fiscal space” money can’t be spent without breaking domestic or EU law. Financial markets would be likely to take a very dim view of any such legal breach, leading to an increase in the cost of servicing the national debt.

There is more. All “fiscal space” forecasts are predicated on the achievement of economic growth in Ireland and the outside world. While any party can publish a plan to set aside a specific amount of “fiscal space” for particular tax or spending measures, the new money would become available only if the economy actually performs at a level sufficient to free up resources.

This depends both on economic conditions and on the effectiveness (and credibility) of government policy. The money simply would not be available if growth stalled due to domestic or international developments.

Risk factor

This is a huge risk factor in all economic plans, all the more so in plans which are supposed to be delivered over the course of years amid volatility in the global economy.

For example, if things go awry in the first year of the economic plan set in train by the next government then its plans for the second, third, fourth and fifth years would be upset. It follows that all assumptions within “fiscal space” forecasts are subject to a multitude of forces.

This means the most crucial “fiscal space” projections are the most immediate ones – for Budget 2017 – as developments for that period are the least prone to future uncertainties. It is the nature of economic forecasting that reliability declines the further into the future the forecast goes – and the same goes for “fiscal space” estimates.

In a sense, the only “live” target for “fiscal space” right now is the target for the very next budget. Such assumptions, however, are subject to whatever happens in coming months.