Learning lessons from past errors

Budget 2016

 

As the Government showed again this week, the final budget before a general election is generally viewed by an outgoing administration as a political opportunity to influence voters in their favour by tax cuts and spending increases; at least where these can be justified as affordable and do not contravene European Union fiscal rules. The fiscal watchdog – the Irish Fiscal Advisory Council (IFAC) – has now taken issue with the Government in this regard.

It has questioned the size of the overall public spending plans and is obviously annoyed at how the Coalition has communicated its budgetary intentions. And rightly so. The council’s specific concern is the surprise €1.5 billion increase in expenditure for 2015. This was announced quietly last weekend, via a White Paper, and the figure was far larger than the IFAC had anticipated. The supplementary spending, when added to the €1.5 billion fiscal expansion for 2016, has meant a total tax and spending package of €3 billion.

The IFAC had earlier endorsed the outline of the 2016 budget but that was based on a €1.5 billion fiscal stimulus and not on one twice that size. The council, which was established in response to the financial crisis, is clearly concerned at both the size and composition of that spending increase. IFAC chairman John McHale yesterday noted on RTÉ’s Morning Ireland that “spending this year looks like it’s going to be €1 .7 billion higher than was budgeted, and about €1 .4 billion of that is current spending”.

The EU’s fiscal rules require tighter budgets at a time of rapid economic expansion but, even so, the fiscal adjustment proposed in the Budget does not breach those rules as the Department of Finance made clear yesterday and as Prof McHale – who had disputed the matter – has readily acknowledged. But the IFAC chairman also questioned whether an economy with a 6 per cent growth rate really needs such a strong fiscal stimulus at just this time.

The IFAC concern is entirely legitimate given recent painful experience and the questions that arise are obvious: is yet another government following a pro-cyclical fiscal policy and fuelling a boom? And have lessons been learned from past experience and from past mistakes?

For now we are left with little choice but to accept Michael Noonan’s assurances that he sees no danger of the economy overheating and that he is fully aware of the risks involved in stimulating a strong economy further. Yet Ireland’s high level of sovereign and household debt remains a concern. And the economy’s great dependence on a range of positive external factors – on a weak euro, low interest rates and low oil prices – over which we have no control compounds our vulnerability in the event of a slowing of the rate of growth in the world economy or some adverse geo-political development.

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