Professor forced into a very public reversal

It was quite a U-turn. Prof John McHale threw something of a grenade at the Government early yesterday by suggesting on national radio that Budget 2016 broke stringent European rules. Hours later, however, he had to withdraw the charge.

This was no small assertion by the chairman of the Irish Fiscal Advisory Council, an independent statutory watchdog set up at the height of the crisis to monitor budgetary policy. At issue first was the credibility of a budget cast to deliver a decent recovery dividend to taxpayers while simultaneously observing caution in the public finances. At issue now is Prof McHale’s credibility, although concerns he raised about the budget are shared by other economists.

It’s a given that opinions will always differ in economics but rules are rules. In light of Ireland’s heavy debts and continued borrowing, criticism of the expansionary fiscal plan was inevitable. A fundamental pillar of the budget, however, was that it would adhere to binding EU rules.

With an election on the way – certain to be fought under the glare of financial markets and European creditors – compliance is seen as a crucial signal to the outside world that the Government would maintain fiscal discipline even as it loosens the purse strings a little.

Enter Prof McHale, who went on RTÉ's Morning Ireland programme first thing yesterday to express deep reservations about the budget.

In advance of the budget, the Fiscal Council had formally endorsed the macroeconomic forecasts on which the plan rests.

Earlier still, the council had given its tacit blessing to the Government’s proposal to expand the 2016 budget by up to €1.5 billion. That was a significant development in its own right as the council had criticised policy on several occasions in the past.

Supplementary estimates

After scrutinising the actual budget, however, Prof McHale was concerned about the adoption of supplementary estimates for a number of departments this year which would roll over into allocations for 2016. Having warned previously against increasing the €1.5 billion package, he suggested that large supplementaries and the rollover carried echoes of past error.

“What we didn’t factor in was the increase in spending this year beyond what was budgeted. So the spending this year looks like it’s going to be about €1.7 billion higher than was budgeted and about €1.4 billion of that is current spending,” he said. “The right approach really would have been to use the revenue windfall to bring the deficit down further.”

Such concerns are not unique to the Fiscal Council. Still, the Government had made the point that the headline budget deficit this year would be well ahead of target at 2.1 per cent of GDP and that it would drop in 2016 to 1.2 per cent of GDP even after the expansionary measures.

To cap it all, Minister for Finance Michael Noonan told the Dáil that the 2016 plan would beat European targets by decreasing the structural budget deficit by more than was required.

The structural deficit is an estimate of the permanent deficit in the public finances net of cyclical and temporary measures, but the definition need not detain us here.

What matters is that Noonan said the budget would ease the structural deficit by 0.8 per cent of GDP in a scenario where EU rules required a 0.6 per cent of GDP reduction. Thus would the Government demonstrate that discipline would not be lost even as it delivered an election Budget.

Obliged cuts

But Prof McHale questioned whether changing circumstances meant the Government would, in fact, be obliged to cut the structural deficit by more than 1 per cent of GDP.

In doing so, he undermined the Government’s stability argument. After all, the central defence against claims that budgetary policy was too loose was that it was all fully compliant with the EU rules. That the charge was levelled by the chairman of a statutory body made it all the more potent. Rules are rules, after all.

By mid-afternoon, however, the Fiscal Council issued a statement in which it conceded that the “actual required improvement” of 0.6 per cent of GDP had been set earlier this year based on the projections then in place.

“The information that the required improvement was fixed earlier in the year has not been published and was not made available to the council,” the statement said.

As it welcomed the climbdown, however, the Department of Finance noted that the EU authorities had published country-specific recommendations for Ireland months ago in which they called for “a fiscal adjustment of 0.6 per cent of GDP” in 2016.

Prof McHale’s argument was that the improvement in economic conditions this year meant that EU rules now call for a bigger cut in the structural deficit. The Government had agreed otherwise with Brussels. Having tackled the Government by the terms of the rules, the Fiscal Council chairman was forced into a very public reversal.