Challenges can only be met by a government with the power to act

Favourable economic data provides an opiate of sorts for Irish leaders as they struggle to form the next government. At a time of acute uncertainty, rapid growth and decent tax returns serve to dull the political senses. But that is an illusion.

Three weeks after polling day, problems are piling up. Spending pressures are mounting, raising questions as to how the new administration plugs funding gaps. Further questions flow from the Luas pay deal, which is set to prompt copycat claims at Dublin Bus and may lead to others. A growing housing crisis requires urgent action. Beyond Ireland, a cascade of forthright warnings about global threats to the British, US and euro zone economies demonstrates that external conditions are anything but benign.

Such challenges can be met only by a government which has the power to act, not by an acting administration which lacks the authority to do anything meaningful. With no pact in sight on a new government, a prolonged bout of political stasis would only magnify the task. This has implications for the stewardship of State in the immediate sense and in the preparation of the all-important fiscal plan for 2017.

Take expenditure. A few days ago Martin Wall reported in these pages that the Health Service Executive warned the outgoing Government in December of potential for a €500 million overrun in its €13 billion budget this year.

The news was quickly followed by whispered rumblings about nascent spending strains in the education and environment budgets. To an extent welfare underspending might free up some money to tackle overspending elsewhere. Yet that obscures the true nature of the dilemma.

Note, first, that the next administration will be bound by budgetary rules which forbid the allocation of supplementary spending estimates late in the year to fund overruns. In principle at least the escape routes are as limited as they are politically tricky. One option is to curtail services in the relevant department. An alternative is to curtail services elsewhere and divert unspent money accordingly. Another is to take surplus funding from elsewhere. There’s nothing at all palatable in this setting, and little enough can be done about it by an acting government: two members of the Cabinet are no longer TDs and a depleted Labour is on its way into opposition.

Fiscal space

A second dimension to this story is that any additional spending granted this year would erode new spending or tax cutting measures in 2017. It follows that excess spending now on current programmes would weaken scope for any new programme to deal with housing.

This takes us right back to the dreaded “fiscal space”, which is already severely constrained next year. The last Department of Finance estimate – which suggested €500 million might be available in 2017 – shows that wriggle room is limited.This narrows the political leeway for the next government as any deal could not fly without some kind of a pre-settlement on the 2017 budget, which must be released by mid-October.

The actual situation will become clearer next month when the department publishes a revised economic forecast for 2016 and a forecast for 2017. Such forecasts, required for submission to the EU Commission, will feed into an updated calculation of “fiscal space” for 2017. The good news is that 7.8 per cent GDP growth in 2015 was greatly in excess of the department’s 6.2 per cent target. Thus the starting point for 2016 was better than projected. With growth this year also likely to exceed forecasts, the updated figures might well suggest that a little more “fiscal space” may be available for 2017.

This must be measured very carefully, however, against emergent spending pressures and growing pressures in the world outside.

Yet there is another avenue for the next administration to increase its budgetary options. This can be done by expanding the overall tax take. Options aired at election time include an increased bank levy. That might well be popular politically but it would hamper the private investment case and could, indeed, lead to higher charges and interest for consumers.

The bottom line is that the State’s finances are still quite heavily curtailed. What is more, they are hugely exposed to ever-increasing economic uncertainty in the world outside. Such uncertainties include the Brexit referendum in June, an event which could throw into doubt a multitude of assumptions about the road ahead for the Irish economy. Meanwhile, meandering talks continue on the formation of a new government. This calls for clear heads and clear action. The State cannot run indefinitely on autopilot.