Chris Johns: Remember, the next economic crisis awaits
Budget 2018: The temptation to spend now and worry later nearly always wins
Fiscal focus: Minister for Finance Pascal Donohoe presents Budget 2018. Photograph: Alan Betson
One way to think about Tuesday’s budget is that we are simply between financial crises: the last one is over, but the next is waiting in the wings. With luck that wait will be a long one, but we just don’t know.
Paschal Donohoe is understandably, and justifiably, optimistic about the future. But the minister for finance during the next crisis will go into that storm with a similar mindset and, as a result, next to no preparation.
One of the more obvious ways in which things could go wrong is with the economic forecast: growth could disappoint. It is in the nature of fiscal policy that every available cent is spent, including the cash promised via our old friend the rosy scenario: buoyant growth expectations.
There are plenty of reasons to be upbeat: European and US growth is picking up. In fact about the only country in the world exhibiting even mildly disappointing economic numbers is the United Kingdom. Everywhere else, including the emerging markets, looks to be experiencing a decent upswing. So economic momentum is with Donohoe.
Things can change quickly, however, and there are two obvious concerns. One is that the global upswing will, sooner or later, bring higher interest rates. Additionally, the one economy not benefiting from world economic growth, the UK, remains rather important for the domestic outlook. Although our own recent economic numbers are solid they contain one or two hints that we are not immune to that UK slowdown.
We should not base our spending and taxation plans on economic forecasts. This would have been a good year not to have had a budget: the planned adjustments are so small they don’t really matter. By waiting a year we could have adjusted the fiscal mindset: rather than spending future – forecasted – tax revenue the Minister for Finance could base his plans entirely on outcomes. Wait and see if tax buoyancy comes through. Then spend accordingly (or not).
Some tax revenue is permanent and can be spent in this way. Other revenue streams are temporary, and should never be spent, let alone promised to be spent forever
Perhaps the main problem we have is with the way we tend to think that all taxes are permanent. If revenue comes in we not only spend it but also commit to spending it each and every year into the future. Some tax revenue is, indeed, permanent and can be spent in this way. Other revenue streams are temporary, and should never be spent, let alone promised to be spent forever.
Two countries, the UK and Norway, both discovered offshore oil about 50 years ago. This provided a tax-revenue bonanza for both nations. One country spent all the oil revenue; the other put it into a sovereign-wealth fund.
No prizes for guessing which country behaved sensibly and which was profligate. The point is that Norway realised the temporary nature of the tax bonanza and figured out how to improve the lot of Norwegian citizens – all of them, including ones not yet born. The UK, of course, did not.
Far from permanent revenue
Many commentators criticise the European Union bailout of Ireland for being too harsh: a banking crisis was inappropriately diagnosed as a fiscal problem and unnecessarily severe fiscal austerity was the result.
Alan Beattie makes exactly this point in the Financial Times when criticising Germany’s outgoing finance minister, Wolfgang Schäuble. Beattie’s criticism misses the fiscal point: the budget at the time of the Celtic Tiger was balanced, so superficially looked restrained, but we spent every cent of boom-time tax revenue, from things like property-related stamp duties and construction workers’ PAYE. That revenue was anything but permanent.
With some revenue streams it is unclear whether they are permanent. A wise finance minister therefore treads with caution. Our booming corporation-tax revenue could well turn out to be the Irish equivalent of striking oil: great while it lasts but with a definite sell-by date. Are we treating this revenue as temporary or permanent?
We seem to be spending every last cent of them – and with a commitment to continue to do so forever, explicitly assuming they will last forever. Could be right, but it’s a risky strategy, particularly for the medium to longer term.
Another clear and present danger lies with Brexit – arguably, the next crisis already has a name. We invariably fail to spot where the next financial disaster is coming from, but this time around we have an obvious candidate. It’s called hard Brexit, and the UK now seems odds-on to crash out of the EU in the worst and most chaotic fashion imaginable. I would have called this a budget for Brexit and planned accordingly.
At the very least I would have slashed the economic-growth assumptions. Better to spend a happy surprise than have emergency cuts in the event of disappointment.
“Fiscal” and “policy” are words rarely used in chat-up lines: too difficult, too dull, simply not sexy. But the decisions taken about taxation and government spending affect every citizen of every state in both obvious and invisible ways.
Budgets are now purely political events, albeit ones with economic consequences. Ireland isn’t unique in this regard; neither is it the worse offender. But we need to figure out how to do all of this in a much better way.