Fiscal council report challenges new politics
Government is at risk this year of breaching the very fiscal rules it pledged to observe only weeks ago
The risk of economic overheating means action might be required this autumn to pull back in the 2017 budget from mooted spending increases and tax cuts
A new report from the Irish Fiscal Advisory Council presents a compendium of economic truth to politicians and the people they serve. Will it anything change? The answer may show whether some kind of a new political order really is in place or whether the same old blather prevails.
Three charges are made in the latest work of the council, an independent statutory body which monitors budget policy. First, the Government is at risk this year of breaching the very fiscal rules it pledged to observe only weeks ago. Second, the risk of economic overheating means action might be required this autumn to pull back in the 2017 budget from mooted spending increases and tax cuts. Third, the Government programme is uncosted and Department of Finance expenditure projections for the next five years may be out by €6 billion.
Stringent fiscal rulesThe Government and its allies might well argue that the situation in Europe’s “fastest-growing economy” is a lot less urgent than the council suggests. But that is to miss the point. Quite reasonably, political debate amid economic recovery is dominated by the demands to claw back expenditure lost to austerity and lessen the load on taxpayers. To keep manners on everyone, however, stringent fiscal rules are in place to prevent fiscal excess.
These rules are laid down in national and European Union law, so the possibility of a breach is not a trivial matter. In a technical sense the rules are deeply complex. Unless your beloved has a PhD in economics, you certainly wouldn’t discuss them at dinner.
Still, they are supposed to ground political discourse and policy-making. Moreover, compliance or otherwise provides some guidance to the external world about the fiscal scene in post-crisis Ireland. In financial markets, for example, compliance would be seen as a sign that public finance repair proceeds even as spending is lifted a little and taxes are cut a little.
Given Ireland’s debts, of course, market perceptions are crucial. Given the volume of data swirling around markets at all times, the rules are a proxy for the Government’s overall stewardship of the economy.
International risksThus it was not for nothing that the Fine Gael-led administration promised in its Programme for Government to comply “in full” with the fiscal rules “to retain confidence in the economy and protect our country from growing international risks”. This came amid numerous uncosted promises.
It’s no small thing, therefore, that the fiscal council has warned that the last official projections for 2016 “do not fully comply” with the rules. The council believes there will be too small a cut from the structural deficit, this being an estimate of the permanent deficit net of cyclical and temporary measures.
“While an outperformance on revenue in 2016 could secure compliance with this rule given current expenditure plans, a repeat of the within-year increase in expenditure seen in 2015 through the supplementary estimates process should be avoided,” said the council. That was on Tuesday.
The next day the Government unveiled a €540 million spending increase, for health mostly but also for the Garda. Although tax revenue seems again on course to exceed targets, the Government is already spending the money.
Fractured Dáil landscapeThere is a problem in health and a heinous gang feud in Dublin has claimed seven lives. But this still merits serious political debate, not least in the light of promises to do things differently in the fractured Dáil landscape.
Such promises are easily made, of course. Nor is the council alone. To one degree or another, there have been pleas for a conservative fiscal stance from the Organisation for Economic Co-operation and Development, the International Monetary Fund and the European Commission. It’s the same for bodies such as the international credit-rating agencies, for whom compliance with the rules is critical.
With all of that in mind – and with the legacies of the crash still a particularly heavy burden on society – it cannot suffice for politicians to wave away the council’s observations. The institution is not given to praise for the Government, but that is not its function. With Fianna Fáil propping up the Government from Opposition, and with Sinn Féin an election-time convert to the fiscal rules, the charge that the rules may be breached must be tested thoroughly. The very same goes for question of economic overheating, and concerns about the lack of demographic costing in official projections.
This should go beyond rhetorical attack. The quest for honesty and proportion in political debate demands as much.