November budget would facilitate better plans for tax spending
Chris Johns: Annual budgeting exercises can distort economic behaviour
Minister for Finance Paschal Donohoe ahead of Budget 2019: modern budgeting is a continuous process, not something suited to one-off events. Photograph: Dara Mac Donaill
This column has argued many times that the annual budget exercise is a circus, and no longer fit for purpose. Some of the largest players on the Irish budgetary stage are American tech companies.
The finance directors of those businesses would agree that modern budgeting is a continuous process, not something suited to one-off events. The complexity of those businesses, and the vagaries of their operating environment – the world economy – mean that strategy is constantly evolving and tactics sometimes have to change, often without warning.
We are not the only ones who persist with stage-managed annual fiscal pantomimes. Philip Hammond, the UK’s chancellor of the exchequer, announced his version last week.
It wasn’t just the event itself that carried echoes of our own process. Hammond repeated the old trick of spending every penny of tax revenues as well as promising to spend assumed future windfalls: that old friend, the rosy economic forecast, always has a central role in most budget performances.
Optimism about future economic growth leads to forecasts of buoyant tax revenues, which lead to extravagant and unsustainable boosts to public spending.
But nobody important is going to listen to calls to put a stop to all of this. It’s pure politics with all of the vested interests committed to leaving things exactly the way they are.
One of the few virtues of our version of the great financial crisis is that we learned some important practical lessons about economic policy.
First, we can be just as tactical as any chief financial officer of a tech company, and change course when needed: emergency budgets happen when they have to, policy can be tactically adjusted continuously.
Second, that first point will only ever happen in the teeth of the crisis: we are wedded to the old ways of doing things and we will return to them as soon as any crisis is over.
Third, it is next to impossible not to spend tax revenues, whether or not we think those revenues are likely to persist. That’s okay if spending commitments are as temporary as those tax revenues. Which brings us nicely to the last constant of fiscal policy: no matter what the budget for health spending, the overrun is going to be about €600 million.
Lots of these features were present in the recent UK budget: these bad habits are global in nature. Health spending is also a big deal in the UK, with the familiar problem that no amount is ever enough.
In 2000, UK expenditure on health absorbed 23 per cent of total public spending. On the plans just announced, that number is going to hit 38 per cent within five years. That’s a jaw-dropping increase with lots of political, not just economic, implications.
The British essentially plan to raise health spending in relative and absolute terms, financed in part by squeezing just about every other area of government expenditure. As the respected Institute for Fiscal Studies (IFS) said this week, this is utterly unsustainable.
If health is going to absorb these kind of resources – a reasonable expectation – then taxes are going to have to rise, probably by a lot. That’s where arithmetic hits the pure politics.
The IFS summarised Hammond’s budget in a beautiful one-liner: “Borrowing forecasts improved by about £18 billion [€20.5 billion] and the chancellor spent it all on the National Health Service.”
I’d put it slightly differently. When rosy economic forecast shuffles off stage there will trouble. The UK public sector is fast becoming a health service with a few bits and pieces tacked on elsewhere
Arithmetic and demography
Spending on health is destined to be at the centre of future budgets on both sides of the Irish Sea. That’s both arithmetic and demography. I’ve lost count of the number of strategic NHS reviews published in recent years. Every new health secretary seems to know that their tenure will be measured in months and that they therefore have only a short time to introduce yet another set of botched NHS structural reforms.
There must be a better way of conducting fiscal policy in general and managing health expenditures in particular.
Annual budgeting exercises can distort behaviour: the Irish Fiscal Advisory Council (Ifac) this week highlighted the Government’s own research, which shows health staffing budget overruns tend to increase strongly in the last quarter of the year, or after the budget. If we can’t wean ourselves off the yearly budget perhaps a more modest proposal might gain some traction: move it to November.
Forecasts are one thing but the main economic anchor for the budget is the fiscal arithmetic for the current year. We might cheerfully expect robust economic growth over the next couple of years but that means the base from which we start is very important.
The trouble is that October, from at least a tax revenue perspective, is the most important month of the year and it would help if the budget were formed with knowledge of the numbers.
Already, a short four weeks since Budget 2019, we learn that corporation taxes are way ahead of recent forecasts and PRSI receipts are also outperforming. Health spending is now €400 million over target and the Ifac expects that to reach the €600 million.
Surely it would help the annual budget if we had a better handle on where we start from?