Paschal’s porridge just right for keeping the bears away

Budget needed to be Goldilocks solution to keep economy from overheating or cooling

The budget introduced by Minister for Finance Paschal Donohoe includes about €800 million of conditional support for those who will be worst affected by Brexit. Photograph: Tom Honan

The budget introduced by Minister for Finance Paschal Donohoe includes about €800 million of conditional support for those who will be worst affected by Brexit. Photograph: Tom Honan

 

Like Goldilocks’s porridge, growth in the economy can be too cold, too hot or just right. The first task of the budget is to keep the bears from the door and ensure that the economy grows “just right”, smoothing out bumps along the way by pumping money into the economy or taking it out.

Unfortunately, during the period 2009-2012, because the public finances were in such a parlous state, the Government did not have the ability to avoid deflating an already very weak economy.

Today, however, the success of the last few years means that the Government has the freedom to take necessary action if the economy is hit by a very damaging Brexit.

While this role of balancing economic swings is the most important task of the budget, it often gets swamped in discussions of what detailed measures will mean for individual households or businesses.

Rapid growth

As the Minister for Finance and many of the other speakers in the Dáil recognised, formulating the “just right” budget this year was particularly difficult. If Brexit does not happen at all, or is delayed until 2021, then the current rapid growth of the economy would mean that the budget should probably take money out of the economy.

However, if we see a hard Brexit in 2020, the economic shock will be very severe, and the Government should pump money into the economy to provide some insulation.

The sensible compromise reached was to present a budget which will be broadly neutral if Brexit does not happen or is delayed to 2021, but which will be mildly stimulatory if a hard Brexit has happened by early next year.

This is achieved by including about €800 million of conditional support for those who will be worst affected by Brexit, if and when it happens. As a result, assuming Brexit happens by the end of this year, the net stimulus in this budget could be up to €700 million, about 0.3 per cent of national income.

If we knew with certainty that Brexit was happening at the end of the month with no deal, a stronger stimulus would probably be appropriate, possibly pumping a further €1 billion or €1.5 billion into what would become a distressed economy.

Investment

While such an injection might be most usefully applied through public investment, the purpose of the injection means that it should be essentially temporary, reversible when the economy begins to recover.

Thus, if Brexit is delayed, happening without a deal over the coming year, such a further injection may be desirable for the 2021 budget.

Looking at fiscal policy in the context of the euro zone, there is a major failure of co-ordination. What should have happened in 2010-2012 was that euro-area countries such as Germany, France and Scandinavia should have applied a significant stimulus to their economies.

While this was not feasible for Ireland and the other distressed economies, such a euro-zone stimulus would have provided a significant offset to our pain.

Now, with a major slowdown in the euro-zone economy in prospect, such a stimulus is again appropriate, with Ireland able to join in. Unfortunately, such a level of co-ordination of fiscal policy is not in prospect in the euro zone, in spite of the fact that this time such a stimulus would benefit Germany directly and ease the problems for the European Central Bank in hitting its inflation target.

Detail

Looking at the detail of the budget, it is important that the support for businesses suffering from Brexit should be temporary and be seen to be temporary. It should be used to help them adjust to the new situation. If they do not have the prospect of becoming profitable through finding new markets, it would not make sense to provide continuing support.

Nor should aid act as a shield enabling businesses avoid taking decisions that would give them a sustainable future.

Finally, as chairman of the Climate Change Advisory Council, I welcome the increase in the carbon tax of €6 a tonne, though an increase of €15 would have been more appropriate. It would also have been better if the Minister’s commitment that this increase would be repeated each year till 2030 were enshrined in legislation.

That is because the point of such a tax is to signal that consumers and businesses will save an increasing amount of money by investing in reducing their greenhouse gas emissions.

Providing certainty that the savings will increase over time, because of a rising tax, would further enhance the incentive for us all to make the necessary changes in our lifestyle.

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