Political aspect of budget always trumps economic
The budget and euro are political creations with almost incidental economic outcomes
Michael Noonan, Minister for Finance: the intensely political budget won’t actually amount to much, economically speaking, because of EU constraints. Photograph: Julien Warnand/EPA
The Irish budget and the euro are linked in many ways. Indeed, the ever-evolving rules and regulations adopted after each euro crisis have a direct impact on the slightly less frequent budget pronouncements of our finance minister. One thing they both share is the way in which economists think about them: the dismal scientists see them both as economic phenomena and hold their noses when reminded of the political consequences. This, of course, couldn’t be more wrong.
Both the budget and the euro are deeply political creations, ones that have almost incidental economic consequences. Only if it is appreciated that the economics of the euro and the budget are merely a residual that falls out of a complicated political equation can we begin to reach proper policy conclusions. We are a long way from that.
It is an exercise in futility to try and change political facts of life: the Irish budgetary process is pro-cyclical and will never change. That means when the economy is growing, we juice it some more. By contrast, when it is on its knees we try and kick it to the ground.
How do we know this? Our policy history since the creation of the State is one clue; another is the experience of the great financial crisis. If ever economic policy could have been fundamentally reoriented in a way that makes sense (to economists at least), it was during that crisis. It didn’t happen and is now never going to happen.
The case for counter-cyclical policy couldn’t be clearer – only ever tighten the fiscal belt during times of economic growth. That we choose not to do so is, clearly, one of those political constants. Consequently, it is now impossible to imagine the circumstances that would lead to its revision.
We can state, with reasonable certainty, that the next time Irish taxes will rise and public spending be cut will be once we have entered another recession. That is as good a definition of madness as I have seen.
Crucially, the authors don’t argue for crude privatisation, just proper management. Inevitably, this means taking these assets away from politicians and putting them under the control of technocrats. We’ve done it with monetary policy – politicians no longer have anything to do with interest rates – so why not one aspect of fiscal policy? A simple audit of just what assets the State owns would, I suspect, throw up some interesting results.
In any event, we are slowly giving up control over spending and taxation policies, via those euro membership rules, which take another upward ratchet every time Greece has a wobble. The scope for autonomous Irish policy decisions is continuously diminishing. This week’s intensely political budget won’t actually amount to much, economically speaking, because of those EU constraints.
Our spending is tightly constrained, except for that extra billion over budget for health, another annual constant – an annual billion that rarely seems to make any difference to anything.
One unique feature of the Irish fiscal landscape is the way in which welfare spending is rising, despite the rate of unemployment falling by a third. That merits further investigation. I suspect it is not unconnected to the fact that 60 per cent of people now earn more from welfare payments and other State transfers than from employment income.
Fiscal reform is never going to happen. The electorate will soon be faced with a familiar choice: choose parties that want polices to continue as they are or vote for other parties that want to raise taxes on a mythical wealthy elite. That’s the sum total of our fiscal debate.