Council makes clear case for front-loading unavoidable pain

COMMENT:HAVING SUFFERED the effects of exploding the public finances for well over a decade from the late 1970s, one might have thought that a Teutonic anathema to fiscal mismanagement would have become tangled in the DNA of every inhabitant of this State. It didn't.

When budgetary pressures eased in the mid-1990s, there was no effort made to put in place mechanisms to prevent a repeat of the fiscal trauma of the 1980s.

One increasingly common method of safeguarding the public finances in other countries in recent decades has been the setting up of independent bodies with specific remit to oversee how governments use taxpayers’ money.

The Bertie Ahern era was not noted for policy or institutional innovation, and an independent fiscal council was not contemplated in boom times.

This was despite (or perhaps because) such bodies have been found to counteract the use of tax and spending powers for purely political purposes – especially in the run-up to elections – and generally improve the management of public budgets. Bureaucratic inertia was also undoubtedly a factor in the inaction of the time.

If such a council had existed during the boom, it might well have highlighted the risks associated with the growing dependence on unsustainable property taxes or woken up earlier than the Department of Finance to the loss of control of the public finances from 2007. None of those things happened and we are, very unhappily, where we are. But if the public finances have been blown again, there is some hope that the failure of institutional memory and learning is not being repeated.

The arrival of the Irish Fiscal Advisory Council is potentially a very important institutional innovation. Although the Coalition was obliged to establish such an entity under the terms of the EU-International Monetary Fund bailout, both Government parties were in favour of an independent public finances watchdog when in opposition. The independence and calibre of the people appointed to the council suggest the Government was not simply fulfilling a bailout obligation.

There is further reason to be optimistic about the role of the council on the basis of the new watchdog’s first report published yesterday.

The report is an authoritative and evidence-based assessment of the budgetary situation and the macroeconomics underpinnings it. It is thorough and comprehensive in its analysis, covering the big, immediate issues. It weighs up all available relevant literature and evidence, and is upfront about the uncertainties attached to the evaluations made. In its tone, it is balanced and moderate.

Its most important (and controversial) proposal – to increase the size of the budget adjustments over the medium term – will not be welcomed by many, including some in Government but is arrived at on the basis of a plausible and convincing cost/benefit analysis.

The council believes there are growth-dampening costs from a bigger adjustment, but that these are limited. Just as fiscal stimulus has limited positive effects in an economy as open as Ireland’s, the effects of fiscal contraction are limited too. On the basis of the evidence since 2008, the council rejects the view that more austerity will be self-defeating, as claimed by those in favour of an easing of the fiscal adjustment.

The benefits of a bigger front-loaded adjustment include enhanced credibility, a more rapid return of creditworthiness and lower total debt-servicing costs, the council believes.

Perhaps the strongest reason for a bigger-than-planned adjustment is a lowering of the risk that the debt dynamics will spin out of control.

In the short term, clambering away from the edge of the precipice as quickly as possible seems prudent given how unstable is the ledge upon which the wider European economy is perched.

Over the long term, the case for doing more is also strong.

The chart shows just how high the council believes debt levels are likely to be over the next 20 years if the current adjustment plan is implemented. On this basis, it foresees that public debt will fall only very gradually, to 84 per cent of gross domestic product in 2030 – very high by historical standards – which leaves very little space in the event of a shock of any kind.

Even if the euro crisis can be solved and the Irish economy returned to healthy growth, having levels averaging 100 per cent of GDP over a two-decade period would be to tempt fate. Just look at Italy now.

The council makes the strongest case yet that the benefits of going for a more front-loaded budget adjustment outweigh the costs. It is a highly convincing analysis and one that the Government would ignore at its peril.