State risks return to dramatic public expenditure cuts - expert

Prof Kinsella will suggest the introduction of new “fiscal stress tests” in order to better prepare for a downturn

Prof Stephen Kinsella of University of Limerick says “The appropriate time to consider changes to the fiscal architecture of the State is now, while these risks are, as yet, unrealised.”

Prof Stephen Kinsella of University of Limerick says “The appropriate time to consider changes to the fiscal architecture of the State is now, while these risks are, as yet, unrealised.”

 

Ireland risks the return of “dramatic” cuts to public expenditure seen during the recession if State spending increases continue as projected, an Oireachtas committee will be told on Tuesday.

The State should also automatically increase welfare payments during an economic downturn in order to limit the impact of a crisis on the poorest in society, the committee will be told.

Stephen Kinsella, an associate professor of economics at the University of Limerick, will tell the Committee on Budgetary Oversight that Ireland “risks replaying the 2007-09 period of dramatic cuts to public expenditure on its currently forecasted path of spending increases”.

Mr Kinsella will say due to the impact of climate change policies, the outcome of Brexit and changes to the international tax landscape “our economy may be in a very different place in 24 months’ time. The appropriate time to consider changes to the fiscal architecture of the State is now, while these risks are, as yet, unrealised.”

He will say in order to offset the risk of rapid spending cutbacks in the future, Ireland should work on the development of new rules on spending and welfare payments which would automatically kick in during a crisis. It should also work on improved methods for estimating the impact of unexpected tax shortfalls or spending overruns.

As has been the case in multiple reports issued recently, the centrality of corporation tax receipts to the exchequer is also highlighted by Mr Kinsella as a key risk.

Recession

A downturn in such tax receipts, coupled with a failure to plan for such a crisis with appropriate policies now, will lead to painful and damaging cuts similar to those inflicted during the recession, when government spending was cut at the same time as new taxes were introduced, according to Mr Kinsella.

The committee will be told to implement reforms to the management of the public finances is “now, when the State’s finances are strong”.

In order to better prepare for a downturn, Mr Kinsella will suggest the introduction of new “fiscal stress tests”.

Such tests would allow officials to test the potential impact of spending increases in Departments that are vulnerable to overspending, such as health, or accurately model the impact of disappointing tax returns. This would allow the government to prepare appropriate policies that would manage these risks.

The UL academic will also suggest that “automatic stabilisers” such as social welfare payments should be modified, and should increase at predetermined crisis points, rather than after a policy decision taken in real time to alter the rate of benefits.

“Automatic increases in transfer and capital spending (should) kick in when unemployment is above a predefined crisis threshold, say 10 per cent,” Mr Kinsella’s opening statement suggests, adding that automatic extensions to welfare programmes during times of high unemployment help to reduce the impact of a downturn on the poorest in society.

“The key recognition here is that it is hard to design such programmes when a crisis is happening in real time. If these measures are designed, legislated for, and administratively provisioned for, well ahead of time, then they can be deployed automatically, as can new taxation elements like property.”