"The plan lacks sufficient coherence and clarity"
ECONOMIST VIEW: IULIA SIEDSCHLAG, Economic Social Research Institue
THE OBJECTIVE of the Government’s four-year National Recovery Plan is to ensure the long-term sustainability of the public finances and to reinforce the confidence of consumers, enterprises and investors.
There are three positive elements that are welcome.
First, the plan acknowledges that the long-term sustainability of public finances depends not only on reducing the budget deficit. Economic growth is crucially important.
Second, the planned fiscal adjustment is based on spending cuts rather than tax increases. Existing evidence suggests that expenditure-based fiscal adjustments are more likely to be successful due to the fact that they improve efficiency while tax-increasing measures have negative effects on long-term economic growth.
Third, the fiscal consolidation will be accompanied by reforms of the budgetary process including multiannual fiscal planning; ceilings for expenditures to ensure fiscal discipline; moving to performance-based decision-making; and establishment of a budgetary advisory council.
However, it seems to me that the plan lacks sufficient coherence and clarity. There are no clear priorities. Its content is to a large extent based on statements and there is not enough evidence to provide support to the announced measures. For example, what evidence is there to suggest that reducing the minimum wage by € 1 will boost job creation?
It is surprising that there is no discussion about solving the banking crisis and how this might impact on economic growth prospects. The lack of strong action by the Government to fix the Irish banking system has been at the core of the current economic difficulties.
In summary, the plan is an important step to strengthen the budgetary framework in Ireland and to bring public finances to a long-term sustainable path. It would bring more credibility to the necessary fiscal consolidation process if the planned policy measures would be focused on selected priorities and if it were based on more economic analysis.
Iulia Siedschlag is associate research professor with the Economic and Social Research Institute