A fiscal call to arms

 

THE REAL function of a fiscal council is to speak truth to power, to remind governments of harsh economic facts they may not want to hear, when they least want to hear them – at budget and election time. How will the Coalition Government respond in deed to the bold advice given by the newly established Irish Fiscal Advisory Council?

Minister for Finance Michael Noonan seems ready to listen. The council in its first report recommends that the Government should accelerate the pace of fiscal adjustment and make greater savings than the €3.6 billion planned in next year’s budget. The Government should also aim, the council says, to cut the general government deficit to 1 per cent of national output by the end of 2015 – two percentage points lower than is now proposed.

The council recognises the difficulties the Government faces in adopting a clear fiscal stance in current economic conditions, given the uncertainties that surround the euro, and the weakening state of the world economy. With lower global growth widely forecast for 2012, Ireland, which relies on a buoyant export sector to boost economic recovery, is adversely affected. The Central Bank in its recent quarterly report acknowledged that by revising downwards its growth forecast for the domestic economy next year. But, like the fiscal council, the bank also favours a more aggressive approach to deficit reduction, arguing this would leave the public finances better placed to cope with “negative shocks to the economy” that may yet arise.

Since 2008, there have been no fewer than six budgetary adjustments, yielding savings of some €21 billion. But despite such austerity, progress in lowering the deficit has been slow. And for the Government to achieve its target of a 3 per cent figure in 2015 will involve four more years of painful fiscal adjustment. Part of the argument for beating the budget targets – and surpassing public and investor expectations – is that it could enable Ireland to re-enter the sovereign debt markets sooner, become less reliant on the EU and IMF troika, and recover some lost economic sovereignty.

The council’s role is to offer an independent assessment of the Government’s budgetary plans, thereby also keeping the public better informed and more aware of policies and choices required to achieve fiscal sustainability. Last year, Klaus Regling and Max Watson, in their report on the banking crisis, proposed a fiscal council as one means of helping to ensure past mistakes – in banking and economic management – are not repeated.

In the context of next December’s budget this document now provides a framework for wide-ranging discussion and debate about how the burden of fiscal adjustment to 2015 will be carried, and by whom. It has already heightened tensions between the Coalition partners. At a time when consideration is being given to cutting the welfare budget – with reductions of up to €1 billion mooted – the question of how much should be borne by the least well off remains the key political issue at the heart of the economic debate, and an indicator of society’s fairness and compassion.