Cliff Taylor: Can we rely on a ‘Phoenix miracle’?

Next week, the starting gun will fire. The Department of Finance will reveal the amount of money which it expects will be available for tax cuts and spending increases in the budget.

No sooner will this happen than the traditional sport of claiming this spare loot will start. It will be spent many times over before budget day comes around.

It’s easy enough to bemoan how all this happens. All the rows will be over what is likely to be €1.2 billion-€1.5 billion in additional resources.

Meanwhile, all sides will assume that the remaining €60 billion plus in annual revenues and spending will remain largely untouched. Reform is off the table.

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When a cross-party committee spends months trying to map an inglorious retreat from water charges, you can see that the current political set-up generates a kind of policy stasis. It is what it is.

It may all be sustainable – if far from ideal – for as long as the economy keeps pushing ahead strongly.

The Central Bank said this week that Ireland was the latest "Phoenix miracle", a term used to describe economies which bounce back from a disaster, growing strongly but without racking up additional debts. And the figures back this up.

The economy could grow by 4 per cent this year and the unemployment rate is heading back below 6 per cent.

But should we be placing all our bets on the Phoenix miracle continuing to fly?

Next week’s forecasts will update estimates from last October about the scope for giveaways in the budget.

Back then, the estimate was that there would be €1.2 billion to distribute via tax cuts or higher spending next October, about the same as was available for this year’s budget.

Whoever is minister for finance in October will not have a big bag of loot to distribute

Under EU rules, the room for manoeuvre could rise in the years ahead, but things will be tight enough this year.

The Department of Finance is expected to increase its growth forecasts – and this may mean some rise in the €1.2 billion figure, perhaps to about €1.5 billion.

But either way we will, like last year, be arguing over small amounts of money – and a significant amount is likely to be eaten up by public pay concessions.

Whoever is minister for finance in October – and with a change in Fine Gael leadership a reshuffle is surely on the cards – will not have a big bag of loot to distribute.

Range of scenarios

A lot of heat and noise will be spent arguing about not very much money. But we would be better off trying to be a bit strategic about this. We need to do our best to prepare for a range of scenarios, because we simply do no know what Brexit will bring. And the continuation of the Phoenix miracle cannot be guaranteed.

There were two warning signals during the week worth heeding.

The first was that tax returns for the first three months were 2.4 per cent below target.

Taxes are notoriously volatile,and we are talking about a €282 million shortfall in tax revenues of €11 billion.

With the economy growing strongly, some bounceback in the months ahead may well appear. But it is a reminder of how quickly tax revenue trends can turn.

The second warning signal is that the move to Brexit is finally starting to hit the UK economy.

A range of data from UK industry, the construction sector and the property market indicate that the surprising strength of the UK economy after the Brexit vote may be on the wane.

This will affect our exporters, as will any Brexit-related sterling falls in the months ahead.

This is not a reason to panic about our economic prospects. Our economy has proven resilient. And the Brexit talks may go better than expected – the penny seems to be dropping in Downing Street about the cost of a hard Brexit. But it would be crazy to disregard the risks.

The right thing to do, in terms of the next budget and the public finances, does not really change much, whatever your view on the flying power of the Phoenix and the threat of Brexit.

New target

Blame the EU if you like, but keeping our borrowing and debt levels on the decline seems like a good idea, especially to leave some leeway when the real Brexit hit comes as Britain actually leaves the EU in early 2019.

The risk is of the usual mock battles over the few spare euro available on budget day

That said, some question the new target of reducing debt in the years ahead to 45 per cent of GDP, well below the EU 60 per cent limit.

This needs to be scoped out and debated, because boosting investment is vital, too.

We have a major housing crisis and wider infrastructural problems. We need a sensible discussion about how to tackle this, while also building the necessary leeway into our public finances.

Otherwise the risk is that the Phoenix miracle will run into the barriers of a growing infrastructure deficit.

And we will fail to capitalise fully on the opportunities to attract business here post-Brexit.

This combination of caution and planing for the future will not be easy to pull off.

As Prof John FitzGerald pointed out in Friday’s Irish Times, funding higher investment may require higher taxes. But can our political system cope with this, after such a palaver over water charges which were meant to fund water and waste investment?

We are promised a review of capital funding from the Department of Public Spending. It will be a vital document.

This should be the meat of the political debate on budgetary matters in the months ahead. But it is hard to make political headlines out of long-term policy.

Instead, the risk is of the usual mock battles over the few spare euro available on budget day.