Cliff Taylor: Time for a dose of Germanic national thrift in lead-up to budget?

Government will need to make the most of the ‘fiscal space’ on budget day

‘Without the EU rules being in place, Ministers might not be able to restrain themselves from throwing around more loot come next October, based on the strong growth we are having at the moment.’  Photograph: Dara Mac Donaill / The Irish Times

‘Without the EU rules being in place, Ministers might not be able to restrain themselves from throwing around more loot come next October, based on the strong growth we are having at the moment.’ Photograph: Dara Mac Donaill / The Irish Times

 

Managing expectations is the key political job facing the Government over the next few months. It is increasingly clear that demands about what should be delivered in the budget are not so much unrealistic as completely off the scale. There is only so much you can do with the €1 billion to €1.5 billion the Government is likely to have to spend on budget day. Of course Ministers are partly to blame for all this, with their endless hints about tax cuts, public pay rises and more spending.

The Government’s spring economic statement, due at the end of the month, may put some reality into the debate. One bit of new jargon will become familiar to us all – the fiscal “space”. This is the amount by which the overall amount of government borrowing can be increased on budget day, while still meeting deficit rules and EU budget limits. We have still to see exactly how the EU rules will be applied here, but I can’t see how this figure for the 2016 budget will be less than the €1 billion granted last year, or much more than €1.5 billion.

Of course “ giving away” €1 billion plus is a lot more pleasant than cutting several billion, as was done during the crisis budgets. But all the positive headlines and the Ministerial hints of good times to come have upped the ante. Ever since we exited the bailout, the message coming from the Government has too often lacked a bit of balance. They have told people the crisis is over, and so everyone wants their money “back”. The Government needs to get some realism into the debate if it wants to avoid a politically dangerous sense of anti-climax.

Already the demands are building. My views on public pay in last week’s column received some bashing at the teachers’ conferences. I argued that basing public pay claims on restoring what was in place before was mistaken. The teachers’ case and that of other public servants is that they deserve their money back. They want “restoration”.

Part of the reason why the Government will go some way along this “restoration” route is political and part of it is legal caution, as it wants to avoid any court challenges claiming that because the emergency used to justify cuts is over, then they should simply be reinstated. But restoring pay would cost €2.2 billion – probably using most of the total fiscal space for the next two budgets, and leaving no room for any tax reduction or spending increases elsewhere.

Does anybody really think this is going to happen over a year or two? The tone of the teachers’ debates suggests they feel it should, along with other measures to hire more teachers and so on– and the same message is likely from other union gatherings over the next week or so. Meanwhile there are demands for tax cuts and for extra spending programmes all over the place.

We are still having an old-style, boom-time, budget debate, when the reality is that the world has changed. And thank goodness it has, because without the EU rules being in place, Ministers might not be able to restrain themselves from throwing around more loot come next October, based on the strong growth we are having at the moment.

If experience has taught us one thing, it is that splashing the cash on the basis of a growing economy is not a great idea, because when the growth stops, a big hole appears. Let’s hope that the IMF warning in a report during the week that the developed world could be heading for a period of stagnation is wrong, but it may not be – and this would have implications for growth here and thus for the sustainability of our public finances. We need to leave ourselves some room for manoeuvre and this is what the EU rules are designed to encourage.

The spring statement changes the normal budget dynamic, where the amount of financial leeway is only defined shortly before the Budget, based on what is needed to meet a certain deficit target. The figure produced at the end of April may alter a bit as the year goes on, depending on economic trends, but not by too much.

There will follow the start of public sector pay talks and a procession of interest groups will arrive to present their case as part of the so-called National Economic Dialogue, which is to be a series of hearings discussing where Ireland goes next. You can make your own guess of what the demands to be presented here will add up to, but I’d wager it will be five or six times what is available.

This will give the Government the opportunity to point out that everything can’t be afforded, though in pre-election mode this is not an ideal message. The Coalition could increase the room for manoeuvre by new tax hikes or spending cuts, but coming up to an election that ain’t going to happen on any grand scale.

What the Government will also, presumably, try to sell is the value of stability and steady progress. This does not suit the “grab it while it is there” nature of Irish budget debates. It almost calls for a more Germanic approach, where national thrift is seen as a virtue. But when you have developers “emerging” from Nama and former bankers and public servants walking around on massive pensions, everyone feels their financial pain should be fixed, too. Trouble is there won’t be the money there to do it, though the problems of dividing up the fruits of growth should still be easier than allocating the pain of cutbacks.

Twitter: @CliffTaylorIT

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