Pat Leahy: Economic statement opening act for difficult budget

The summer economic statement published by the Government on Wednesday night was a compromise between the forces that always shape high-level policy decisions for governments – politics and economics.

In particular, it was an uneasy deal between the political need to channel more funding into housing and the economic imperative to return to something like budgetary normality in the medium-term future.

But it also signposts the Coalition’s future in important ways – in particular, towards a stormy autumn budget season, as the reality of spending ceilings (even at relatively high levels) becomes apparent to Ministers.

Economists – those at budgetary watchdog the Irish Fiscal Advisory Council (Ifac) and others who spoke privately and frankly in recent days – worry about the high levels of borrowing and debt in the coming years that the document sets out. “The commitment to a balanced budget is just gone,” one senior economist told me. “Nobody has said how or why.”

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Clearly, untrammelled borrowing and spending is not possible; but neither is an overnight return to a balanced budget

They are particularly exercised about the continued borrowing during a period of strong economic recovery and wonder what happens if a change in external circumstances – higher inflation, more “normal” interest rates – means that the costs of debt repayments increase. “Is it risky?” asks one of the dismal scientists. “Well, it’s not playing it safe.”

Sebastian Barnes, head of the Ifac who monstered the last Government economic statement in April as unrealistic and lacking credibility, said there was “very significant good news” in this one. “They’ve done a lot of good things,” he told Morning Ireland yesterday. In the Department of Finance they purred.

There was a but, though. Barnes identified one of the key elements of the statement – the policy change from aiming for a balanced budget, to acceptance that there will be a budget deficit until 2025, (medium-sized or large, depending on how you measure it). This is the bit that the economists don’t quite approve of. “The Government is definitely taking more risk with these plans and that’s why we’re concerned,” said Barnes.

Yeah fine, say politicians always in response to this. These guys don’t have to get elected, do they?

Politicians have to find a balance between what they think is acceptable to the public and what is necessary economically. Clearly, untrammelled borrowing and spending is not possible; but neither is an overnight return to a balanced budget. The question is one of degree.

Donohoe and McGrath – who constitute the strongest cross-party axis of the Coalition – have gone as far as they think they can with deficit reduction and spending control.

We will see the full nature of the housing investment when the Government publishes its Housing for All plan before the end of the month. But everyone who knows anything about it in Government expects a substantial jump in capital funding for building public housing. This was a sine qua non [necessary condition] for Taoiseach Micheál Martin during discussions on the economic statement this week.

But it is possible at this stage to see the outline of the forthcoming budget and those after it – new spending of just €1 billion-ish a year? There will be blood on the carpet when Ministers realise they will have no new money and – in some cases – face a painful reduction in funding for some programmes.

This is the quid pro quo [something for something] for the Taoiseach’s sine qua non: deficit reduction is accepted as a real commitment. Yes, it’s not enough for the economists; you may be sure it will be rather too much for the Ministers in charge of spending departments who are about to find the clamps put on their budgets. It begins in September, when preparations for the October budget and spending estimates move up a gear. Very soon, in other words.

“They know what is coming in general,” one person closely involved in the process tells me. “But the full detail won’t dawn on them until they meet their secretary generals and senior officials in September.”

If the Government sticks to these spending ceilings – and it must, if it is to retain budgetary credibility – then a very difficult budget process is in store

Ministers realise the change in policy but as ever they tend to think it should apply to their colleagues, not to them. One grumbles that major decisions on fiscal and economic policy were made in the course of a brief (40 minutes or so) Cabinet meeting on Wednesday. I hate to break it to the Minister in question, but those decisions weren’t made at Cabinet – they were made in the hours of wrangling between the three party leaders, Donohoe and McGrath and their senior officials in the days which preceded the Cabinet rubber stamp.

There will be a welfare package in the budget, that much is clear, with pensions and other social welfare benefits increased; there will be a tax package, but that is unlikely to consist of anything other than the indexation of income tax bands, hardly the type of tax cuts for the people who get up early in the morning of which the Tánaiste once dreamed.

If the Government sticks to these spending ceilings – and it must, if it is to retain budgetary credibility – then a very difficult budget process is in store. Expect heated meetings, tactical leaking, maybe even walkouts from budget meetings and, inevitably, further last-minute compromises. In other words – a return to normal budget making following the period in which there were no limits on spending.

The summer economic statement is a reassertion of the basic axiom of government: to govern is to choose. If you wish to spend money here, you must save it there. It does not spell out what those choices are, that time will come soon enough. It will be a moment of significant change and challenge for the Coalition.