Summer economic statement underlines need to make hard choices

Taoiseach and Minister for Finance must balance ambition and prudence

Minister for Finance Paschal Donohoe played down expectations for the October budget in his Summer Economic Statement. Cliff Taylor of the Irish Times looks at the decisions the Minister faces

 

The summer statement is an important marker in the Government’s economic management – and particularly so when a new Taoiseach and Minister for Finance are in place. The statement has set out some new approaches, while also sticking to the existing targets to reduce borrowing, so that a key EU target can be met next year. Apart from that, the main direction is to apply more resources in the years ahead to boosting capital investment.

Striking an appropriate balance is difficult, with such significant uncertainties ahead, particularly from Brexit but also from the prospect of gradually increasing ECB interest rates in the next few years. In this context it is welcome that the Government remains committed to reducing borrowing below 0.5 per cent of GDP next year, thus meeting an EU-imposed requirement.

Building international confidence in Ireland’s finances – allowing us to borrow at cheap interest rates – has been based on us reducing borrowing and meeting our targets. It is essential that as plans for Budget 2018 are finalised, some leeway is allowed to ensure that this trend continues. We have become used to Budget targets being exceeded each year, but by no means can this be taken for granted. The room for manoeuvre on Budget day itself, meanwhile, remains very limited. There will be a lot of bluster in the next few months on where this cash should be spent. The reality, even if some additional cash becomes available, is that any significant new tax or spending measures will have to be paid for by savings or higher revenues elsewhere. The new Budget reality involves making choices. Ministers should not be promising a big giveaway when this is clearly not afforable.

Much of the debate will surround the decision to divert half of the planned contribution from 2019 onwards to a new rainy-day fund and use it instead to boost capital investment. Boosting investment is required, but it is also essential that the money is properly spent. Investment only makes sense if it yields a decent return, either in terms of economic or social goals.

It is also important that we now get transparency on how the Government plans to use other State resources, including the cash held by the National Treasury Management Agency and the significant resources in the Strategic Investment Fund. There are indications that more of this may also go towards investment. This may be justified, but recent history has taught us that we do need a significant buffer in our public finances, given the volatility in our growth patterns and tax revenues. In the decisions to come, this also needs to be given priority.

There is no reason why the new Taoiseach and Minister should not be ambitious in their plans. But they also need to be prudent. The risks in the years ahead are significant and real.

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