Will Paschal Donohoe practise what he preaches on financial restraint?
There’s one force working against pledges to not repeat mistakes of the past: an election
Big test: Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe. Photograph: Dara Mac Dónaill
What have the Irish Fiscal Advisory Council, the ESRI, the OECD, the European Commission, the International Monetary Fund, the Central Bank, European Central Bank, Cliff Taylor, Colm McCarthy, Cormac Lucey, Dan O’Brien and a host of other economists all got in common – apart from the fact you wouldn’t want to stuck beside them at a dinner party?
They have all warned that the Government against making bad economic decisions in the midst of the country’s current prosperity.
They say variously that the Government should use the fruits of a strongly growing economy to protect against inevitable future downturns – by paying down debt, investing for the long term in the economy’s productive capacity, in education and training and in infrastructure, by bolstering the embryonic buffer against the bad times established in the rainy day fund and by maintaining spending discipline in the public sector, both in numbers and in wages.
You could sum all of this up as follows: don’t blow it again, lads.
The most recent warning came at the Budgetary Oversight Committee this week. The Fiscal Advisory Council – set up by the previous government specifically to help avoid a repeat of the economic crash – warned Government Buildings that there was a “window of opportunity” for good policy-making to use the fruits of the current strong growth.
They will say they have learned the lessons of the crash, and are listening to the experts. But they should be judged by their deeds, not their words
The ESRI chipped in with: “Given the very strong economic performance at present, it is imperative that fiscal policy does not risk overheating the economy. Given the clear need for increases in capital expenditure . . . and ongoing pressures on current spending, it is difficult to see scope for significant tax cuts without adding to the risk of overheating.”
The question is: will the warnings be heeded by the Taoiseach and his Minister for Finance, Paschal Donohoe – also Minister for Public Expenditure and therefore the most powerful minister for finance since Charlie McCreevy in his pomp?
Of course, they will say they have learned the lessons of the crash, and are listening to the experts. But they should be judged by their deeds, not their words. That means we will only be able to tell whether they are serious about the pledges of prudence when Donohoe frames his budget – with the assistance and input of his colleagues, and his friends in Fianna Fáil, of course – in October. But we will get a sense of where he is going with that next week, when the Minister presents his summer statement.
The election, stupid
All the warnings are fine and dandy of course – but it’s easier said than done. The complicating factor, as ever, is politics. Last time I checked, the pointy-heads from the Fiscal Council and the rest of them aren’t running for election any time soon.
Paschal Donohoe is. And so is Leo Varadkar and Simon Harris and Eoghan Murphy and the rest of them. And so are Micheál Martin, Michael McGrath, Mary Lou McDonald, Róisín Shortall and Brendan Howlin.
Charlie McCreevy is remembered for his simple philosophy that when he had the money, he spent it, and when he didn’t have it, he didn’t.
A less well-known McCreevyism was uttered at the Oireachtas banking inquiry a few years ago, when he wondered if it was even possible to run a surplus in a democracy, given all the competing (and worthy) demands on public resources when they are available. This ignores the fact that many democracies, including about half of the European ones, are currently running budget surpluses. The real question is whether it is possible to run a surplus in the Irish democracy.
Of course we are going to try to buy the election, one member of the administration told me then. But we will do it as prudently as we can
So this becomes a question of politics more than economics. And for politics, read elections. Irish politicians have been wedded to the idea that a government with the resources has to use them, lavishing tax cuts on taxpayers and budget increases on public services. This has been most associated in the public mind with Fianna Fáil, but maybe that’s just because that party has been in office more than anyone else.
Not generous enough
At the last election Fine Gael and Labour used the pre-election budget in October 2015 just as politically as any Fianna Fáil government had done, cutting taxes and hiking public spending. Of course we are going to try to buy the election, one member of the administration told me then. But we will do it as prudently as we can. Michael Noonan promised that “All workers will gain a full extra week’s wages”. The Government, he said, could “well afford the extra expenditure”.
In the event, the voters were unimpressed. Fine Gael was hammered. Labour was annihilated.
What lessons can we take from this? Well, we can take one of two. Either the voters were unimpressed by Government giveaways at election time, understanding that this was a big part of what got us into trouble in the first place – or they figured that the giveaway wasn’t half generous enough.
As the realisation sinks in that the confidence-and-supply agreement is unlikely to be renewed and that therefore we are in the run-in to a general election, the lessons of the last election have been much discussed in Government Buildings. Ministers, officials and handlers alike have wondered which of the two interpretations is the correct one.
I am told Paschal Donohoe leans towards the first one: that while voters want the problems in housing and health to be addressed, budget giveaways aren’t really what they used to be, electorally speaking. If this is so, he will soon get an opportunity to demonstrate his aversion to the practice of buying voters off with their own money. He certainly talks a good game. But it is his policy choices in the coming days and months that will be really instructive.