Spring Statement Gets the Balance Right

Backslapping. Clarity. A break from the policies of the past. Balance. Forecasts as anchors for expectations. Prudence.  Long-term thinking. These were the phrases I scribbled down while listening to Ministers Noonan and Howlin during last Tuesday’s spring statement.

First things first: Olympic-level backslapping. The government has a good news story on the economy and wants to let everyone know about it. By the standards of Irish politics they weren’t too over the top about it, and didn’t give the opposition anywhere near as much abuse as I thought I might see beforehand, but the ministers might get repetitive strain injuries and end up in back braces if it keeps up much longer.

 Clarity. The government wanted to frame the next few budgets in terms of moving away from income taxes and towards taxes which put the economy on a sounder footing, as well as planning for demographic changes which will impact public spending, particularly on health and education. This was really well done in my view, and proper fiscal forward guidance. The level of analysis was excellent and the assumptions did not seem either too rosy or too conservative. The balance and prudence the government was hunting for is reflected in their numbers, particularly in the programme update documentation. An example: investment in the economy is predicted to rise by 15% in 2015, 12% in 2016, and 8.1% in 2017, and 4% in 2018. So the impulse from investment, or exports, or any other category, is much smaller than we have seen in previous periods.

A break from the policies of the past. It is a genuinely interesting five-year plan, which amounts to a joint statement of political intent for the coming general election. Given that every single previous government has tried to buy the election in some shape or form, being as open as possible about that. The government is trying to formulate an Irish solution to the political business cycle, where incumbents run the economy like a broken rollercoaster in order to hold the levers of power for another go-around. Given how often this tiny state has found itself in fiscal calamity since independence I can only applaud the effort.

Balance. On the tax side, the medium term strategy is to ensure that more and more the state is paying for state services with revenue from property and carbon taxes rather than just income and consumption. The spring statement describes a falling path of taxes from income and wealth from now until 2020. The ‘average’ household, earning somewhere between €35,000 and €70,000, will see gains of around 5 to 10 euros per week into their pockets after each budget from now until 2020, assuming we see growth in the economy of around 3%.

Across 2015 the government will spend around €50 billion. Increasing that by €0.75 billion really won’t help anyone in a big way, but in each year to 2020, that kind of giveaway will help return us to the wealth and income levels of the early 2000s for a majority of the population.

On the spending side, the government told us the surplus to be distributed would be between €600 and €750 million in next October’s budget. This is a very useful piece of information, particularly if you’re a lobbyist. You know what the government has to spend, and you can make your case based on the forecast the government takes as truth. The €750 million puts a natural limit on the level of spending people will end up asking for, particularly on public sector pay and health spending. Other political parties also have to react to this forecast. Sadly, the government has decided to long finger the creation of an independent budget office until after the next election. Such an office will allow credible budget plans for all the political parties.

Forecasts as anchors for expectations. If it is treated with the respect it deserves, then the forecast of the spring statement will not only set the agenda for the pre-election debate, it will also act as an effective backstop on interest-group based pay and service demands during the national economic dialogue, which will take place in July, as well as the capital expenditure strategy we will see in the next few weeks. The really big news will be the expectation anchor the spring statement can provide. The government needs to stick to its guns here and treat that anchor seriously, as upon it the next government can build in serious multi-annual budgeting. In reality the backstop comes from the fiscal rules imposed upon us by our European partners. The €1.2 to €1.5 billion ceiling is the residual of that calculation. Wherever these millions go, 50% on spending and 50% on tax changes, as long as the ceiling is respected, the government will have done a good day’s work.

Prudence. All of these forecasts are predicated on steady growth. 3% might seem high but it is achievable in a period where our major trading partners are enjoying the benefits of economic rebounds helped by quantitative easing, low oil prices and a weaker euro as we are. Given such favourable external conditions in the short term, it should be relatively easy to move the unemployment rate from 10% to 9% as demand for labour picks up during the rebound phase the economy is in. But moving from 6% to 5% is much more difficult, as the skill mix those in the 6 to 5 bracket is different, meaning the government will have to spend heavily on labour market activation programmes into the future to alleviate the problem of long term unemployment. The ‘full employment’ target for the government is to reach 6% unemployment by 2018. The current forecasts from the statement show it closer to 7% in 2018, but I think the difficulty is appreciated in government buildings.

Long-term thinking. This government might be unique in actually grasping the problem of long-term policy making. Brendan Howlin made the simple (and true) statement that even if there were no policy changes, expenditure on education, particularly third level, and health would have to rise, and that this needed to be planned for carefully.

Finally, is the spring statement really that prudent? The Ministers were all but wearing t-shirts saying ‘no return to boom-bust’, and yet their plan ultimately amounts to taxes going down and spending going up, and letting economic growth, plus selling off our stakes in the banks, take care of the size of the national debt. The opposition won’t believe in the plan voiced by the spring statement. The government holds the levers of power for 300 or so more days. If it believes the plan, other actors will be forced to as well. Combined with a bit of luck, the government might have gotten the balancing act right for once and changed Irish fiscal policy for the better. Here’s hoping.

(An unedited version of my Sunday Business Post Column from yesterday).