Let’s draw up a list of the groups most likely to vote en masse in the next election. Homeowners, private sector workers, public sector workers, older people, families, farmers, employers, and our vitally, vitally important start-up people.
Now let’s look at Budget 2016. The deferral of any local property tax re-valuation until 2019. Homeowners? Check. Money for more teachers, nurses, and gardaí; more money for existing public sector workers. Public sector? Check. Money for workers, especially those earning up to €70,000 via tax cuts and an increase in the national minimum wage to €9.15 per hour. Workers? Check.
Money for older people via the Fair Deal scheme; an increase in the old age pension, up €3 a week; plus a bump on the fuel allowance of €2.50 and an end to the pension levy. Oldies? Check. Money for kids up to 12 via the extension of the GP scheme; a fiver on child benefit and increased childcare provision, including increasing early childhood education placements from three years to five-and-a-half with disability supports; inclusion training; increased capitation payments to childcare facilities; 8,000 places through subvention; provisions of after-school using school buildings; and two weeks of paternity leave. Families with kids? Double check.
An increase in the respite grant for carers, as well as a tax credit. Carers? Check. Tax incentives for the SME crowd. Check. Succession planning and tax treatment for farming stock. Farmers? Check. Nama magicking up tens of thousands of houses in Dublin by 2021? Check.
Notice who is not there in the list. The young, the homeless, marginalised groups (like Travellers, for example), those with unpayable levels of debt, the long-term unemployed, those renting, and those trying to buy. Landlords. Those within the health service who feel the system, already a bottomless pit for taxpayers’ cash, needs yet more of it. Patients’ groups. There are more.
The government has chosen a mildly expansionary budgetary strategy, cutting income taxes a bit, increasing current spending a bit, and increasing capital spending a bit. It can do this because tax revenues are well ahead of profile, and the ratios that matter all have gross domestic product in the denominator.
As long as gross domestic product is forecast to expand (and it is) by more than 6 per cent this year and more than 4 per cent next year, the government can do pretty much what it likes and still stay within the fiscal strictures set down by our own fiscal rules and our need for compliance with the structural balance limits set by the European Commission.
Spending was going to have to increase, to cope with the increased needs of the older and younger portions of our society. Our workers have been promised tax cuts for a year, and so they had a legitimate expectation that they would get something back. Public sector workers had their wages cut because of an emergency which the government never tires of telling us has passed. So their wages needed to go up a bit.
If that was all that had happened, the budget would have been a masterstroke of both fiscal prudence and electioneering. Given the huge drop in capital spending caused by the crisis, extra tax revenue could have gone to shore up these deficits, or to increase services. But that didn’t happen.
Instead, large sections of society – coincidentally, those who vote early and often – got the sweeties that the ministers were more than happy to give out. Decreasing taxes when services are starved of cash, and increasing disposable income when retail sales are bouncing along at near 2008 levels, both make no economic sense. In fact, they smack of precisely the same logic which got us into this mess.
Many economists were worried before this budget – easily the most leaked in a decade – that it would have an expansionary effect at the wrong point in the cycle. Ireland is rebounding very strongly from a deep recession caused by the collapse of an asset bubble, a financial crisis and then austerity. This rebound won’t last for ever. Planning as if it will is folly. Spending as if it will is downright dangerous – using windfall revenues as if they could not blow away on a different wind makes no sense whatsoever.
Enter Professor John McHale. Bright, articulate and responsible, he was an excellent choice to head the Fiscal Advisory Council, and has been instrumental in maintaining its independence. The Galway-based economist has not been afraid to criticise government and, at times, the relationship between the state and its fiscal advisory body has been fraught. This is arguably a very good thing.
Last week, McHale broke with tradition. Normally, the council waits a month in order to assess the budget. Last week, McHale did not even wait a full day, appearing on RTE’s Morning Ireland on Wednesday to outline his view that Budget 2016 was too expansionary.
In one remark, he questioned whether the budget was even within the EU deficit rules. Shortly after, he withdrew the remark. The rules say our structural deficit has to come down below 0.8 per cent of GDP, and the budget projections have it coming in at 0.6 per cent. So McHale was technically incorrect, but the spirit of his critique – don’t spend windfall revenues from a rebound as if the structural weaknesses in your economy have disappeared ��� is exactly correct. It is a shame the deficit comment has overshadowed the other points he made in relation to the budget, all of which I agree with.
The government has declared this budget to change Ireland’s tax-and-spend mix by only €1.5 billion. In reality, it is much more. By massively increasing its spending for 2015 through the use of supplementary estimates, the overall impact on next year is closer to €3 billion. For a country still running a deficit, this is a massive sum.
There are plenty of reasons for the government to make this decision. As I’ve mentioned above, after years of austerity, the public services need additional funding, and most of the population have been longing for tax cuts; government TDs, too, have been dying to bring these back to their constituents.
But there is also a creeping feeling that the budget was framed by an imminent election. In this sense, it begs a question: has the government put politics above economics? With short-term growth surging, there is, as the ESRI’s Professor Kieran McQuinn has noted, little need to artificially stimulate the economy further at present.
This was a point highlighted by credit rating agency Fitch which said that the pro-cyclical stimulus in Budget 2016 was likely to “increase economic volatility” (although it did note that the overall package was consistent with improving public finances).
Despite withdrawing the deficit remark, McHale remains worried about the impact of supplementary estimates on next year’s numbers and the government’s multi-year expenditure ceiling. I’m worried, too. Are we at the start of yet another series of poor decisions on fiscal policy, ultimately ending in ruin for the country?