Government parties are at it again – making spending pledges on uncertain growth
All electoral promises are fictions a party writes from a need to appeal to the classes most likely to vote for it. The electorate hates the universal social charge, because it is such a good tax. So parties are queuing up to kill it.
Even Ibec’s excellent idea to turn the USC into a pension pot has seemingly fallen on deaf ears. Yet Ireland is not a high tax economy overall; it is more accurately described as a high income tax country.
Fine Gael and Labour have promised to scrap USC, while Labour has pledged to increase the minimum wage by more than 20 per cent. Economic growth will supply the missing funds. Given that the USC funds some €3.8 billion of social transfers, without it, and without growth, services will have to be cut back or stopped altogether. Yet again the poor will suffer.
Growth is not a variable the government controls. In fact, Ireland’s growth rates are highly volatile, as are its tax revenues. The Irish Fiscal Council recently looked at just how variable PAYE, excise, corporation tax and Vat were, relative to forecasted levels of those taxes. I’ll spare you the whole report, but its essence is this: the forecasts of how much the government will have to spend are highly variable, and this variation comes from macroeconomic drivers, where the government over-estimated how much cash it would have coming from a growing economy.
In promising to spend between €8 billion and €12 billion on current and capital spending and tax cuts from now until 2021, the government parties have committed this error again. In policymaking, nothing is learned for long. Not only are the parties promising to spend money they might not have, but in effect they are creating a credibility problem if the growth doesn’t materialise. Each and every part of each and every plan assumes a fast-growing economy. No growth? No plan. No trust.
The Fiscal Council prepared ‘fan charts’ of the likelihood of growth in the next three years. They showed growth ranging between 1.5 per cent and 8 per cent. The council recently scolded the government, saying budget 2016 did not provide well-specified medium-term plans, and worse: its own multi-year expenditure ceilings were not being implemented. We are not operating in an environment of maximal prudence. And we should be. The warning noises from the international economy are getting louder.
This has been an election dominated by economic policies of one kind or another, essentially trying to solve three problems.
First, what to do about those in middle classes who lose half their incomes in tax.
Second, how to fix the capital bottlenecks, including the housing problems the state’s poorest citizens are experiencing.
Third, how to cope with the demographic pressures on the state caused by a simultaneously younger and older population, in early childcare, education, and health.
Fine Gael and Labour will cut taxes and spend a bit more on childcare, help households save for a house and pay for that mortgage, employ more gardaí, doctors, nurses, and social workers, and build more primary care centres and schools.
Both parties have a plan to build many, many houses. Both parties favour current spending on social transfers such as child benefit and pensions to capital spending such as building roads and hospitals in a ratio of about 4 to 1. For every euro promised by both parties in current spending, only 10 cents is in capital spending.
As former Department of Finance Secretary General John Moran recently and correctly argued, every time a minister for public expenditure commits to spend more on current spending, that spending is locked in forever more. 2016’s increase in child benefit is there in 2017, and 2018, and 2019, and probably increased, as well.
Increases in capital spending are finite. Eventually that road gets finished. Yet the tried and true political promise to voters is around changes in current spending.
The over-arching narrative in the reception of these ideas is the inability of the public to trust the government, or the opposition, on economic or social issues. It is not a good time to be a politician.