We have bankrupted the state three times since 1950. Each time the broad pattern was the same: an international shock depressed economic activity here and the state’s ability to fund itself through general taxes was compromised. National debt levels rose to plug the funding gap, and spending on redistributive programmes to help the weaker parts of society fell. The state’s ability to fund itself was not as strong as the people, or their government, thought.
Each time we’ve found that politicians can gain popularity by lowering taxes and increasing spending in the short run, only to find that promising everyone the Mater Private in their front garden and Croke Park in their back garden isn’t sustainable.
As I’ve written many times now in this column, we are back full circle to 2002, when unrealistic public expectations and a political system paralysed by the need to be popular is talking about spending more, and taxing less.
But there’s a difference this time. We have spending rules built into our Constitution, and a quango to monitor whether those rules are being observed.
We also have a much more analytically-driven civil service, which has tried to learn the lessons of the crisis by building much more analysis and data into its decisions.
Last week, the aforementioned quango, the Irish Fiscal Council, released its report showing that Ireland was technically in breach of its fiscal rules, and that tax-and-spend measures announced in the Programme for a Partnership Government aren’t costed. The language is firm but very clear.
Here’s a sample: “[The Programme for a Partnership Government] document does not reconcile the overall cost of the various policy proposals with an estimate of the resources that will be available in future years to fund new tax and spending measures.”
Can’t be much clearer than that.
The council is clear that exiting the ‘corrective’ arm of the fiscal rules Ireland has signed up to is a good thing, but tells us that the ‘preventative’ arm’s rules are quite a bit stricter, and so budget giveaways will be harder and harder to do.
Remember the context Ireland is within now. We have the fastest growing economy in Europe. Even stripping out some of the activities of multinationals and just looking at domestic demand for goods and services, we can see that Ireland is booming ahead. Unemployment is falling and employment is rising – everywhere across the country – and workers want wage increases and employers want tax cuts. Everyone wants their share of the recovery. It’s all back to normal.
In 2014, then minister for health Leo Varadkar gave a speech at the MacGill Summer School in which he said that, far from the people not trusting politicians, the politicians don’t trust the people. Varadkar wrote: “We tell them that you can have a school in every village, a university in every large town. And worse still, even if it is affordable, we do not trust people enough to tell them why it would not be a good idea. Routinely, in opposition, politicians promise the undeliverable and then, surprisingly, under-deliver.”
The fiscal council is designed to get around this problem – of having to promise too much to get elected, and then either delivering on promises you know are fiscally foolish or being flogged at the next election for failing to deliver them.
Frankfurt’s way, etc, etc.
Think how far our budgetary institutions have evolved. From Charlie McCreevy getting up on Budget Day in the early 2000s and announcing measures his own cabinet hadn’t heard of, to today’s fiscal council reports, Spring Statements, National Economic Dialogues, a Parliamentary Budget Committee, a Budget Office to cost the figures independently, and an agreed spending envelope by the public, a lot has changed in 15 years.
Despite the annoyance it generated during the election, ‘fiscal space’ is a well recognised academic idea dating to the 1990s, and the fact that the entire debate took place using broad parameters everyone serious agreed upon is a very good thing. We actually had a debate in Ireland, messy and all as it was, on whether to spend more on services, or give back more in tax cuts. The public chose the former in large numbers. They want a recovery in services.
The fiscal council estimates that, just to keep the show on the road, red-queen style, the government will need to spend another €6 billion to cope with demographic pressures, inflation pressures and more. And that’s just to stand still.
The fiscal council punctures the balloon of unrealistic expectations when it writes that despite the boom in our economy this year, we have seen “only a modest improvement in the public finances”.
It is only through rigorous and transparent analysis of where we actually are as a state that we can strengthen our finances to avoid the vicissitudes of another collapse. We are one of the most open economies on Earth. Every shock has the capacity to affect us. The state’s finances have not been able to cope three times before. Next time, if the warnings of bodies such as the fiscal council aren’t ignored, we just might avoid a fourth national crisis.