It’s not a fiscal space - it’s a sweetie space
Sweeties for all. The good times have returned, total domestic demand is forecast to grow by 3.5 per cent in 2017, and everyone seems to have forgotten that the country needs to to borrow to keep the lights on, that only three or four years ago we were in a troika bailout programme, and that the structure of our society has changed markedly since the early 2000s, when sweetie-giving became the order of the fiscal day.
Ireland is almost unique in the developed world in the way it does its fiscal planning. The process is: figure out roughly how much tax you’ll have by budget day, listen to lobbyists, float possible policies suggested by lobbyists through the media, and then do a big announcement in the Dáil, but only after handing the entire budget over to the media, thus making the Oireachtas completely redundant, except as an audience for your big speech and a rubberstamp to the Finance Bill a month or so later. No scrutiny beforehand is allowed.
This process is completely bonkers. It results in policy madness like decentralisation in the 2000s and the abolition of water rates in the late 1970s, and it has to be thrown in the deepest part of the sea, preferably after being set on fire for quite some time beforehand. It is the core of the process which has bankrupted our state three times since independence. It has got to go.
To be fair to our civil servants – and there aren’t many people who are – the budgetary process is evolving. The new Committee on Budget Oversight under Fine Gael’s John Paul Phelan had very little time to get its act together for this budgetary cycle, but still produced a very useful preliminary report, and is now ready to go for Budget 2018.
The Department of Finance has published the summer statement setting out its likely forecasts for the short and medium term. It also published its position papers on tax and held the National Economic Dialogue, while the briefings various departments gave to incoming ministers to the new government were also very useful.
Combine these reports with the reports of the Fiscal Advisory Council, and the European Commission via its Country Specific Recommendation mechanism, and you have a much fuller picture of the state of the Irish economy, compared to the picture that Ahern and McCreevy had in the early 2000s. The people in the Departments of Public Expenditure and Finance are also better trained, and have access to much better data – not to mention better computers. The reader would be shocked to find out how many recent budgets this state pumped out using Lotus Notes. If you don’t know what Lotus Notes is, keep it that way. Just compare, say, Budget 2016 with Budget 2006 to see the difference in analytical capacity (to say nothing of formatting capacity).
The goal is to have open and inclusive budget planning. No more decentralisation or water rates episodes. The new processes give information to Oireachtas members through a yet to be set up Parliamentary Budget Office, and empower committees to seek higher-level analysis of Ireland’s budgetary position earlier in the year. This doesn’t take power from the government. Ultimately, the cabinet decides on budgetary matters and Ministers Noonan and Donohoe get to announce the tax (Noonan) and spend (Donohoe) portions of Budget 2017 in the Dáil.
What the new processes take away is the spectacle, the performance element of budget day, where someone like Charlie McCreevy can stand up and announce a measure like decentralisation without much of his cabinet knowing the details, let alone the Oireachtas or his department. The new processes reduce the likelihood of truly stupid policies coming before the Dáil to rubberstamp them.
Fiscal comes from the Latin for purse. The management of the purse demands you look at how much is coming in – from tax revenues; how much is going out, in expenditure, and how much you need to borrow to fund the difference.
Ireland is constrained in how much extra it can spend by the spending rules known as the fiscal compact. The ‘fiscal space’ is between what you as a government spend now and the upper limit of the application of those rules. It’s about €1.2 billion this year, with a tax part of €400 million and a spend part of €800 million.
This is less than half the fiscal space available last year, when we had €1.5 billion but crammed in that much again to change expenditure ceilings for this year under the EU’s revised budget rules. In reality, the last government stimulated the economy by nearly twice as much as it said it would. Then the 2016 election was fought over the size of the fiscal space from 2017 to 2021.
Gift bag
But it’s not a fiscal space. It’s a sweetie space. A huge gift bag of taxpayers’ money to be redistributed as the government sees fit. And this is a minority government with Independent Alliance ministers within it, and a confidence and supply agreement with Fianna Fáil.
It looks like there will be a -0.5 per cent cut on the 5 per cent USC rate worth about €350 per year per person at the highest relevant income rate, and a direct subsidy to builders and property developers via a tax credit to first-time buyers, albeit with a sunset clause. This, combined with tax measures to help firms getting whacked by Brexit, will eat up much of Michael Noonan’s sweetie ration.
The USC cut and the homebuyer tax credit make no sense. The cut to USC is unnecessary given the severe need for capital investment in areas such as housing, transport and education. The first-time buyer tax credit will fuel price appreciation and do nothing to help increase what is really needed: increased supply of housing.
The tax credit is a way to get around the Central Bank’s savings rules, which exposes a deep difference of opinion between the Department of Finance and the Central Bank. Effectively one arm of the state is working directly against another using their various policy instruments. Whoever wins, the first-time buyer loses, unless they are part of the 50 per cent or more transactions taking place entirely in cash.
(An aside to any journalists reading this column: who are these people buying houses with cash, and where does this cash come from?)
Ireland’s sweetie space has got a little bigger, with an extra €200 million coming into the space thanks to increased corporate tax revenue.
One of the problems for the new Committee on Budget Oversight was the volatility of corporation tax receipts. Things are going Ireland’s way at the moment, as corporation tax receipts are booming. But they could also go awry very quickly should conditions in the international economy worsen. Corporation tax could be this government’s stamp duty. Without the large increases in corporation tax, the extra €200 million for tax measures would not be possible, and without the increases in corporation tax, the overall tax take for 2016 so far would be down, not up. The volatility of corporation tax needs to be taken seriously. You don’t plan to pay your bills with money you find on the street.
Structural changes
Really, this is Paschal Donohoe’s budget. He gets to spend €800 million or so, and he gets to spend it on childcare, old age pensions, public sector pay, health and education. Here, the battles will be fought over the weekend on the exact composition of the budget, but again, it’s all about doling out sweeties rather than enacting fiscal policy to make structural changes in our economy.
Make no mistake: €100 million for higher education is welcome, but it doesn’t come even close to solving the underlying problems in the third-level sector, of creaking capital infrastructure, institutions in deficit positions and over-worked staff, to say nothing of Ireland’s slide in the international rankings.
The problems the state are centred around are demographics, infrastructure and legacy. All are long-term, all are thorny, and all are practically impossible for a minority government held in check by arch populists. Demographic challenges arise because we have a very young, and a soon to be very old, population. Both require increased spending on education and health before you do anything. Both groups require increased state supports such as childcare, child benefit, the old age pension, medical cards and HSE spending. This means before you do any new policymaking, you have to increase your spending on the current side.
Ireland has underinvested in infrastructure for more than a decade. The recent world economic forum report lambasted us for failing to invest properly, noting that we have worse port infrastructure than some land-locked countries. The capital plan unveiled by the last government in September 2015 put around €4 billion into the pot for 2017, and Donohoe increased that to about €5 billion for housing-related work.
It’s clear this number needs to go up for the foreseeable future. Legacy issues include the reparations paid by the Redress Board to survivors of institutional abuse, the set up of Irish Water – it hasn’t gone away either – and our near certain failure to meet our climate targets. Each mean the exchequer is on the hook for more and more as the years roll by, with no particular solution mechanism evolving.
There is no clamour to sort these problems out, of course. And it is obvious why not. Because there are sweeties.