To govern is to choose — so the minister has tough choices ahead
The silly season is upon us but politicians should stop backing schemes that will blow the budget, writes Colm McCarthy
THE Dail recess commenced last Friday — the annual signal for the abandonment of serious politics until the autumn. In case anyone failed to notice, Transport Minister Shane Ross helpfully proposed that Ireland should offer to host the Olympic Games, thus formally inaugurating the silly season.
But the week also contained the summer economic statement, setting a sobering background for October’s budget, and the Central Statistics Office (CSO) released revised estimates of economic activity in recent years, following on from the realisation that figures prepared in line with the European statistical conventions have become meaningless for Ireland.
The operations of multinational companies exaggerate Ireland’s apparent economic performance in three ways. Companies can re-domicile overseas operations, which have nothing to do with Ireland, in a manner which inflates Irish GDP as measured; they can locate intellectual property here so that its annual depreciation gets counted as Irish output; and aircraft which may never even have visited Ireland can also get their depreciation counted here if they are the property of Irish-based leasing companies.
These effects have always been present but jumped dramatically in 2015, creating the impression of an extraordinary hike in the growth rate. The fault rests with the international statistical conventions employed by Eurostat, the EU’s statistical agency in Luxembourg, and not with the Irish CSO in Cork.
When the dodgy numbers for 2015 were first released last year the American economist Paul Krugman pronounced them “leprechaun economics”, a silly remark repeated faithfully by Irish reporters who should understand by now that the leprechauns are in Luxembourg, not in Cork.
The CSO has thankfully produced modified numbers which make better sense, but it is required by Eurostat rules to continue the publication of the meaningless ones as well. The modified and more credible measure of economic activity, while confirming the rapid growth since 2012, is much lower than the leprechaun, Eurostat-ordained figure. As a result, measures of the ratio of state debt, or public spending, to economic activity will now be available in two variants: one (the lower of the pair) that makes no sense at all and a less flattering version that means something. Opportunities to cite the flattering version will be available to anyone who enjoys throwing sand in the eyes of the public. In addition to producing the more credible numbers, the Irish CSO should be campaigning for a revision to the international statistical conventions which gave rise to Professor Krugman’s popular, but silly, description.
If Finance Minister Paschal Donohoe’s budget in October is as prudent as he has been promising, it will represent another step in the restoration of long-term sustainability in state finances.
It is just a few short years since the Irish State lost access to the sovereign credit markets and was forced for the first time to borrow from the IMF and other official lenders. The inability to borrow in the next downturn would eliminate the scope for domestic policy options, in particular for any counter-cyclical budget measures. The dividend for prudence now is freedom of action in the future should things go wrong.
After five straight years of brisk economic recovery, and with the labour market finally beginning to tighten, the next few years will likely see a slowdown and the Department of Finance has been forecasting a gentle deceleration. For a country with heavy state debt, the risk is that the next downturn coincides with difficult conditions in the markets and another enforced period of austerity.
The architecture of Irish economic policy has been simplified, and the key choices narrowed, since the adoption of the common currency back in 1999. Countries with their own currency can respond to a slowdown through cutting the exchange rate or through easier monetary policy. These options are sacrificed when the independent currency is abolished and the only stabilising instrument is the budget.
If the freedom to borrow has been preserved, government debt can be allowed to rise in the bad years, provided there is somebody willing to buy. When there is no exchange rate to manage downwards and interest rates are determined elsewhere, and if budget relaxation is also not possible, there are no policy instruments left and poor economic conditions cannot be ameliorated through domestic action.
The eurozone is thus a challenging place for small members with heavy debts. When market access to state credit evaporated in the summer of 2010, the sole remaining policy tool became unavailable. There will be a repetition should, for example, a Brexit-induced recession coincide with nervous government bond markets. The current ability of the Irish and some other indebted eurozone governments to borrow freely at low interest is a consequence of a European Central Bank policy regime which will not long survive.
Department of Finance figures released two weeks ago confirm that the outstanding Irish debt burden is, relative to debt-servicing capacity, still at dangerously high levels.
A period of zero deficits, or indeed of steady small surpluses, is required in order to eliminate reliance next time on the kindness of strangers.
The ultimate constraint on budget policy is not the thicket of European Commission fiscal rules, it is the availability of willing purchasers of government debt in the bad times. Paschal Donohoe’s statement acknowledges this central reality and his resolve will be tested in October.
The greatest threat to Donohoe’s first budget is not unrealistic expectations of tax cuts or of increases in current spending. There will be very little of either. The biggest mistake over the next few years would be, yet again, a splurge on capital spending, particularly if politics rather than economics drives the selection of projects.
The capital budget has been squeezed since the bubble burst and there is now a backlog of work to be done. More funds are being committed to housing and the Exchequer must pay for modernising the water system, since users are to be relieved of charges. But there will be limited funds for other projects when the capital plan is finally released.
Politicians are already engaged in promoting projects which, in aggregate, exceed both the financial capacity of the Exchequer and the physical capacity of the building industry. Tom Parlon, the chief executive of the Construction Industry Federation, acknowledged in an Irish Times article last Friday that choices will have to be made.
He wrote: “You can have Metro North or the M20 but you can’t have both.”
The M20 is the Cork to Limerick motorway deferred during the crisis and Metro North an underground tram line serving the airport on Dublin’s northside.
Each November, Dublin City Council does a detailed traffic count, the so-called Cordon Count, on the main commuting routes into the central area of the city.
Contrary to popular belief the figures, posted on the council website, show that traffic has yet to recover to pre-crisis levels.
The worst congestion in the Dublin area is on the M50 and not on routes into the city from the airport or anywhere else. Indeed, the airport enjoys excellent bus connections from all parts of Dublin and the provinces.
The underground tram would cost as much as €2.5bn, an extraordinary sum and at least double the cost of the Cork-Limerick route.
To govern is to choose.
‘The dividend for prudence now is freedom of action in the future’