Bud­get to re­veal ex­tent of ‘hid­den space’ pri­or­i­ties

The Gov­ern­ment has more free­dom of ac­tion in Bud­get 2018 than vot­ers be­lieve — but there’s a catch, writes Dan O’Brien

Sunday Independent (Ireland) - - Comment -

OVER the next week there will be a lot of talk about how bud­getary rules — both EU and na­tional — prevent the Gov­ern­ment from do­ing this and do­ing that. Let’s start this pre-Bud­get col­umn by set­ting out some facts.

Nei­ther set of rules puts any limit on public spend­ing in­creases, pro­vided those in­creases are funded by tax in­creases. Equally, the Gov­ern­ment can cut taxes as much as it wants, pro­vided it re­duces spend­ing in line with the cost.

‘To gov­ern is to choose’ goes the old saw. The rules oblige gov­ern­ments to make choices, in­stead of al­low­ing them to hood­wink vot­ers with tax cuts and/or spend­ing in­creases paid for with bor­rowed money which they, and their chil­dren, will have to ser­vice and re­pay.

Nor do these rules prevent shift­ing the em­pha­sis of spend­ing or tax­a­tion. Ear­lier in the year the Taoiseach de­scribed the free­dom to shift pri­or­i­ties as the “hid­den fis­cal space”.

The lat­ter point is par­tic­u­larly im­por­tant in the con­text of cap­i­tal spend­ing — the money spent on roads, hos­pi­tals, schools and public hous­ing. The lat­est De­part­ment of Fi­nance doc­u­ments show cap­i­tal spend­ing will ac­count for only 7pc of gen­eral Gov­ern­ment ex­pen­di­ture this year. Put an­other way, the cap­i­tal bud­get could be in­creased by 50pc if re­cur­rent spend­ing was trimmed by just a few per­cent­age points.

Tues­day’s Bud­get may not re­veal very much, but it will show how much, if any, of the ‘hid­den’ fis­cal space Gov­ern­ment has de­cided to use. If the Gov­ern­ment fol­lowed the ad­vice of the ma­jor­ity of econ­o­mists, it would con­fine it­self to the hid­den space alone, rather than us­ing lim­ited lee­way for un­funded spend­ing in­creases and tax cuts.

The rea­son most dis­mal sci­en­tists ad­vise against stim­u­lat­ing the econ­omy in Bud­get 2018 is, ul­ti­mately, to lessen the like­li­hood of re­sort­ing to aus­ter­ity when the next slow­down oc­curs. That, in turn, is be­cause the Gov­ern­ment still has not bal­anced its books, 10 years af­ter tum­bling into the red.

If you are spend­ing more than you are tak­ing in the good times, it does not take much of a slow­down to cause the public fi­nances to move into the dan­ger zone. That risk is much greater when you al­ready have a mas­sive ac­cu­mu­lated debt bur­den.

This was un­der­scored on Fri­day when the Cen­tral Statis­tics Of­fice pub­lished its full set of public fi­nances fig­ures for 2016.

At the end of last year, the Gov­ern­ment owed €201bn. When the Gov­ern­ment’s cash on hand is de­ducted from that gross fig­ure, the state had a debt of €176bn. De­spite the econ­omy be­ing in re­cov­ery mode since 2012, the debt pile has risen by €24bn over four years and con­tin­ues to rise.

To put that into less mind-bog­gling terms, it amounts to a debt bur­den of €37,000 for every per­son cur­rently at work in the econ­omy.

The Gov­ern­ment’s Bud­get 2018 sums are pred­i­cated on the econ­omy growing strongly next year. Most econ­o­mists who try to fore­cast how ac­tiv­ity will evolve agree. The bud­getary watch­dog — the Fis­cal Ad­vi­sory Coun­cil — has given the man­darins’ eco­nomic pro­jec­tions its stamp of ap­proval.

This is per­fectly rea­son­able. Ire­land’s main ex­port mar­kets are, col­lec­tively, growing at the fastest clip in a decade. For­eign in­vest­ment con­tin­ues to flow into the coun­try. And there are more than a few in­dige­nous sec­tors that are ex­pand­ing nicely. But growth is not guar­an­teed.

Two weeks ago this col­umn noted two wor­ry­ing re­cent de­vel­op­ments.

Fig­ures pub­lished in mid-Septem­ber showed the widest mea­sure of con­sumer spend­ing con­tracted in the April-June pe­riod. A week later an­other set of num­bers showed em­ploy­ment growth had slowed sharply in the same pe­riod.

As sug­gested two weeks ago, this could well have been a tem­po­rary soft­en­ing of the re­cov­ery: such lulls are com­mon enough. But two more timely in­di­ca­tors pub­lished last week give fur­ther cause for con­cern.

On Tues­day, the CSO’s es­ti­mate of the monthly un­em­ploy­ment rate was pub­lished. Just over 6pc of the labour force was job­less in Septem­ber — a rate that has re­mained un­changed since June, af­ter fall­ing al­most un­in­ter­rupt­edly for five years. This sug­gests the near-halt­ing of jobs growth in the sec­ond quar­ter of the year may not have been a one-off blip.

Last week’s sec­ond wor­ry­ing in­di­ca­tor was from the nation’s fac­to­ries.

Though Ire­land is now largely a ser­vices-based econ­omy, man­u­fac­tur­ing still mat­ters a lot. In Au­gust, the “tra­di­tional” in­dus­try sec­tor pro­duced less than in any month in al­most three years and the re­cent trend has been down­wards. The fig­ures are ad­justed for sea­son­al­ity, so the sum­mer hol­i­day slow­down does not ex­plain away the slump.

These new, ad­di­tional con­cerns were partly off­set by the lat­est Gov­ern­ment tax and spend fig­ures.

Last week the Septem­ber num­bers were pub­lished, giv­ing the full pic­ture for the third quar­ter of the year. They showed that the widest avail­able mea­sures of rev­enues — which im­por­tantly in­cludes the large sums paid in so­cial in­sur­ance (PRSI) — perked up a bit over the sum­mer. They cer­tainly didn’t flag.

Over the first nine months of the year, all the Gov­ern­ment’s main sources of cash un­der­shot the De­part­ment of Fi­nance’s pro­jec­tion, if only by a lit­tle, with one ex­cep­tion — the ever-top­i­cal cor­po­ra­tion tax.

Last week’s sur­prise an­nounce­ment by the Euro­pean Com­mis­sion that it was tak­ing the Ir­ish Gov­ern­ment to court gen­er­ated lots of cov­er­age. Brussels re­sorted to the ac­tion be­cause of the Gov­ern­ment’s tar­di­ness in get­ting Ap­ple to put bil­lions of euro into an es­crow ac­count to cover un­der­pay­ments of tax it claims were in breach of com­pe­ti­tion laws. But the an­nounce­ment means very lit­tle. The cash will be lodged before the case is de­cided by the judges.

Martin Shana­han, the boss of the IDA, said last week the de­ci­sion of the Com­mis­sion in Au­gust last to find against Ire­land and Ap­ple has had no im­pact on Ire­land’s at­trac­tive­ness as an in­vest­ment lo­ca­tion.

The threats to Ire­land’s corpo- ra­tion tax regime from var­i­ous Euro­pean an­gles are ex­ag­ger­ated in both like­li­hood and im­pact.

A big­ger and less-dis­cussed threat is the volatil­ity of these rev­enues and the im­pact a de­cline could have on the future fis­cal space.

In the first nine months of this year, cor­po­ra­tion tax re­ceipts were up by half a bil­lion euro on the same pe­riod in 2016. The in­crease was a third more again than the De­part­ment of Fi­nance had pro­jected. Rev­enues are on course to top €8bn for the full year. Un­der­es­ti­mat­ing this source of rev­enue has be­come par for the course in re­cent years. In 2015 alone cor­po­ra­tion tax re­ceipts jumped by 50pc.

What has hap­pened to this wind­fall?

The Gov­ern­ment has spent the lot and locked-in future spend­ing com­mit­ments on the as­sump­tion that the cash keeps flow­ing. Given that this source of rev­enue is among the most volatile — it halved from peak to trough dur­ing the re­ces­sion — this was not wise.

If those rev­enues were to un­wind in the future, for what­ever rea­son, a big hole would be blown in the public fi­nances.

‘The Gov­ern­ment can cut taxes as much as it wants — pro­vided it re­duces spend­ing’

SMIL­ING NOW: Taoiseach Leo Varad­kar (right) and Min­is­ter for Public Ex­pen­di­ture Paschal Dono­hoe

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