Public Spending
Finance minister Paschal Donohoe’s extravagant spending plans have attracted a slap on the wrist from the state’s spending watchdog, writes John Kinsella
The finance minister has budgeted for a massive increase in public spending. A state watchdog says his plans are unsustainable
When the local chapter of this extraordinary economic time comes to be written, much of the focus will be on Paschal Donohoe. The Minister for Finance has been little to the fore as the limelight of the country’s Covid response has fallen to others, mainly Micheál Martin and Leo Varadkar, with the supporting cast of NPHET public health officials, and even Eamon Ryan of the Greens getting a look in.
It has been left to Donohoe to grapple with the economic circumstances, while thanking his lucky stars that he chose an ultracautious budget in October 2019, despite a looming general election.
It was not an election budget in the traditional Irish sense because of the possibility at the time that the UK would crash out of the European Union at the end of 2019. After an election of their own last December, the British signed up for a Withdrawal Agreement.
Suitably relieved, Ireland’s election then went ahead in February, and Fine Gael under-preformed at the polls. Donohoe very nearly lost his own seat in Dublin Central, eventually securing the third berth of four available.
Some of his unfortunate colleagues thought Prudent Paschal might have budgeted a smidgen more to help them out. Slow-forward to where we are now, since this year has dragged so much. Brexit’s glacial grist, in negotiations over a future relationship and trade deal, have laboured to bring forth Groundhog Day in the dying weeks of 2020.
There have now been two once-ina-century financial collapses in the space of 12 years, and many people believed the implosion of 2008 could not be matched in their lifetime. But yet, it has come to pass, and in relatively short order.
It was Michael Noonan who worked with might and main a decade ago to restore Ireland’s credibility while wearing the hair shirt imposed by the troika of EU Commission, IMF and European Central Bank on foot of a humiliating bailout. Yet the aftermath of the Great Financial Crisis eased the funding crisis caused by the pandemic.
Due to central bank quantitative easing (their term for printing money), ten-year borrowing has never been so cheap. Keynesian pump-priming is the order of the day, with monetarism and austerity banished like such old-fashioned medicine as the application of leeches.
To date in 2020, Ireland has borrowed c.€24bn, with loan maturity averaging 11 years and the new debt cost averaging 0.21% per annum. A ten-year bond issue in November got away at a yield of 0.20%, i.e. funders are paying the Irish state to buy its debt.
This opens up a whole new vista for borrow and spend ministers. For instance, sovereign bonds amounting to c.€17bn that matured in 2020 had
an annual interest cost of €800m. Replacement borrowing at 0.21% incurs annual interest payments of only €36m.
Against this backdrop, Budget 2021 is very different to its predecessor a year earlier. Instead of planning for a modest surplus for 2020, the state’s expenditure package for 2021 is posited on massive borrowing that will see additional spending of more than €15bn.
The planned budget surplus has vanished. Donohoe expects a deficit of 10.7% of Gross National Income for 2020, and a €20bn deficit in 2021. The Minister for Finance, a keen student of history and capitalism, is overseeing Ireland’s largest ever borrowing binge, while reassuring his public that there’s nothing to worry about.
As with Michael Noonan before him, conveying calm and confidence is half the battle for the person in charge of the state’s finances. Donohoe’s inability to turn a hair is one of his strongest suits, and he is becoming the Fine Gael dauphin, as primed to succeed as Brian Cowen was in Bertie Ahern days of yore.
The finance minister is innately cautious, which makes his billions in Covid emergency supports somewhat surprising. Employers and individuals should be grateful, but not everyone is impressed. The year ended with a sharp slap on the wrist for Prudent Paschal, with the Irish Fiscal Advisory Council noting that Budget 2021 included substantial and permanent increases in spending without long-term funding. IFAC pointed to non Covid-related spending and hiring in health, education and other areas, spending likely to remain long after the pandemic.
Chairman Sebastian Barnes commented: “The increases are surprisingly large in the context of uncertain growth prospects and compared to previous budgets. The permanent increases could even be as high as €8.5bn. These measures are not conducive to prudent economic and budgetary management. There is no sense as to how this spending will be financed sustainably over the medium term, and these unfunded commitments will add to future fiscal pressures.”
Donohoe is now under pressure to deliver “credible plans” in the government’s medium-term strategy, which is due in April 2021. In IFAC’s view, Donohoe and his colleagues can’t be trusted to do the right thing. The watchdog is calling for legislative change to the Fiscal Responsibility Act 2012, to anchor deficits to Gross National Income instead of leprechauneconomics Gross Domestic Product.
In many finance ministries, the new conventional wisdom is that the size of sovereign debt doesn’t matter, so long as the interest bill can be serviced. And with the ECB depressing rates below zero, the temptation is to spend like there’s no tomorrow.
Partly due to the pandemic, but also because of political choices, by the end of 2021 Donohoe will have presided over a 22% expansion in Ireland’s net debt in two years. If Donohoe really has been captured by the big spenders in Fianna Fáil, then he might want to plot his exit from Merrion Street, rather than having to be the man who makes us pay some of it back.
As chairman of the Eurogroup committee of single-currency finance ministers, Donohoe is banking some Brussels credibility. Judging by how often he refers to ‘our country’, close observers believe his heart is still in Phibsborough, and the highest prize in domestic politics.