Varadkar plans to ‘spend big’ as tax cuts curbed
The pre-budget review should conclude that the economy is strong and giveaways are not needed, writes Colm McCarthy
THE Government will this week announce a “significant ramping up” of spending on Ireland’s infrastructure to allow it to bring forward long-delayed projects like Dublin Metro, the Sunday Independent can reveal.
However, the scope for tax cuts in the Budget this October is understood to have been overstated and is now expected to be closer to €250m, an outcome which may disappoint the “squeezed middle” who were led to anticipate substantially more money in their pocket.
But yesterday a Cabinet source said: “There are still many moving parts. For example, we could still raise taxes on cigarettes and use some of that to make the income tax package better.” He added: “There will be more money in people’s pockets, but also, modern infrastructure all around them.” The Government intends to stick to a 2:1 expenditure versus tax relief ratio agreed with Fianna Fail.
The new capital spending plan, which is also expected to see projects like the M20 between Cork and Limerick, motorway access to the West and North-West, and the A5 from Letterkenny to Derry brought forward, is now expected to form the centrepiece of the Summer Economic Statement to be announced by Finance Minister Paschal Donohoe.
Mr Donohoe is to bring the plan, which is said to also include “major investment” in healthcare, housing and educational institutions, to Cabinet on Tuesday for approval.
In the Sunday Independent today, the distinguished economist Colm McCarthy, a known opponent of the Dublin Metro plan, writes: “It would be a tragedy if resources, likely to be scarce for many years to come, were squandered on politically motivated white elephant schemes.”
Cabinet sources said that the additional expenditure, above what is already planned
through the new 10-year National Development Plan, will not take effect until 2019 onwards. This now leaves the Government open to an accusation that the additional spending to be announced on Wednesday will amount to a series of promises intended to win Fine Gael votes ahead of a General Election likely to take place next year.
But a Government source said: “The increased spending will be incremental each year. There is concern that ramping up spending too quickly will cause construction inflation and we don’t want to end up paying more for the same. We want more for more.”
There is, however, a growing expectation that an election will be held before the Budget next year, possibly as soon as spring or early summer.
Yesterday, Fianna Fail targeted Mr Varadkar’s “new economic policies”, dubbing them “Leonomics” and stating that a number of his policy positions had been found to have “no substance”.
Public Accounts Committee chairman Sean Fleming said: “It’s evident that the Taoiseach is more interested in issuing sound bites rather than actually outlining economic policies of substance.”
Also in the Sunday Independent today, Fianna Fail’s Social Protection spokesman Willie O’Dea says that if government was only about “photo-ops and designer socks” then anyone with a “personal trainer and spin doctor could do it”, a jibe at Mr Varadkar’s reception of the Canadian Prime Minister Justin Trudeau last week. However, Mr O’Dea adds that no matter how Mr Varadkar “juggles the figures” there is “no way I can back any plan that denies increases for carers, people with disabilities or pensioners”.
He says increases over recent years have not kept pace with the increasing cost of living “and that means they have, in real terms, been losing out”.
The Sunday Independent understands that the Government intends to index increas- es in the State pension to the cost of living as an automatic minimum increase every year.
Cabinet sources also told of how Mr Varadkar had adopted a “markedly different style” to his predecessor Enda Kenny.
One source said: “There were two meetings this week to allow for a two-hour discussion on the Summer Economic Statement. That involved a PowerPoint presentation, which was certainly the first time we had one of those under this Government anyway.”
Another source said: “As you saw with the Trudeau visit, he has a different style to Enda. Not better or worse but different. For example, Fine Gael ministers meetings start earlier and, as such, there is more time to discuss the big political issue or challenge of the week. Meetings are also more likely to start and finish on time.”
Other sources said Mr Varadkar “goes through non-contentious items very quickly leaving more time for big or important ones”; also, “there are a lot fewer late, or ‘under the arm’ memos coming to Cabinet”; “he tends to do a ‘tour de table’, inviting everyone to have their say rather than just taking questions on demand”.
However, it is also understood that Mr Varadkar’s style is giving rise to “certain tensions” within the civil service. A senior Government source said: “He is doing bilateral meetings with ministers and their secretary generals so he can get an overview of things, you know, spot potential future problems or banana skins and, other than that, assess progress on implementing the Programme for Government. He has already met Paschal Donohoe, Charlie Flanagan, Eoghan Murphy, Finian McGrath, Richard Bruton and Mary Mitchell O’Connor. There is no resistance so far, but you’d never know. Is there a certain anxiety at civil servant level? I’m sure there is.”
The Government intends to hold a full ‘away day’ Cabinet meeting on climate change and the capital expenditure plan at the end of this month.
Yesterday, Fianna Fail ramped up its political attack on the Government, stating that a number of “key policy positions” taken by the Taoiseach, Leo Varadkar, “have been shown to have no substance”.
PAC chairman Mr Fleming said Mr Varadkar “needs to be more honest and thoughtful regarding his new economic policies.“Taoiseach Varadkar recently stated that he would use the State’s Rainy-Day Fund in order to invest in infrastructure. This may sound like a reasonable proposal but it is lacking in substance. Officials in the Department of Finance confirmed this week at the Public Accounts Committee that there is in fact no money in the Rainy-Day Fund.
“The Taoiseach has also introduced a new concept called ‘hidden fiscal space’. Department of Finance officials again have indicated that there is no hidden fiscal space.
“Taoiseach Varadkar was also forced to do a spectacular U-turn on his pledge to abolish the USC. In reality this tax will continue albeit under a new merged name.
“The Taoiseach is damaging his own reputation when it comes to economic matters. People want to see policies with substance rather than this new Leonomics.”
A source close to Mr Varadkar said yesterday: “Leonomics — I’d say he will like that. Hopefully the people will too.”
LAST Thursday, the Cabinet met to consider the state of the economy in advance of a formal review to be published later this month. The purpose is to usher in the pre-budget speculation season, on which large volumes of ink must be spilled over the next three months.
If the review is rooted in reality, it will draw two conclusions: (i) The economy is in the fifth straight year of a decent recovery, and (ii) this provides no basis for budget giveaways.
Budget 2018 is due early in October. It will be, and it should be, another low-key affair with only minor changes in taxation and spending, which will not discourage the pre-budget speculation industry.
Measuring the performance of the Irish economy has become greatly complicated by the distorting effect of the multinational sector and the requirement on the Central Statistics Office to employ EU-mandated accounting conventions. These procedures exaggerate economic activity here and the figures for Gross Domestic Product include economic activity which actually occurs elsewhere.
Many other macroeconomic aggregates are required to be mismeasured in compliance with rules overseen by Eurostat, the EU’s statistical agency, and the mismeasurement has been getting worse over the years. This leads politicians and commentators, sometimes knowingly, to under-state the ratio of national debt (or any other magnitude) to GDP and to over-state the current balance of payments surplus.
While the economy is doing well, the statistical rules can encourage an exaggerated view of its performance. A measure of real economic activity uninfected by these problems is total employment and the chart shows the trend since early 2006.
Employment has finally recovered to the pre-bubble level of early 2006 and the improvement is continuing. The jobs created in the final bubble years of 2006 and 2007 had all been lost by early 2009, especially in construction, and employment in that sector is unlikely ever to return to the bubble maximum. But employment in the broader economy also contracted sharply and the total was down more than 300,000 from peak in the bleakest years of 2011 and 2012.
The recovery from early 2013 has been vigorous and has exceeded expectations. The Irish economy, on this measure, is into the fifth straight year of a strong recovery as under-employed resources have been brought back into productive use.
The performance has been better than in most eurozone economies and has been reflected in a sharp fall in the unemployment rate, now 6.3pc and expected to fall below 6pc later this year. The peak was more than 15pc and there are already reports of firms struggling to fill vacancies. The unemployment rate is not the only indicator of labour market conditions and it is too early to conclude that the labour market has finally tightened back to a satisfactory balance. But that happy outcome cannot be too far away.
Since Ireland no longer has its own currency, some tools of macroeconomic management (interest rates or the exchange rate) are not available. Shortrun management of aggregate demand must rely on the annual budget. In current circumstances, a relaxation of budget policy is hard to justify on the grounds that the cyclical position of the economy requires a boost.
The textbook recommendation, assuming the Government can borrow easily, is to spend your way out of a slump, not to spend your way out of a boom. The Irish Government ran out of road in 2010 and could not borrow, so the budget policy had to be kept within the confines of what the IMF and the EU institutions were willing to lend, since nobody else would.
The lesson of those years is to avoid expulsion from the sovereign credit market, for fear that a similar inability to follow the textbook awaits next time round.
Last Thursday, officials from the Department of Finance had to remind Oireachtas members that the debt burden leaves Ireland highly exposed in the next downturn. Total debt on the State balances sheet is more than €200bn and remains excessive relative to future government revenue. Moreover, the budget is still in deficit so the debt continues to rise (albeit slowly) and the Government’s economic advisers have argued, and will continue to argue, that there is no scope for give-aways.
There are also EU budget rules constraining what the Government is free to do. These rules are sometimes cited as the explanation for government reluctance to borrow more. This is not entirely honest — the rules do not require that an otherwise sensible policy be sacrificed. If there were no EU rules, the case for a giveaway budget would be weak, after a fiveyear expansion and working off a very high debt burden. Unless, that is, you enjoy macroeconomic risk-taking for its own sake. The EU budget rules require policies which a prudent government would choose to follow anyway.
There is now a multi-annual budget framework and the outlines of a medium-term strategy have already been articulated. The budget needs to move into surplus fairly soon — given the strength of recovery, it should have done so already — with the intention of keeping it there for a sustained period. The last time the Irish State became seriously over-indebted, in the late 1980s, it took more than a decade of cautious budget policy and a long run of economic expansion to get things back into a reasonable balance. It will be no different this time round and the cost of any departure from this formula will be another trip to the official lenders, should the supply of easy credit for governments dry up again. The current situation in Europe, where governments with heavy debts are able to borrow cheaply, is historically unprecedented and will not last forever.
The Taoiseach and several ministers have been arguing that the public capital budget, much of which goes on infrastructure investment, needs to be expanded after a period in which relatively little had to be spent — pressure on the public capital stock was diminished by the severe downturn. There is now a case for extra capital spending, but it is easy to create an atmosphere in which commitments are made to low-priority projects. There is a long history in Ireland of weak project appraisal and of political factors affecting project selection.
These risks are greatest when the public capital budget is expanding and the task of project appraisal is too often left to project promoters and their public relations advisers. Every proposal needs to be put through the wringer in a dispassionate and centralised evaluation process, in line with the procedures contained in the public spending code. It would be a tragedy if resources, likely to be scarce for many years to come, were squandered on politically motivated white elephant schemes.
‘It would be a tragedy if resources were squandered’