Surplus is neither necessary or sufficient in this week’s Budget
IRISH Budget policy used to be an awful lot easier. Probably less efficient, less effective and less equitable — but definitely a lot easier. It’s only a slight exaggeration to say that, in the dark pre-Celtic Tiger era, the main role of the Finance Minister was to say no to every proposal whether bad or good. Through the boom period, it was a case of saying yes to everything and when the crisis took hold the task was simply to shake the economy to find all possible sources of savings in spending and extra revenues.
It’s been quite a journey since the budget that was presented on October 14, 2008 took the first small steps in what would become a large and long fiscal tightening. Thankfully, the background to Budget 2019 is hugely better but it will still be delivered amid a crescendo of conflicting claims and competing demands. Disappointingly, much of the discussion of what Paschal Donohoe should or shouldn’t do is still couched in terms of turning on or off a fiscal tap.
Most economists agree that the Government shouldn’t seek to boost economic activity massively. But much of the advice offered is too simplistic in simply arguing that Budget 2019 should prioritise building a surplus in the public finances and thereby reducing outstanding Government debt.
A budget surplus is, in itself, a good thing but, in terms of economic goals, it shouldn’t be seen as the only thing. It may not be necessary for economic stability and history shows it certainly isn’t a sufficient condition in itself. Ireland ran substantial budget surpluses in 10 of the 11 years between 1997 and 2007 but, as became painfully obvious, that didn’t reflect a stable fiscal setting or provide much protection from the crisis.
It may be more useful to consider the road we are travelling rather than the point we are at. Of the EU 28, only Greece has gone through a larger fiscal turnaround since the crisis. Ireland has made enormous progress since 2008/2009 when the budget deficit was about three times the EU norm to the point in 2017 where it was about one-third of the EU average. We should look to ensure this continues.
Admittedly, the explosive deterioration in Ireland’s fiscal position that followed from the crisis means that public debt is likely to remain higher than might be ideal for some time to come. Servicing these borrowings will both constrain growth and reduce room for manoeuvre in the event of a downturn. Fortunately, low interest rates reduce the scale of this problem in the near term at least. Indeed, globally, there is an argument that the current environment of low borrowing costs should translate into some controlled increase in spending on public infrastructure.
It is also important to acknowledge that it is almost impossible to imagine that any feasible fiscal retrenchment could markedly reduce Ireland’s stock of debt anytime soon. As recent history shows, the initial period of austerity saw Irish public debt soar while the Irish economy’s return to growth has coincided with a modest but important turnaround. This suggests that a properly prudent fiscal policy should focus primarily on actions that boost the sustainable growth rate of the Irish economy and thereby deliver better outcomes for society.
I think that such an approach has three key elements; the first recognises that major problems in Ireland’s public finances are more likely to be a result rather than a cause of problems in the Irish economy; the second seeks to ensure that government spending and revenues are set credible and compatible paths rather than prioritising arbitrary numerical targets — even if we need to adhere to EU fiscal rules; while the third acknowledges that fairness and efficiency should be complementary rather than alternative approaches.
So, what do each of these mean in practice for Budget ’19? Well, encouraging as the current performance of the Irish economy is, it still faces many challenges. So, for example, measures that boost the supply rather than the demand for housing would be welcome. Similarly, measures that hurt rather than help the domestic cost base particularly vis-à-vis the UK or pre-commit larger future spending need to be avoided in the shadow of Brexit.
It is entirely possible that a surge in Corporation taxes could mean that the Irish public finances could return to surplus in 2019. However, rather than celebrating the surplus with a broadly based loosening of policy as happened during the Tiger era, the right thing to do would be to set aside windfall tax gains and look to slow spending growth to a rate consistent with the underlying increase in taxes. This would mean problem areas such as health might still receive priority funding but this comes from hard choices rather than additional largesse.
Finally, while the Irish economy is doing well at present, this significantly reflects increased numbers living and working here. Metrics like consumer sentiment suggest large swathes of the population are still struggling and feel increasingly remote from the boom they read about. Budget 2019 must offer some broadly based — even if modest — improvement in living standards to ensure that society, as well as the economy, is set on a sustainable path.