No More Cookies In The Jar?

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90431884Michael Taft

From top: Minister for Public Expenditure Pascal O Donohue with Minister for Finance Michael Noonan present Budget 2017; Michael Taft

In the immediate aftermath of Budget 2017 there were serious voices raised that we were about to descend into fiscal chaos. And, yet, Ireland has one of the better deficit records in the Eurozone.

Michael Taft explains:

These days any question of increased resources – whether for investment, public services or social protection – is met with ‘how can we afford it?’, ‘the fiscal rules won’t allow it’ and ‘you just want to return us to the bad ol’ days’.

In short, there are no more cookies left in the cookie jar. Such is what passes for debate over fiscal policy.

The fact is that in many cases we can afford it (always, of course, within limits), the fiscal rules do allow it and the only ones determined to return us to the bad ol’ days is the government itself.

In the immediate aftermath of Budget 2017 there were serious voices raised that we were about to descend into fiscal chaos and imprudence. The Irish Fiscal Advisory Council claimed that the tax and spend numbers went ‘beyond what was prudent and was set to breach key EU rules’.

The Irish Times was even more dramatic:

‘The notion of a prudent Budget appeared threadbare after Michael Noonan announced a package of measures in the Dáil stretching the so-called “fiscal space” to near-destruction.’

And, yet, Ireland has one of the better deficit records in the Eurozone.

cookie-jar

We’re well into bottom half of the table, far away from fiscally-troubled countries like Spain, France and Portugal. This is not chaos. Even our debt level is well below the Eurozone average.

In 2017, the Government estimates government debt to be 74.3 percent of GDP; Eurozone debt is 90.6 percent. Ireland is closer to the parsimonious Germans (with a 65.7 percent debt to GDP) than the Eurozone average. Irish debt is falling faster than any other country – from nearly 120 percent of GDP in 2013.

This is not to be complacent but it is a warning against scare-mongering. As for the ‘can’t afford it’, etc. arguments, let’s run through some points.

First, the Government cut the deficit more than was necessary in Budget 2017. The fiscal rules require we reduce the structural deficit by more than 0.5 percent. Instead, the Government cut the structural deficit by 0.8 percent.

This may seem fractional but had the Government stuck to the rules this would have provided an additional €550 to €800 million more for investment, public services and social protection.

Second, the Government has been actively cutting its own revenue. In the last three budgets, the Government has cut tax revenue by €2.6 billion. Some of these cuts were valid enough – removing the PRSI step-effect for minimum wage workers, for instance.

There might be other valid tax cuts such as inflation indexing thresholds and credits (that would have only been relevant for next year). But if the Government had been less reckless at cutting the tax base – say 50 percent less – then there would have been €1.3 billion extra to spend in 2017. If you keep cutting your own revenue you will have, as a matter of arithmetic, less to spend on.

Third, the Government is intent on continuing to drive revenue into the ground, thus depriving us of more resources. Tax revenue will be cut by over €2.6 billion by 2021.

This will reinforce our low-tax status. In 2014, tax revenue as a % of GDP (this could be the last year we can use the Fiscal Council’s adjusted GDP to allow for the activities of multi-nationals) was €14 billion below what it would be had we been taxed at the Eurozone average .

We are €22 billion below the average of our peer group – other small open economies; but who’s counting.

And then there are those who complain we’re still borrowing. Recently one commentator lamented that we were still borrowing to keep the lights on; over €20 million a week (that’s to scare the children with big numbers).

The fact is we don’t borrow for day-to-day expenses. Next year we will have a €2 billion surplus on the current side; that will buy a lot of light bulbs. We are borrowing for investment and in a saner world with saner rules we’d be borrowing a lot more for investment, especially with interest rates on the floor.

This is all about choices. And there’s another choice coming up. The EU Commission has done an about-turn and is now urging Governments to fiscally expand. EU austerity may not be over but it is, at least, being temporarily suspended – no doubt a response to the social disquiet that the far-right is exploiting.

They are proposing that governments spend an additional 0.5 percent of GDP on expansionary programmes. It’s only once-off and far too little to get the EU out of its rut, but you take what you can get.

In Ireland it would be worth approximately €1.2 billion. The Government seems hesitant but a rational response would be to take this money and kick-start housing builds in Dublin. This could build an additional 6,000 to 7,000 units. Again, a relatively small amount but forensically targeted could help key disadvantaged groups such as the homeless.

Don’t reduce the deficit so fast, increase spending (even if it’s allowable under the fiscal rules), increase taxes, take a fiscal holiday – isn’t all this a return to the bad ol’ days? Hardly. It’s the Government that is returning us to pre-crash fiscal policy:

  • Eroding the tax base which leaves us exposed to external shocks – think Trump protectionism, think Brexit
  • Pumping the property market through mortgage and rent subsidies
  • Over-reliance on an emerging tax revenue bubble – this time, corporate tax revenue
  • Basing projections on dubious assumptions – the Government’s budgetary numbers don’t factor in the potential structural change in the UK sterling exchange rate.
  • And don’t, no don’t, mention the A word, the potential impact of the Apple ruling and the acceleration of European tax coordination – just like not mentioning astronomical house prices prior to the crash

Now that’s a return to the bad ol’ days.

We have choices. Yes, there are limitations. How could there not be after years of recession and austerity? We cannot solve every problem today or tomorrow and, therefore, are forced to prioritise resources. That puts an even bigger premium on smart allocation and prioritisation.

But the next time you ask the Government for a cookie and they just shrug their shoulder and point to any empty jar – just remember: it was the Government who stole the cookies.

Michael Taft is Research Officer with Unite the Union. His column appears here every Tuesday. He is author of the political economy blog, Unite’s Notes on the Front. Follow Michael on Twitter: @notesonthefront

17 thoughts on “No More Cookies In The Jar?

  1. Owen C

    “And, yet, Ireland has one of the better deficit records in the Eurozone.”

    By my understanding, a ‘record’ would refer to the past, rather than the future. A past which saw some pretty chunk deficits records in the 2008-2014 period.

    “In 2017, the Government estimates government debt to be 74.3 percent of GDP; Eurozone debt is 90.6 percent”

    Yes, the statistically robust Irish GDP figures…

    We do have some fiscal space, but lets not get carried away with (a) the magnitude of that space or (b) the risks to that space.

    1. nellyb

      What’s the point of talking about economy in isolation to people? Is fiscal space a natural phenomenon? Is economy a natural phenomenon? Why don’t the animals other than humans have it then? It’s like a doctor freaking out about cancer patient skin condition while neglecting the cancer all together.
      Where the hell are bright holistic thinkers, did we bread them out or forced them out?

  2. Jake38

    All very well, though to be taken with the usual grain of salt given the origin (Unite).

    At least Michael did not explicitly refer to more money for public servants as “investment”.

    1. Fact Checker

      Public investment in Ireland is close to the lowest in Europe. I think Greece is a bit lower at the moment.

      Given the growing population, and shortage of housing and poor public infrastructure in urban areas, one could make a very good case that it should be higher to support a higher quality of public services over the long term.

      1. Cian

        Yes, but we need to invest in infrastructure. Not pay restoration for the Civil Service. Not tax cuts.

        Taft’s wish list is probably correct. His reliance on our GDP-Debt ratio is, ahem, suspicious.

        1. Fact Checker

          The category ‘public investment’ to which I am referring is capital spending on physical projects. It does not include public service salaries.

          Total public service cost in Ireland are pretty much in line with EU averages by the way.

          Estimates of over/under-payment of public servants are hazardous given differences in price levels, working hours, skills, etc.

  3. Fact Checker

    It is somewhat naive to take seriously the Commission’s estimates of the structural deficit given that they rely on assumptions about potential growth in Ireland that no one can be sure about. Simple version: no one knows if the Irish economy is overheating or cooling right now simply because the ‘natural’ level of economic activity is anyone’s guess.

    Looking at debt-GDP numbers is also hazardous. The important number is interest payments, and they need to be paid for from taxes. In 2017 debt interest will absorb 8% of general government income in Ireland. This is far above the euro area average of 4.5% and about the same level as ITALY – rarely cited as an example of fiscal competence!

    Finally, the most relevant lesson of the past ten years is GDP growth and tax revenues are EXTREMELY unpredictable in Ireland. Common sense would imply that this implies more caution, not less.

  4. louislefronde

    Excuse me, if I’m wrong Michael, but doesn’t Ireland have a National debt of €186 Billion which equates to €39,456 for every man, woman and child in the country. I suppose you have come up with a solution that that debt is going to vanish into thin air. Perhaps, Michael you might tell me, how the Irish people could service that enormous debt if there is a massive hike in interest rates, something which seems likely if a global trade war breaks out, which seems possible given Trumps current trajectory?

    1. Cian

      One ‘advantage’ of interest hikes is that these usually go in tandem with inflation. So while the repayments are higher, the principle is worth less.
      30 years ago we had a national debt of €40 billion, and that was about equal to the GDP. We have never paid that back, but that €40 billion (due to inflation) is now a lot smaller.
      Countries (in general) don’t ever pay back nation debt (they do service the interest) – they allow inflation to erode its value. And then borrow more!

  5. Yoda_

    I’d say Noonan has a board position waiting for him in Goldman Sachs or similar. They always do, these bank loving bureaucrats.

    1. 15 cents

      id say, like phil hogan, he was in line for a job in the EU, but they’ve seen his incompetence and probably wouldnt give him a job cleaning the toilets, no matter how hard hes been slobbin.

  6. Baffled

    Given the extent to which Irish GDP is inflated by the MNCs I would be instinctively skeptical of any argument that cites headline deficit/GDP and debt/GDP figures.

  7. dav

    basically, ireland has no money for it’s citizens, but plenty of the stuff for the vulture funds and tax evading multinationals

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