Is Ireland really on the path back to the rampant fiscal malpractice of the Celtic Tiger years?
Only days have passed since Standard & Poor’s upgraded Ireland’s debt, a clear sign of international confidence in the recovery as the economy expands at the fastest rate in Europe. But the Economic and Social Research Institute (ESRI) now questions the Government’s plan to expand the 2016 budget by up to €1.5 billion. The think tank’s intervention today follows similar anxieties from the Irish Fiscal Advisory Council just one week ago. So what exactly is going on?
Warnings from the ESRI and fiscal council come on foot of the spring economic statement in which the Coalition unveiled plans for an expansionary fiscal package in the October budget of between €1.2 billion and €1.5 billion divided equally between tax cuts and spending increases. The International Monetary Fund has already given tacit backing to the strategy – and the European Commission has raised no real objection. Moreover, financial markets are unperturbed.
Yet the ESRI is not happy. The body favours a neutral budget in the autumn. It also suggests a budget surplus may be required in 2017 to take some steam from the expanding economy, a year earlier than foreseen by the Government.
Political calculation
All of this reflects raw political calculation, no doubt, on the part of Fine Gael and Labour, who insist theirs is the only credible set of fiscal policies.
In the ESRI account, however, steps should already be taken to avoid repeating the accumulation of errors which led Ireland to disaster once recession struck. Seven years on, the ESRI accepts that the expansionary measures mooted for 2016 would not put the economy straight back on to the road to ruin. Still, it would be irresponsible to continually pursue pro- cyclical policies of this nature.
“It’s about trends, I guess, in many respects,” says Prof Kieran McQuinn when asked whether the ESRI could accused of adopting an overly cautious approach after in the aftermath of a €30 billion marathon of fiscal retrenchment.
“It’s fair to say that the adoption of the measures talked about this year is not going to cause any serious deterioration in the state of the public finances. But it’s more the principle,” he adds.
Pro-cyclical behaviour
“This is the first time when we have discretion in terms of the kind of fiscal policy we pursue. We haven’t had that discretion since 2008 really – and before that we adopted very explicitly pro-cyclical behaviour. So it’s about this notion of putting a very solid approach and principle at the heart of how we administer the public finances,” he says.
With the election ever- present on the horizon, there’s little prospect of the Government edging back from the springtime commitment to expand the budget next year. At a time of mounting political pressure for recovery dividends, Ministers see no advantage in leaning against the fiscal wind to guard against shock or setback. Although they might not say it publicly, they may form the view that observers in think tanks don’t have to campaign for Dáil seats.
What is more, money in 2016 is already spent via the Lansdowne Road public pay deal. In addition, impressive tax returns in the first five month of the year have prompted economists to say the Government could have €2 billion at its disposal for tax and spending measures.
But the ESRI urges caution. Prof McQuinn says the expansionary policy cannot be attributed solely to the pay agreement. By saying not all the promised money is already spent, he implies scope remains to pull back from the overall pledge. As for the notion that the Government could yet have the space to adopt a €2 billion package, he insists that would be neither sensible nor prudent.
