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EDITORIAL: Fiscal space oddity

February 13th, 2016 10:03 PM

By Southern Star Team

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UP to the start of this month, most members of the Irish public were blissfully unaware of what fiscal space was. Now they are getting an unwanted bellyful of it since the general election campaign officially got under way just over a week ago, as the term is being bandied about by many of the election candidates as if they were experts on it.

The various parties’ arguments about how much or how little disposable income is going to be available to the next government in this now infamous fiscal space is purely hypothetical and debating it so heatedly seems to be a pointless exercise, akin to counting one’s chickens before they are hatched.

According to the Department of Finance, fiscal space is defined as the projected amount of resources available to the government for additional expenditure and/or tax reductions, while ensuring compliance with the fiscal rules. How they are used is at the discretion of the government of the day.

When the Fine Gael-Labour Party government got a windfall boost in corporation tax receipts towards the end of last year, it did not stay long in the fiscal space and was mainly used to ‘buy’ votes for this general election and the next lot will, undoubtedly, try to do the same. Whatever will be available during the coming years will need to be used more prudently, as our public services are so deficient and there is also the necessity to keep paring back the national debt from its current far-too-high level of 96.6% of GDP.

Trying to predict what will be available in the fiscal space during the lifetime of the next government is like trying to predict the winner of the Grand National in four years’ time because we don’t know who will be in the field then. Neither do we know at this stage the complete picture of what our economic circumstances may be like in the coming years. 

Not being able to quantify it accurately in advance makes the fiscal space something of an oddity in itself. All the government can say at this stage about what will occupy the said space over the coming years relates to the factors it can itself control by following the strict fiscal rules laid down by our EU masters and assuming that our economy continues to grow as it has been, although obviously not at the same rapid rate that has defied all the odds. 

However, there are so many outside influences currently fuelling our exponential growth that won’t last indefinitely and that the government cannot control, and these are bound to peg back our economic ambitions in time to come. One wonders how long more ECB president Mario Draghi can maintain his bank’s quantitative easing strategy that has weakened the euro currency but boosted Irish exports in particular, which are key drivers of our current 7% year-on-year growth.

If quantitative easing eventually has the desired effect of fuelling inflation, that will add some other factors to the economic mix and will see more demands for pay rises beyond those the government is already committed to with the public service unions through the Lansdowne Road Agreement. These will impact on what is available in the fiscal space when they come into play

Another factor not reckoned for in the predictions – but which could throw our economy into disarray – is if Britain decided to leave the European Union. The so-called Brexit may never happen, but it is another thing that is beyond our control and the incoming government will need to devise a Plan B to deal with the possibility that it could happen, rather that languishing in total denial about it.

When its Fiscal Advisory Council tells that the government – and indeed politicians of all hues – that they are overestimating the amount the fiscal space may yield, this independent body should be listened to and the parties should not be getting carried away making promises about how to spend money the government hasn’t yet got and may never get if the economic recovery runs into problems outside of its control.

It was bizarre that, on the very first day of the general election campaign, Taoiseach Enda Kenny – whose main pitch for seeking re-election is the success of the economy so far under his government’s stewardship – should try to dismiss questions about the fiscal space by stating that he wanted to avoid using ‘economic jargon which the vast majority of Irish people don’t understand.’ This comment was, rightly, described by Fianna Fáil leader Micheál Martin as patronising and condescending.

The electorate is not stupid and insulting them, albeit unintentionally, is not going to help the outgoing Taoiseach’s cause.

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