THE government’s Summer Economic Statement, issued just days before the referendum in which the people of the United Kingdom decided they wanted to leave the European Union signalled the provision of a ‘rainy day’ contingency fund, starting from 2019 with €1bn being committed to it every year from then on. The idea of having such a fund had been doing the rounds for a few years as we sought to learn from our lack of preparedness for the severe sudden economic downturn that came in the wake of the demise of the Celtic Tiger boom in 2008 and the subsequent ignominy of the bail-out programme.
Expounding the well-known economic theory that if you’re going into recession you should spend more money, Minister for Finance Michael Noonan, when announcing the ‘rainy day’ fund, declared: ‘Everybody knew the theory, but there was never money there to do it before.’ There was. Last year.
The last government had an opportunity to set such a fund up at the end of last year, when their coffers received an unexpected boost of almost €2.5bn in extra corporation tax receipts, however the Fine Gael and Labour Party coalition parties chose to blow most of it to try to ‘buy’ votes in this year’s general election. We all know now where that got them – nowhere – and it was a great chance spurned to put some money aside for unexpected shocks such as Brexit, which may have domino-like knock-on effects for some time to come if not managed in a sensible and orderly fashion.
This year’s Summer Economic Statement estimates that the current government will have much less to play with for tax cuts and capital spending in 2017 – more in the order of €1bn – and, with the agreed programme for government sensibly providing for two euro of spending for every one in tax cuts, its effects will be quite modest, just doing enough to keep the economic recovery on track, but not making any significant inroads on the major shortfalls we face in areas such as public healthcare and social housing.
While the British exit from the EU – if indeed it ultimately does go ahead – will not happen until at least two years after the UK gives formal notice of its intention to quit, it should largely be business as usual between us and them, notwithstanding the effects of currency fluctuations. But, by 2019, we may need to be dipping into the contingency fund as quickly as the money is put in if the Brexit causes unexpected economic after-shocks.
Come 2019, it is expected that the ‘fiscal space’ the government will have to work with annually will the in the region of €3bn and there will be a change in the ratios of how it is used, with 46% going on expenditure programmes, 20% on tax cuts and 34% to the rainy day fund. There should also be provision to top it up from any further windfalls like the corporation tax one of last year that was passed up on.
It is important also that a strict set of rules is devised, specifying when money is to be paid into the fund and how and when it can be drawn down. As Fianna Fáil finance spokesman Michael McGrath, quite rightly, stated in reaction to its announcement, the ‘rainy day’ contingency ‘must not become a pre-election slush fund for the government.’
The other important action arising from the Summer Economic Statement is for the government to ensure that the capital expenditure allocations are spent expeditiously as they are a crucial component of our continuing economic recovery.