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OPINION: Government needs to heed fiscal advice

June 16th, 2019 5:00 PM

By Southern Star Team

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The report reminds government that a ‘disorderly Brexit' poses profound risks to the public finances and that, if it materialises, the shock to the economy, revenues, and cyclical spending could mean debt ratios beginning to rise.

RESERVATIONS that have been expressed in this week’s latest report from the Irish Fiscal Advisory Council need to be heeded by the government, especially given the increased level of uncertainty that surrounds Brexit due to the chaotic political situation in Britain at the moment.

The Fiscal Council's  report assesses ‘Ireland’s national medium-term fiscal plan’ and concludes that the ‘plans are still not credible and the government needs to develop a credible strategy.’ Projections show surpluses increasing in every year, however the spending forecasts underpinning these projections are not credible, the report states.

While acknowledging the successful efforts to turn around the large budget deficit in the past decade, the Fiscal Council notes, however, that little progress has been made since 2015 and Ireland’s net debt ratio remains the fifth-highest in the OECD. In the past four years, only limited progress has been made in reducing the underlying budget balance, with quite a bit of a gloss put on the country’s fortunes by the surge in corporation tax receipts, which will likely prove temporary and relying on these in the future would be as foolish as the reliance the economy had on stamp duty during the property boom of the first seven years of this century.

The report shows that an estimated €3bn to €6bn of the €10.4bn in corporate tax receipts received in Ireland in 2018 could be considered above conventional levels. With the public finances still in a relatively vulnerable position, it advocates that unexpected corporation tax receipts should be saved by setting these aside through allocations to a ‘Prudence Account.’

However, the most immediate threat to the economy is coming from Brexit with the likelihood of a no-deal withdrawal by Britain from the European Union having increased significantly since Prime Minister and voice of reason Theresa May was deposed as Conservative Party leader. With ‘hard Brexiteers’ in the ascendancy, Boris Johnson is among the favourites to take over and he’s hardly likely to accept the withdrawal agreement that Theresa May was unable to get through the British Parliament.

The Fiscal Council report expresses concern that the government's medium-term forecasts assume that the UK will make an orderly and agreed exit from the EU by the end of 2020. That looks like a shaky foundation in the current circumstances.

The report reminds government that a ‘disorderly Brexit’ poses profound risks to the public finances and that, if it materialises, the shock to the economy, revenues, and cyclical spending could mean debt ratios beginning to rise again. The trade-offs could be severe and the government might need to cut spending or raise taxes to offset this.

Also, if additional discretionary measures are to be taken beyond current plans, then the government should introduce revenue-raising measures to preserve overall sustainability or scale back planned spending increases and tax cuts elsewhere, the Fiscal Council further advises. And, they are not the only people saying this.

Before his departure to Frankfurt to take up his new role as chief economist of the European Central Bank, the former Governor of the Central Bank of Ireland, Professor Philip Lane, warned the government that Ireland should be running a significantly larger budget surplus. The first such surplus since the financial crisis began over a decade ago, was only achieved last year and Prof Lane feels that the surplus of 0.2% of GDP that Minister for Finance Paschal Donohue is aiming for this year is far too low.

The Irish Central Bank’s advice to the government would be ‘to run sufficient surpluses during phases of good economic performance’ so as to build up a financial buffer against economic shocks – one of these possibly being an increasingly-likely ‘no-deal Brexit.’ But, here’s the catch: to do so could involve imposing higher taxes and, with the prospect of a general election in Ireland within the next six to nine months, none of the political parties in power would want to countenance such an unpopular move even if all the economists in the world advised that it would be for the greater good.
Taoiseach Leo Varadkar’s government is in enough trouble already over its handling of the health service and housing crises during supposed good economic times. With looming increased carbon taxes already writ large, any further taxation towards running a larger surplus would not go down well with the electorate, therefore it is unlikely the government will take on board all of what the experts are advising them.

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