PATRONISING, bordering on dismissive, was Taoiseach Enda Kenny’s reaction to the latest report of the Irish Fiscal Advisory Council (IFAC), when he described it as ‘a valuable set of observations’ while making it clear that his government was going to do its own thing regardless. This was in spite of the IFAC report calling into question the credibility of some of the government’s projections on spending.
The flashpoint is the Taoiseach’s gung-ho determination to have a giveaway Budget 2016 in advance of the upcoming general election versus IFAC’s advice urging prudence as the €1.2bn the government allocated in its recent Spring Economic Statement for tax cuts and spending increases ‘appears to go against the letter and spirit’ of the European Benchmark rule.
IFAC, which is a statutory body set up as a watchdog on economic policy to try to ensure that the mistakes that led to our serious economic downturn are not repeated in the future, is ‘strongly of the view’ that government plans should be based on expected compliance with the fiscal rules and that the reasons for any deviation should be clearly explained. Before the economy went into the downward spiral that led to the bail-out programme Ireland was forced to enter in 2010, various economists had been warning for a number of years of the impending collapse the property bubble was going to cause, but what they were saying was crudely dismissed by the likes of then Taoiseach Bertie Ahern and we all know the heavy price the people of Ireland subsequently had to pay.
When a body such as IFAC tells the government that medium-term budgetary projections, which are essential for underpinning budgetary planning, are not realistic, it should be listened to. IFAC points out that published tax revenue forecasts do not take into account government commitments to reduce taxes and that the likely costs of demographic ageing and cost pressures in delivering existing public services are not factored in either.
Like them or not, stricter rules on fiscal parameters have been put in place by the EU, designed to prevent the extremes of boom to bust economic cycles in the future, and it looks as if the Irish government wants to shamelessly ignore some of them for the purposes of buying votes for the next general election, conveniently forgetting that such actions may have consequences somewhere down the line. Of course, it may not be Fine Gael and the Labour Party’s problem at that stage, but it would be sad – and costly – for all of us if they undid all the good work they have done over the past four years in getting the economy back on track purely for the sake of political expediency.
While we are being spun the line that everything is rosy in the garden, economically, at present, the uplift in the economy has not reached many people and many places, so we – and the government – should not be getting ahead of ourselves. We are still quite a way off being out of the woods because while the current economic lift seems robust on the surface, some of the underlying fundamentals are still fragile and could easily be undermined by circumstances outside our control.
Remember, we are only just on the point bringing the deficit to below the minimum requirement of 3% in 2015 and exiting the Excessive Deficit Procedure. We are still borrowing for day-to-day expenditure and our national debt still in excess of 100% of GDP – one of the highest in the world.
Public finances need to be brought from deficit to surplus a lot more quickly in order to provide a buffer against any unexpected events and avoid a return to austerity that could be triggered by them. In the lead-up to the general election, the government seems intent on giving away most of the increased revenues for short-term gain.
While Taoiseach Enda Kenny does have a point when he says that the people who made the sacrifices during the era of austerity should be rewarded by way of reduced taxes – and we are not against this – giving back too much too soon could prove counter-productive in the context of our longer-term recovery. There is a delicate balance to be struck here and IFAC obviously feels that this balance is slightly askew.
The sooner the public finances can be brought from deficit to surplus the better because – apart from giving us the ability to better withstand any unexpected economic shocks – a realistic programme of expenditure needs to be embarked on to bring our public services up to the type of acceptable standard that exists in most other European countries.