These days any question of increased resources – whether for investment, public services or social protection – is met with ‘how can we afford it?’, ‘the fiscal rules won’t allow it’ and ‘you just want to return us to the bad ol’ days’. In short, there are no more cookies left in the cookie jar. Such is what passes for debate over fiscal policy.
The fact is that in many cases we can afford it (always, of course, within limits), the fiscal rules do allow it and the only ones determined to return us to the bad ol’ days is the government itself.
In the immediate aftermath of Budget 2017 there were serious voices raised that we were about to descend into fiscal chaos and imprudence. The Irish Fiscal Advisory Council claimed that the tax and spend numbers went ‘beyond what was prudent and was set to breach key EU rules’.
‘The notion of a prudent Budget appeared threadbare after Michael Noonan announced a package of measures in the Dáil stretching the so-called “fiscal space” to near-destruction.'
And, yet, Ireland has one of the better deficit records in the Eurozone.
We’re well into bottom half of the table, far away from fiscally-troubled countries like Spain, France and Portugal. This is not chaos. Even our debt level is well below the Eurozone average. In 2017, the Government estimates government debt to be 74.3 percent of GDP; Eurozone debt is 90.6 percent. Ireland is closer to the parsimonious Germans (with a 65.7 percent debt to GDP) than the Eurozone average. Irish debt is falling faster than any other country – from nearly 120 percent of GDP in 2013.
This is not to be complacent but it is a warning against scare-mongering. As for the ‘can’t afford it’, etc. arguments, let’s run through some points.
First, the Government cut the deficit more than was necessary in Budget 2017. The fiscal rules require we reduce the structural deficit by more than 0.5 percent. Instead, the Government cut the structural deficit by 0.8 percent. This may seem fractional but had the Government stuck to the rules this would have provided an additional €550 to €800 million more for investment, public services and social protection.
Second, the Government has been actively cutting its own revenue. In the last three budgets, the Government has cut tax revenue by €2.6 billion. Some of these cuts were valid enough – removing the PRSI step-effect for minimum wage workers, for instance. There might be other valid tax cuts such as inflation indexing thresholds and credits (that would have only been relevant for next year). But if the Government had been less reckless at cutting the tax base – say 50 percent less – then there would have been €1.3 billion extra to spend in 2017. If you keep cutting your own revenue you will have, as a matter of arithmetic, less to spend on.
Third, the Government is intent on continuing to drive revenue into the ground, thus depriving us of more resources. Tax revenue will be cut by over €2.6 billion by 2021. This will reinforce our low-tax status. In 2014, tax revenue as a % of GDP (this could be the last year we can use the Fiscal Council’s adjusted GDP to allow for the activities of multi-nationals) was €14 billion below what it would be had we been taxed at the Eurozone average . We are €22 billion below the average of our peer group – other small open economies; but who’s counting.
And then there are those who complain we’re still borrowing. Recently one commentator lamented that we were still borrowing to keep the lights on; over €20 million a week (that’s to scare the children with big numbers). The fact is we don’t borrow for day-to-day expenses. Next year we will have a €2 billion surplus on the current side; that will buy a lot of light bulbs. We are borrowing for investment and in a saner world with saner rules we’d be borrowing a lot more for investment, especially with interest rates on the floor.
This is all about choices. And there’s another choice coming up. The EU Commission has done an about-turn and is now urging Governments to fiscally expand. EU austerity may not be over but it is, at least, being temporarily suspended – no doubt a response to the social disquiet that the far-right is exploiting.
They are proposing that governments spend an additional 0.5 percent of GDP on expansionary programmes. It’s only once-off and far too little to get the EU out of its rut, but you take what you can get. In Ireland it would be worth approximately €1.2 billion. The Government seems hesitant but a rational response would be to take this money and kick-start housing builds in Dublin. This could build an additional 6,000 to 7,000 units. Again, a relatively small amount but forensically targeted could help key disadvantaged groups such as the homeless.
Don’t reduce the deficit so fast, increase spending (even if it’s allowable under the fiscal rules), increase taxes, take a fiscal holiday – isn’t all this a return to the bad ol’ days? Hardly. It’s the Government that is returning us to pre-crash fiscal policy:
- Eroding the tax base which leaves us exposed to external shocks - think Trump protectionism, think Brexit
- Pumping the property market through mortgage and rent subsidies
- Over-reliance on an emerging tax revenue bubble - this time, corporate tax revenue
- Basing projections on dubious assumptions – the Government’s budgetary numbers don’t factor in the potential structural change in the UK sterling exchange rate
- And don’t, no don’t, mention the A word, the potential impact of the Apple ruling and the acceleration of European tax coordination – just like not mentioning astronomical house prices prior to the crash
Now that’s a return to the bad ol’ days.
We have choices. Yes, there are limitations. How could there not be after years of recession and austerity? We cannot solve every problem today or tomorrow and, therefore, are forced to prioritise resources. That puts an even bigger premium on smart allocation and prioritisation.
But the next time you ask the Government for a cookie and they just shrug their shoulder and point to an empty jar – just remember: it was the Government who stole the cookies.