The Government’s recently published Stability Programme Update provides economic and fiscal projections out to 2025. In the best of stable times, such projections should be treated with caution; even more so given the uncertainty of pandemic’s medium-term impact on certain sectors (e.g. how long will it take for international tourism to return to pre-pandemic trends?). Nonetheless, such projections are useful tools to guide policy.
These projections are based on no changes to policy. In other words, this is what would happen if there were no changes to taxation or expenditure. As always in these type of exercises there is some good news, not so good news and, most importantly, warnings.
No need for Austerity
It is now official: there is no need for austerity to repair public finances. There is no need for tax increases or spending cuts to bring the budget back into balance (though this is not necessarily a good idea – see below).
We entered the pandemic with a small budget surplus: 0.5 percent. This will turn into a deficit in 2020. However, it starts to fall this year until, by 2025, we arrive at (broadly-speaking) a balanced budget. Similarly with the debt: it will top out this year and start falling next year. By 2025 it will be lower than pre-pandemic levels.
And all those budget fundamentalists should take note: the debt starts to fall in 2022 and falls every year subsequently – even though the Government is still borrowing. This shows that one does not have to balance the budget in order to reduce the debt burden.
Trapped in the Low Tax Model
The projections show that, without a change in Government policy, the economy will still be stuck in a low-tax equilibrium. In 2019, Government revenue was 42 percent of GNI*. By 2025 this will have fallen to 41.7 percent. This may appear a fractional difference but, in money terms, it amounts to €2.2 billion.
It also means that we still trail the average revenue levels of other EU countries in our peer group – high income economies such as Austria, Belgium, Denmark, Germany, etc. In 2019, we’d have to increase revenue by approximately €10 billion to reach our EU peer group average, factoring in interest payments. In reality, we wouldn’t need to increase revenue this much given we have fewer pensioners and, so, need to spend less on pensions than other countries. But we have a much younger population so we need to spend more on education and family supports.
The big policy challenge for any government serious about boosting public services and income security will be how the revenue can be raised in a progressive manner without damaging growth prospects.
Squeezing Public Services and Social Protection
The Government is projecting a significant increase in investment – increasing by 20 percent out to 2025 when inflation and population growth are factored in. This is good. What is not so good is that it will be paid, on current projections, by squeezing public services and social protection.
Current expenditure will fall from 43 percent of GNI* in 2020 to 33 percent by 2025, or a real fall of 12 percent when population is factored in. Some of this will be due to the fall in unemployment payments such as the Pandemic Unemployment Payment. However, we will need to spend more to meet the challenge of an older population, especially in health and long-term care – never mind rolling out European level of public services and income security.
Rejecting a Balanced-Budget Strategy
A big takeaway from these projections is the government’s determination to balance the budget by 2025. As we saw above, this will occur without any policy changes. However, a balanced budget is unnecessary. It will unduly straight-jacket investment strategies, while squeezing public services and income supports. We can give ourselves breathing room by adopting SIPTU’s proposed target of a 2 percent deficit over the medium-term.
How much fiscal breathing room could we expect? Here is a static projection – static because it doesn’t factor in increased economic growth arising from the increased social and economic investment.
Whether that 2 percent is expressed in GDP or GNI* terms, the additional resources could be substantial – accumulating between €20 billion and €30 billion over this critical four-year period. It’s not that we would spend all this money in any one year. SIPTU has proposed that additional borrowing could be warehoused and spent later in the decade, addressing the necessary investment to tackle climate change, automation and the prospect of a low-growth future. The point is that it would give any government considerably more flexibility and manoeuvrability in terms of increasing taxation (better to phase it in over the medium-term rather than sharp annual increases) and to maintain investment levels.
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The Government’s projections show that:
- There is no need for tax increases or spending cuts to bring public finances under control
- However, we will remain stuck in a low-tax model. It’s not enough to bring public finances under control, or to avoid austerity.
- While investment is rising (good), public services and social protection will be squeezed. We will need to employ growth-friendly strategies to increase revenue in order to implement European-style public services and income security.
Most of all, progressives and trade unionists must challenge the balanced-budget orthodoxy. This orthodoxy will hamper any government’s ability to address the big challenges coming at us – in particular, climate change and Just Transition.
A progressive alternative is an expansionary one (within the limits imposed by external forces – from international markets, the ECB and a revamped Fiscal Rules). It is investment-based. It aspires to best-practice public services, income security and employment conditions.
We got the vision thing. Now we need a strategy to bring that to reality. That is one of the big tasks for any government-in-waiting.
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