The Government’s head-long drive into a balanced budget is premature, unnecessary and potentially damaging to our social infrastructure. Progressives and trade unionist should unite to oppose this strategy.
It’s been a bit of a roller coaster this year regarding medium-term projections.
- Back in April the Government was targeting a small deficit of €800 million or -0.2 percent of GDP by 2025.
- A few months later, in the Summer Economic Statement, the Government revised this target to a deficit of €7.4 billion, 1.5 percent of GDP, by 2025.
- Now, in yesterday’s Budget 2022, the Government is projecting a surplus of €875 million, or 0.3 percent of GDP.
This turnaround – from a deficit of €7 billion to a slight surplus – has occurred because of sharp post-pandemic recovery resulting in higher tax revenue and lower expenditure – namely, unemployment payments.
So what’s wrong with that? Isn’t a balanced budget a good thing? After all, it’s being achieved without any spending cuts. Well, here’s the rub. Current spending is being squeezed. Let’s look at expenditure on public services.
Spending on public services will decline to 2023 and start to rise again. But in 2025 it will still be lower than what it was this year; 1.4 percent lower. It should be noted that this squeeze is happening at a time of upward pressure on spending due to older demographics, especially in health.
Another way of looking at public service expenditure is to measure it as a percentage of GNI* - in other words, how much of our national income do we set aside for public services. Let’s take a long look.
We’re pretty much back to pre-crash levels. Between 1995 and 2007, spending on public services averaged 18.4 percent of GNI*. The Government is projecting public service expenditure to be 18.8 percent in 2025. In fact, the Government projections will put public service spending below the pre-pandemic level of 2019 which was 19.7 percent.
Big state indeed.
[Note: while spending on public services rose as a percentage of GNI* during the austerity period, as shown in the graph, this was not due to increases in spending. During that period spending was actually cut. It rose because it is benchmarked against a rapid decline in national income.]
The situation regarding Social Payments is more difficult to analyse because we don’t have a breakdown of its components. But here’s what the projections tell us.
Social Payments falls considerably. Between 2021 and 2025 it falls from €37.4 billion to €31.7 billion factoring in inflation; or from16.7 percent of GNI* to 12 percent.
It can be argued this is due to falling unemployment and to some extent this is true. But to what extent is debatable. Let’s look at the three-year period from 2022 to 2025.
- Real spending on social payments falls by over €1 billion
- Unemployment falls from 7.2 percent in 2022 to 5 percent in 2025. In actual numbers, it falls from approximately 183,000 to 135,000 – a decline of 48,000 on the Live Register.
- However, during this period we should expect an additional 60,000 pensioners.
So the growth in pensioners will more than cancel out the decline in unemployment. Yet real expenditure on social payments falls. Something has to give (that is, squeezed). Payments? Qualifying conditions?
There is an alternative strategy. SIPTU has proposed that we maintain a deficit of 2 percent out to 2025 which would give the Government greater fiscal flexibility. However, let’s assume a more modest target – one that maintains compliance with the currently suspended Fiscal Rules. This would allow the Government to target a 1 percent deficit by 2025. It seems like a small amount but in Euros it adds up.
- In 2025, it would provide an additional €6.2 billion in spending.
- Between 2022 and 2025 it would provide an additional €21.2 billion in spending
Those are substantial sums. And they would be available to the Government if they just followed with the Fiscal Rules. Unfortunately, the Government is going further and faster that what those rules require.
With those resources we could target spending on the key drivers of long-term economic growth. Three leading drivers are:
- Education and R&D: investment in human capital
- Childcare: to promote labour force participation
- Eliminating Child Poverty: maximise skills and life opportunities
There are other areas, including additional resources for housing if supply constraints ease, which could also benefit and which help build a robust and resilient social infrastructure.
[Note: if the government spent this money it would generate additional revenue from more people employed and higher economic activity. This would mean the net impact on the deficit would lower it and, so, we would be well in line with the Fiscal Rules.]
So the issue is not whether there is the money. It’s there – and for cheap on the international markets. The issue is that the Government has decided not to avail of it. Of course, they may be giving themselves some wriggle room in their medium-terms projections. If so, we have to force them to do lots and lots of wriggling.
For as it stands now they have made a political choice to squeeze public services and social protection to the point that they are falling in real terms in order to fast-forward an unnecessary balanced budget.
It’s that political choice we must challenge.
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