The Irish Fiscal Advisory Council is warning against over-spending in this year’s budget – over-spending relative to the 5 percent spending rule. It could undermine confidence in Ireland’s public finances, warns the Council; it could see a repeat of the mistakes made in the run-up to the crash. It could, according to the Council, risk plunging us into a pro-cyclical trap whereby more spending risks a deterioration of our fiscal stance in an ever-downward spiral.
These risks and warnings are well-taken; especially as both Fianna Fail and Fine Gael have implemented irrational fiscal policies in the past - both prior to and in the aftermath of the crash (even the Fiscal Council aggressively promoted pro-cyclical fiscal policies in the past). So caution is needed when considering these track records. However, let’s get some perspective on all this.
First, Irish public finances are stronger than almost all other Eurozone countries – by a considerable margin.
The EU Commission projects that Ireland will be the only country (bar Cyprus) to run a b budget surplus in 2024 (and that is after excluding the excess corporate tax receipts). Ireland will be running a surplus of 1.5 percent of GNI*. The Euro area, on the other hand, is projected to run a deficit of 2.4 percent.
The International Monetary Fund projects annual surpluses and deficits out to 2026. While a little bit more tentative, they show that this story will continue: Ireland (apart from Cyprus) will be the only Eurozone country with a budget surplus. And the gap between Ireland’s strong performance and the Eurozone average will widen even further.
The situation is similar when comparing debt levels.
The EU Commission projects that, up to 2024, Ireland’s debt level will be well below the Eurozone average. In 2025 and 2026, the IMF projects that Irish public debt will fall even further compared to the Eurozone. Irish public debt is falling faster than any other Eurozone country.
The Government will take credit for this ‘prudent fiscal management’ and in many respects, they deserve kudos. However, it is easy to run surpluses when you suppress spending. Even when old age pension expenditure is excluded, Irish current spending would have to increase by approximately €7.5 billion just to reach the average spend of our EU peer group.
There are a number of important debates in the run-up to the budget. Whether the Government increases net spending by 5 percent or 6 percent (the reason for the row between the Government and the Fiscal Council) is not one of them. If the Government ‘breaches’ its spending rule, it will make little difference relative to Eurozone averages and our own fiscal dynamic.
We would still be best in the class.
However, all this glosses over a far more important debate. If we want to make transformative improvements in public services and social protection, while maintaining a high level of public investment, we will need to significantly increase tax revenue, and without resort to the windfall or excessive corporate tax receipts.
But this is a debate we’re not getting. It is looking more and more likely that the recommendations of the Commission on Taxation and Social Welfare will be marginalised. There will be no road-maps to an enhanced social state. Overall tax levels will remain relatively low at the cost of social prosperity and economic efficiency.
If that happens, we will be sent to the back of the class.
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