Don’t let State spending go up in smoke

The fiscal hawks sounding the warnings must be heeded by the Government, says Kyran Fitzgerald, and public pay and capital expenditure must not be allowed to keep drifting up

There is a hint of autumn in the air. Ahead of the summer break, the interest groups have been positioning themselves ahead of Budget 2020 which is due to be presented in early October.

Those in the business of special pleading will be making plenty of noise — much of it in TV and radio studios — in the weeks ahead.

Over the past week however, it is the fiscal hawks that have been bearing their claws.

The job of the Irish Fiscal Advisory Council is to fret about the irresponsibility of the politicians in charge of the public purse. Its current chairman, economist Seamus Coffey, has not disappointed in that regard.

Last week, he delivered the council’s latest assessment report, cheerfully blowing a few raspberries in the direction of Taoiseach Leo Varadkar and his Finance Minister Paschal Donohoe.

Mr Coffey delivered a punchy address. Key points included — growth in spending has ‘drifted up’ beyond increases planned from 4.5% to more than 6% — his use of the verb, to ‘drift’, is one suspects intentional.

The policies are ‘pro cyclical’. Here we have the old mistake Irish governments fall into of ‘spending it when you have it’ to use the famous words of former Finance Minister Charlie McCreevy. This, of course, risks exacerbating an overheating economy and leaving the administration with less in the kitty with which to cushion itself —and the rest of us — in a downturn.

And the worm could easily turn, warns Mr Coffey, citing the State’s reliance on surging corporation taxes, receipts ‘unexplained by an underlying economy.’ What goes up can easily come back down.

The Irish economic frog is beginning to simmer, if not slowly come to the boil.

The council warns that the output gap is growing — demand is beginning to outstrip the economy’s potential and if construction continues to pick up as forecast, the gap could grow high indeed, putting pressure on prices and wages.

The Government is contributing to this by failing to rein in spending. The overrun jumped to €1.3bn in 2018.

We have not used the chance to cut back our national debt which remains the fifth highest in the OECD. Talk about not repairing the roof while the sub is shining — fiscally, that is.

And to really cheer us up, Mr Coffey points to a few of the risks to the public finances. One being of particular relevance — almost half of our corporation tax receipts come from just 10 companies.

Mr Coffey delivers a harsh verdict on the state planning and forecasting machine: “The medium term plan is not credible. The projections of surpluses (in the plan) are not credible. The Government needs a credible medium term strategy.”

Wham, bam. Just like Katie Taylor.

Interestingly, much of what Mr Coffey had to say was implicitly echoed by the Department of Finance chief economist, John McCarthy, at the ESRI Budget Perspectives Conference on Thursday.

Mr McCarthy did not, of course, directly criticise his political masters, merely noting that the headwinds are picking up before listing some of the scary scenarios that could unfold beyond our border.

As he spoke, news was coming in of attacks on two oil tankers near the Strait of Hormuz in the Gulf — news which led to a spike in oil prices.

We remain at the mercy of events as a Coalition government discovered way back in October 1973 when war came to the Middle East.

Significantly, the Merrion St mandarin ventured onto sensitive terrain with his observation regarding the concerns of colleagues in the Department of Public Expenditure regarding value for money — or the lack of it — secured on expenditures at the Department of Health.

He also suggested that in the event of a sharp downturn, the capital programme would have to be re-examined carefully as part of a resetting of priorities.

What the Government or its successor must avoid at all cost a panicked response to a sharp deterioration in the country’s fiscal position.

Ten years ago, far too many vital programmes were shut down or curtailed. One thinks of funding for public dental care, home care and community projects.

A poorly designed redundancy programme stripped the public service of people of real expertise with resulting impact on the corporate memory bank and effectiveness across Government.

Some of those let go at great expense as part of an effort to restore our ability to borrow at reasonable rates in the sovereign debt markets were later rehired as consultants.

Much of the delay in tackling the housing crisis can be attributed to a lack of administrative effectiveness across local government in part due to the fact that public housing programmes were run down over the years.

Some of the current Department of Health overspend may be due to the fact that we are in catch-up mode after years of low investment across the system.

After 2012, we got lucky. We benefited from a surge of foreign investment. We cannot rely on this happening again.

The Government — both temporary and permanent — will have to become much more vigilant when it comes to ensuring value for money in public spending.

This means keeping a tight lid on the upward drift in public pay and casting a cold eye on certain capital projects, particularly against the background of growing concern among experts and the wider public about climate change.

After German unification, the Federal Government lavished billions on infrastructure in the former East Germany.

Much of the investment was no doubt welcome, but the harsh reality is that economic recovery has not followed in its wake.

The population in the East of the country is now as low as it was in 1913 having lost three million since 1990.

Equally, throwing large amounts of taxpayers money at projects — regardless of proper cost-benefit analysis —will not by itself revive the struggling areas in rural and small town Ireland.

We need a real honest debate — a forum of experts — on how best to spend in order to regenerate regions that are lagging behind our major urban centres.

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