Budget criticised by IFAC: Spending money we don’t have

A government budget is always about managing expectations, economically, politically, and socially. 

It gives the government an opportunity to communicate directly with the public on matters that affect their daily lives. 

But if it gets the mix wrong, it can have devastating consequences.

The most glaring example of this was the fall in 1982 of the Fine Gael-Labour coalition government, in the wake of an attempt to impose Vat on children’s shoes as part of a hairshirt budget. 

The political consequences far outweighed the economic benefits. 

Ditto the the ill-fated decision, in 2008, by a Fianna Fáil-led government to take away medical cards from the over-70s. 

That led to protests on the streets.

With that in mind, it was hardly surprising that the current Government would use our rising economic fortunes to give workers, pensioners, and welfare recipients a few extra euro in their pockets. 

When he announced details of the budget in October, Finance Minister Paschal Donohoe characterised it as a “caring budget” that was “about securing our future, renewing the centre” and which also had “an emphasis on strengthening our national finances”.

The Irish Fiscal Advisory Council (IFAC) would dispute the last point. 

It has strongly criticised Budget 2019, saying spending growth goes beyond safe levels, leaving the country exposed in another downturn.

That’s a sobering reflection on what the Government heralded as a budget for growth and jobs. 

It is also a sobering reflection on the purpose of the IFAC, if successive governments and ministers for finance continue to ignore it.

A review of the workings of IFAC, in June 2015, concluded that some of its reports risked being predicated on too pessimistic an interpretation of economic trends. 

It also argued that some reports were so excessively detailed that it made it easy for the government to dismiss them. 

However, it recognised that the credibility of any fiscal council depended on being prepared to articulate analytically well-founded positions, even if they were unpopular.

The IFAC has never been afraid to do that, even when much of its advice falls on deaf ears. 

Back in September 2014, a month prior to the first budget since Ireland exiting the bailout, the council called for €2bn of tax hikes and spending cuts, in order to avoid another cyle of economic “boom and bust.” 

It said that being prudent would show the government was serious about fixing the remaining problems in the economy. 

However, the Fine Gael-Labour coalition insisted that the main focus would be on meeting EU deficit targets and that could be done with a neutral budget.

That has continued to be the focus ever since and, judging from Taoiseach Leo Varadkar’s response to the IFAC’s criticism, will continue to be so, at least in the short- to medium-term. 

The Taoiseach cited the European Commission’s finding, last week, that the budget was fully compliant with the Stability and Growth Pact, adding that EU deficit targets would be met. 

That brings us to a third sobering reflection: Almost five years on from exiting the bailout, budgetary strategy is still being largely dictated by Brussels.

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