Talk of tax cuts and axing USC totally unrealistic

The election may not have been called yet but political parties are already trying to elbow in on our fiscal space.

With all the major parties forecasting a figure of anywhere between €8.6bn and €12bn, voters could be led to think that there will be giveaways and tax-cuts galore after the election.

But the bottom line is that there won’t be.

Coalition wrangling, misguided department forecastings, changing demographics, inflation, and simple pre-election auction politics — the list goes on — mean that whatever the true fiscal space is, it certainly won’t be the figure political parties are currently peddling.

Fiscal space has become the new buzzword among politicians and political strategists as parties try to eke out as much financial room to manoeuvre as possible with voters.

Essentially, the term refers the amount of extra money the Government has to spend after it has complied with European and national rules to reduce the structural budget deficit.

Both Fine Gael and Labour are taking the optimistic view that we will have around €12bn to play around with in the next five years.

This will allow Fine Gael to abolish USC, provide a €2.5bn rainy day fund, and increase services.

Labour will use their fiscal space to phase out USC for those on salaries of up to €72,000 and pump money into health, education, and other services. They also seem to be in favour of a rainy day savings account but have yet to provide details of how much they would set aside for this.

Although they are working with the same figure, both parties — if in a position to try and form a government after the election — will be coming to the negotiating table with different proposals which will invariably be watered down.

Although Fianna Fáil have yet to place their bet on the level of fiscal space, they said it will be less than €10bn.

Sinn Féin are sticking with the Department of Finance estimate of €8.6bn.

All of these figures are far above the €3.2bn fiscal space that the financial watchdog, the Irish Fiscal Advisory Council, has forecast.

Chairman John McHale last week warned: “We actually think that there is a need for a further allowance for demographics and also if you were to maintain the existing level of public services and benefits, really the free fiscal space drops quite sharply to about €3.2bn.

“So there is a real question about affordability.”

The Department of Finance has estimated that “gross fiscal space” available up to 2021 will be €10.9bn but the calculation for “net fiscal space” in the same period is €8.6bn.

Even taking what could be seen seen as the safer option, the department’s €8.6bn figure is risky.

For a start, the Department of Finance can get its figures wrong — you only have to look back to 2006/2007 when they forecasted a “soft landing” — and calculating long-term projected fiscal space is near impossible.

As economist Constantin Gurdgiev has said, it is relatively easy to predict the short-term fiscal space but beyond 2017, “the visibility of fiscal dynamics changes due to expected normalisation in interest rates and Government debt yields, as well as looming uncertainty about the direction of global economic growth”.

Relying on fiscal space to invest in much-needed services while doing away with the hated USC is unrealistic.

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