BUDGET 2016: Accounting alchemist Noonan doubles his budgetary clout

Finance Minister Michael Noonan has been in a few political scraps in his time and, since his appointment at the depth of the crisis more than four years ago, he has proved to be the most political of finance ministers, and yesterday’s budget was the most political of budgets since the end of the boom years.

The Government faces a particularly tough test: There is a looming election to be fought at a time when the opinion polls are flashing red for the prospects of the Coalition parties.

Since sweeping to power in February 2011, the polls suggest the two parties have shed a remarkable 20 percentage points in popular support. Above everything, the election has set the scene for this budget.

Until recently, it looked like an impossible task for Mr Noonan to deliver something big in this budget from so little. In the end, he needed to employ a lot of accounting alchemy, effectively making the €1.5bn in spending and tax measures he announced yesterday to go much, much further.

Reducing the universal social charge (USC) swallowed up the greater part of the €750m he had long advertised he had at hand to cut taxes.

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It turns out that a €1.5bn budget is not a lot of money if the decision has been made to reduce the key austerity tax.

So, how did Alchemist Noonan make something apparently from so little?

That magic trick was achieved last weekend when the Department of Finance published its White Paper on Estimates of Receipts and Expenditure.

The finance minister didn’t perform the conjuring trick yesterday, but rather showed his hand in the White Paper, which detailed a huge €1.5bn in additional spending, all to be allocated in the last weeks of the 2015 budget.

After seven long years of austerity and bailout, last year’s budget ended up being slightly expansionary — putting a bit more money into the economy than had been taken out.

Even as the economic outlook brightened, Mr Noonan spent the past year carefully talking down expectations and advertising budget 2016 as merely “mildly expansionary”.

But the secret of yesterday’s €1.5bn in tax cuts and spending increases is that the package was in fact double that amount.

The White Paper used a large amount of the additional tax bounty to pay down debt and, significantly, used even more cash to fund a splurge of spending. It allocated this largesse across several departments to plug huge deficits in health and to fund new policy initiatives across several others, including transport and social protection.

This alchemy not only plugged the €600m hole in the health budget, but marked a level of spending not seen since the boom years, and all to be executed in the last few weeks of the current accounting year.

The spending is allocated to 2015, even though no-one is pretending that the overall effect is to provide a huge boost to the 2016 budget. In a flash, a further €1.5bn of spending measures was effectively added to the other €1.5bn earmarked yesterday in spending rises and tax cuts, creating a package worth €3bn.

This alchemy has created a substantial pre-election budget.

The background to Budget 2016 lies in the mishandling by the eurozone political and monetary authorities of the continent’s debt crisis.

The eurozone’s political and monetary leaders took years longer to respond, as the US and the UK did, to save the financial system. The economic recovery here was delayed by at least two years — enormously complicating the Government’s political calculations.

There were plenty of hints about the improving economic fortunes facing the Coalition when Mr Noonan unveiled his spring economic statement in April.

The economic statement was hailed as a milestone in reforming the country’s decision-making and budget-making.

The statement painted a picture of an economy buoyed by a huge surge in exports — thanks to an exceptional favourable exchange rate.

With the euro having slumped against sterling and the dollar, exporters were able to price their goods and services at highly competitive prices.

Slumping oil prices provided a further boost to companies and consumers.

The Government’s improving economic fortunes didn’t end there. Tens of thousands of households were still overwhelmed by large amounts of debt, the legacy of the financial crash, but more jobs buoyed consumer spending as the long years of tax increases tapered off.

In April, the exchequer had already collected almost €550m more than it had expected.

By last weekend, the Government projected it would have €2.3bn more in the kitty for the whole year, and some economists believe that that sum will grow to €2.5bn when the year-end sums are counted in January 2016.

Financial watchdog the Irish Fiscal Advisory Council has endorsed the Government’s budget macro-economic forecasts.

Mr Noonan yesterday reiterated the projections that the Irish economy would surge by 6.2% this year — the second year Ireland has led the European growth league — and continue to grow at a rapid clip next year too, of 4.3%.

The annual budget deficit in 2015 will fall to 2.1% in 2015, well below the 2.9% level mandated by the EU rules this year.

Next year, Ireland will face for the first time the new rules that are meant to police government spending even more strictly.

But it appears that Mr Noonan employed a bit of accounting alchemy last weekend that allowed him to double a 2016 accounting package long advertised to be worth only €1.5bn into something much more politically interesting.