If the new rules embedded in the fiscal compact treaty would not have stopped the madness during the past decade, what is the point of implementing it now, asks Conor Ryan
ONE of the most compelling arguments for implementing the fiscal compact is that it will stop governments ever playing silly buggers with the national finances again.
But for this clause to be convincing, it is revealing to look at whether it would have done anything to stop the boom-time governments signing off on the measures that got us into this mess.
At its core, the treaty wants to limit the amount of debt a country can amass relative to the size of its economy.
And every year it seeks to prevent finance ministers from producing a budget that is premised on a structural deficit — even if, on the surface, the same budget balances.
On these terms, it would appear the Celtic Tiger would have had nothing to fear from the fiscal compact.
The budgets of Charlie McCreevy and Brian Cowen would, in all likelihood, have passed the litmus test, despite creating a situation that sent the economy hurtling off a cliff with only the IMF and the ECB as its parachute.
As part of its obligations to the euro currency, the country files Maastricht return accounts with Brussels every year. These are produced in a standard form so that each country’s set of figures can be analysed in a uniform fashion by statisticians across the eurozone.
Until 2008, when the housing market collapsed, Ireland had been filing impeccable Maastricht returns. Debts were small, the causes were clear and the economy was large enough to contain them.
Greece may have lied about its figures, but ours were exactly what was requested.
These returns included a list of explanations for the one-off and fluctuating factors which influenced changes in any given year.
In 2008, these included abnormal events such as the €546m buy-out of the West Link Toll Bridge.
When Ireland woke up after its bubble-driven hangover, then taoiseach Brian Cowen said the country had to address a €16bn “structural deficit”.
In simplistic terms, this was the effect of stamp duty and capital gains tax, which were stripped from the income side of the balance sheet almost overnight.
Structurally, the Irish economic edifice was largely supported by this pillar of funding and it became very lopsided when it crumbled to virtually nothing.
Coupled with this, more than a quarter of men were employed in the construction industry, which sent the welfare payments soaring once the building stopped.
The treaty text speaks about these types of trends, but does not spell them out. It suggests that unsustainable patterns would be accounted for and adjusted in the assessment of a country’s economic returns.
Fine Gael director of elections Simon Coveney has cited a letter from the Commission which said Ireland will be given freedom to define its interpretation of the rules.
And this was welcome because it would give us flexibility.
However, Mr Coveney said if an economy was based on the need to build 90,000 houses a year, as the Celtic Tiger was, then that would raise a red flag for structural deficit analysts.
But there is no firm evidence that stamp duty and capital gains tax have featured in any debt brake measurement.
This is because structural deficit is a woolly enough term. In fact, for such a key provision in the treaty, the Referendum Commission opts to deflect a full explanation of it when it attempts to compile a glossary of terms.
Instead, it buried its head in another piece of jargon. It said: “The structural or underlying deficit is the general government deficit for the year ‘cyclically adjusted’ — that means adjusted for the effects of faster or slower than normal economic growth — and with one-off or temporary revenue or spending measures removed from the calculation.”
On Friday, Taoiseach Enda Kenny was asked the Government’s definition of the term, but he said that was still to be ironed out.
“The question of the structural deficit is one that will be dealt with by the country, working with the Commission, beyond 2017 and the methodology adopted by this country will be applicable and there will be an individual country plan produced,” he said.
The structural deficit measurement creates a dilemma because of what is and what is not temporary.
Ireland’s day-to-day revenue more than doubled between 1997 and 2007. Yet, the trend during that time was steady.
In seven of those years there was an exchequer surplus. This kept us on the good side of the Stability and Growth Pact and would have kept us on the good side of the new treaty.
Two of the years we ran a deficit, in 2002 and 2005, were below the 1% of GDP cut-off allowed under the proposed rules.
Broadly speaking the “cyclically adjusted” jargon used by the Referendum Commission is difficult to pin down.
The consensus of economic commentary during the boom would point to a belief, at the time, that Ireland’s growth was not cyclical.
Supposed all-knowing think-tanks such as the OECD were assessing our accounts right up until the crash and predicted, like others, that we were due a soft landing.
Germany already applies its own structural deficit rule, which presumably will form the foundations for the European gold standard, but the Government has been told this is not obligatory and it can define its own structure.
The German model is based on trends such as unemployment, and if there is a surprise fluctuation, then the effect it had on revenues for that year is eliminated.
For instance, if a natural disaster occurred and required billions in investment, the rules would be adjusted. Based on Maastricht data, a bespoke spend such as the West Link buy-out would also be eliminated.
Moreover, a shock rise in unemployment, as was seen in 2008, could also be forgiven until it became part of the norm.
The soft-landing talk of 2007 would not suggest the type of one-off blip spoken about in German-style structural deficit forecasting.
So, if the new rules embedded in the fiscal compact would not have stopped the madness during the past decade, what is the point of implementing it now?
© Irish Examiner Ltd. All rights reserved