JIM POWER: Budget needs sensible policy, not stupid politics

File photo of Paschal Donohoe's Budget 2018 speech.

Over the past week the IMF and others have warned or advised the Irish government to adopt a cautious approach in framing Budget 2019 and in managing fiscal policy thereafter, writes Jim Power.

This means that they want expenditure to be controlled and any tax cuts to be specifically targeted at areas that would increase labour force participation.

This is timely advice because this is the time of the year when the various government departments sit down to think about what they would like to get in terms of extra spending from the Minister for Finance in October and the time when the Minister gets inundated with pre-budget submissions from all sorts of interest groups.

A cautious approach to fiscal policy is certainly advised at the moment.

The sensible approach to fiscal policy, which is the policy that describes how the Minister controls expenditure and raises revenue, is in a counter-cyclical fashion.

This means that when an economy is growing strongly, that is the time to apply the brakes and control spending and any tax giveaways.

Then when an economy is experiencing sub-par growth, that is the time to press the accelerator and boost growth through a combination of tax cuts and expenditure increases.

In Ireland, we have a long and inglorious history of doing exactly the opposite.

In the first six years of the century, the various governments put the pedal to the metal by cutting taxes and increasing spending at a time when the economy was firing on all cylinders.

Then when the crash occurred, we had nothing in reserve and we were subsequently treated to a combination of savage expenditure cuts and tax increases.

Obviously, this approach exacerbated the downturn, but there was no choice given the mess that the public finances were in.

Hopefully, lessons have been learned.

The Irish economic cycle is very strong at the moment and the last thing we need is an expansionary fiscal policy delivered through a combination of tax cuts and/or expenditure increases.

At a time like this, we should, in theory, be running budget surpluses, which would give us the wherewithal to run deficits when the inevitable downturn in the economic cycle occurs.

Alas, such an approach to economic policy is much easier said than done.

On the economic front, it is very clear that extra investment is needed in vital public services such as health, education, and law and order.

At the same time, the pressure on public sector pay is escalating.

Meanwhile, Ireland 2040 implies a considerable but sensible increase in capital expenditure over the coming years.

Personally, I was always a fan of the now defunct “Golden Rule” in the UK, which was a fiscal rule that only permitted a budget deficit for capital spending purposes.

On the taxation side, the personal tax burden increased alarmingly over the past decade and it is now undoubtedly an impediment to attracting the labour inflow that the economy now badly requires as we move towards full employment and labour shortages in most sectors of the economy.

It will be a difficult balancing act.

On the political front, the challenges are also obviously immense.

Assuming the Government survives until October, it is hard to see how Budget 2019 will not be the last one delivered by the current administration.

Hence, there will be massive pressure to make the upcoming budget a pre-election one.

The unfortunate thing is that no matter how prudent the Minister for Finance would like to be, the two main opposition parties appear to desire a massive increase in spending on anything that moves in the economy.

The reality of politics is that to push policies, one needs to have power, but history would suggest that the only way to sustain or attain power in this country is to promise to spend money on everything and at the same time cut taxes.

That is exactly the combination that Ireland does not require at the moment.

Whether the Minister adopts a prudent approach or not to the public finances, the reality is that resources are by definition limited and scarce, and demands are virtually insatiable.

He will have to make choices, but we should hope that these choices are driven by sensible economics rather than stupid politics.


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