Growth will determine if more austerity is needed

There is just over a week to go to Budget 2014. In many ways it is a very predictable budget. The Government has hemmed itself in with all sorts of commitments about the split between taxation and cuts as well as delineating several “no go” areas such as income tax.

The likely source of much of the additional revenue the Minister for Finance has to raise is also known.

It will come from the full-year impact of measures such as the property tax and changes to pension tax relief flagged last year.

Michael Noonan has a limited menu of options to choose from to make up the balance and will target the new "old reliables" such as taxes on unearned income. If there is a banana skin, it's probably in the pension changes.

Spending cuts
There is less clarity as to where the spending cuts will come, although again there are a number of "no go" areas. The expectation is that the Minister will try to take a little from a lot.

All of this has meant that the story of the budget so far has been about the quantum of the adjustment and much will be made of whether it is a €2.7 billion or €3.1 billion adjustment.

The tensions in the Coalition over the size of the adjustment has kept it in the headlines but it is really only political theatre. The question uppermost in people's minds is whether next Tuesday will be the last bite of the austerity apple or whether a few more will be needed. As Chris Johns pointed out in a piece in this newspaper last week, the couple of hundred million that we are talking about in the context of next Tuesday's budget cuts is not going to determine this.

It is worth remembering that the health budget has been exceeded by a couple of hundred million every year since the troika came to town.

What will dictate whether further austerity budgets will be needed is not how hard next Tuesday’s budget is, but whether the economy grows next year.

It is growth that will determine the all-important deficit-to-GDP ratio on which our fate hinges. If we don’t hit the targets agreed with the troika, then there will be more cuts – counter-productive as it seems to many.

The problem the Minister faces is that there really is very little he can do next week to improve the economy’s growth prospects.

Fundamentally you would need to be a magician to create growth by taking either €2.7 billion, or €3.1 billion for that matter, out of the economy.

But that will not stop the Minister announcing various measures and initiatives to “boost growth” along the lines of last year’s 10-point plan for small and medium-sized enterprises.

If the Minister can do anything next Tuesday to boost growth, it will be to bolster confidence and hopefully to engender a virtuous circle, in which people spend more. Making a plausible argument that this is the last austerity budget is one obvious way to do this.

Paradoxically, as argued above, he can’t really do that unless he can make a compelling case for reasonable growth next year. He would certainly have to argue that growth will be stronger than most people are predicting.

This is not as hard – or as foolish – as it might seem. The budget is two months early this year in order to comply with the new European rules aimed at fostering fiscal discipline.

As a result it is being framed using a growth rate for next year based on the economic data from the first half of this year.

Huge uncertainty
Even by the standards of economics, this is a shot in the dark. There is huge uncertainty about growth, with some encouraging signs in the last few weeks conflicting with disappointing numbers for the first half of the year.

The risks, however, are not all on the upside. Lurking in the shadows is the impending crisis over the US debt ceiling.

If you accept the argument above, then the single most important figure that the Minister will utter next week is not the size of the budget day adjustment but his growth figure for next year.

It is worth noting that this year, for the first time, the Fiscal Advisory Council is supposed to vet the economic forecast used by the Government in the budget.