Cliff Taylor: Why we should future-proof our national finances

Are we getting ahead of ourselves? When the Budget was announced last October, I wrote that my preference would have been for a neutral package, rather than the €1 billion in tax cuts and spending hikes. My point was not that we don’t need higher spending and lower taxes – we do – but whether we could yet afford it. Given the trends in the meantime, with strong growth and tax revenues, you could argue that I was wrong – it looks like borrowing will fall this year, despite the Budget measures and that we remain on course to meet all our commitments under EU rules.

Now the Government is promising to spend more money increasing public sector pay. There is a debate to be had about who should benefit from the room we have to cut taxes and hike spending – but let’s park that one for the moment. The bigger question is how much financial leeway we have in the first place. Having spent €1 billion in the last Budget, the Government is now upping the bet on growth, planning to put in another €1.5 billion next October. What this means is that the country will borrow more money so that taxes can be cut and spending increased.

If we had two neutral budgets for this year and next, then borrowing by 2016 might have been near enough eliminated – falling to less than 0.5 per cent of GDP. Now it will be 2018 before this happens, on current estimates. This two-year gap does not matter much if growth keeps everything on track – but it will matter a lot if the economy slows.

Government accounts are not like the accounts of a household, or a business. You can make a case for a government to borrow – certainly when times are bad – to support economic activity. The complex EU rules put in place after the crash try to allow for this. We all know that the start of our budgetary problem was the “When you have it, you spend it” Charlie McCreevy philosophy. The then finance minister did add, when he said this in 2001,that “the mistake is to try to spend it when you haven’t got it.”

As it turned out, McCreevy and the finance ministers who succeeded him in the run-up to the bust thought they had loads of cash to spare, when in fact they hadn’t, because the whole edifice of the exchequer finances was built on the sand of property-related tax revenues. Once the economy turned, the exchequer finances did, too, And how.

We can measure, using EU rules, something called the “underlying deficit” which is the amount the State borrows each year adjusted for the economic cycle and for once-off factors – for example it excludes the money we paid in to recapitalise the banks. As the crisis started, this deficit measure turned from a small surplus in 2007 to a deficit of a whopping 11.5 per cent of GDP by 2009. Now the downturn we saw in the crash was unprecedented, but this is a measure of how quickly things can turn.

The spring economic statement underlined this, showing the vulnerability of our growth forecasts and exchequer finances in the years ahead, if international growth slows or interest rates rise. If you wanted to take an optimistic view of the world, you could point out that growth could outpace expectations. This may indeed happen in 2015, with momentum strong in the Irish economy, but the point is that, beyond that, we just don’t know.

We have a remarkable range of factors at the moment helping us – a reasonable international growth picture, rock bottom interest rates and no great cause of turbulence. Who knows what can change, from a Greek euro crisis to a British vote to leave the EU, to a general disappointment in international growth or instability as interest rates start to increase in the years ahead.

Maybe we should stop worrying about these unknowns and just let the good times roll. We all need a break from austerity. You could argue that the Government was always going to loosen the purse strings as the general election approached. So far, strong economic growth is allowing Ministers to face both directions at the same time – promising to safeguard the national finances, while at the same time planning a relatively generous Budget for October. The EU rules also restrict their hand; were they not in place I expect we might be looking at a €2.5 billion giveaway next October, rather than the more modest €1.5 billion we are told is planned.

If growth stays strong, it will all work out. I would have preferred, however, to use the unique moment we are now in, helped by low interest rates in particular, to future-proof the national finances, cutting out borrowing and lowering our debt ratio for another year or two before starting to loosen the purse strings.

Now, however, the whole national argument is not about how much we should give away, but who should benefit. The pay deal will leave €300 million going to higher public pay out of total planned spending increases of €750 million. Another €750 million will go on tax cuts. If the economy improves more before Budget day, the total amount available could increase. Also, the Coalition could choose to save a bit more, or raise a bit more, and thus have more on the other side to give away.

Few would dispute that taxes need to fall or that more spending is not called for in some areas. The question is whether the electoral cycle is leading to too much being spent, too soon.

Twitter: @CliffTaylorIT