Fintan O’Toole: Everybody knows Ireland’s fiscal rules are daft

Our nearest neighbours are not the only ones who have held daft referendums. Apart from the one on abortion in 1983, the daftest one we’ve done was in May 2012.

It passed quite easily and nearly a million people voted in favour of it. There was a very strong consensus in the media, among the biggest political parties and among the great and the good that it was a good thing.

Its purpose was to endorse a set of fiscal rules that must be applied by all governments in the euro zone. Those rules will set the very tight spending parameters within which Paschal Donohoe will present today’s budget. And here’s the absurd little secret: almost nobody thinks they make sense – except, that is, as evidence of the stifling power of orthodoxy.

The fiscal rules were essentially a religious act. In 2012, the euro zone was in turmoil as a result of its own poor design and of the European Central Bank’s initially inept response to the great banking crisis.

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Even while Barack Obama’s policy of fiscal stimulus was clearly working in the US, it was decided that the euro zone must show the markets Europe would do penance for its sins and show a firm purpose of amendment. This was to be done by having member states sign up to the so-called Fiscal Compact which, in effect, seeks to outlaw Keynesian economics. Its thrust was to shift national budgeting out of the arena of democratic debate and into that of technocratic control.

Ireland voted on this even before the full package was agreed by the euro-zone countries. When it was suggested that we might hold off until we could see the whole picture, Richard Bruton, speaking for the government, warned that delaying the referendum even by a few months "would put Ireland in the same category as Greece".

In order not to be Greece, we had to rush into the river to be baptised in the new faith of fiscal rectitude. This was the overwhelming message from Fine Gael, Labour and Fianna Fáil and from the standing army of economists.

The truth, even at the time, was that even most of the economists couldn’t understand how exactly the rules were supposed to work. And I don’t think it is patronising to suggest most voters did not know what the formula they “chose” to endorse as the benchmark for compliance with the rules actually means: bbt = 60 per cent + 0.95*(bt-1-60 per cent)/3 + 0.952*(bt-2-60 per cent)/3 + 0.953* (bt-3-60 per cent)/3. All voters knew was that we were in a terrible state and at the mercy of the financial markets and this is what our betters said we had to sign up to.

Opaque formulae

Fast-forward seven years, however, and it is now just about possible to admit in polite circles that this whole thing is daft. Last month, Robert Watt, secretary general of the Department of Public Expenditure and Reform, and himself a key figure in the State's management of the austerity programme, spoke to the Dublin Economic Workshop. Within this discreet context, he acknowledged what ought to have been obvious in 2012, that the rules are foolish: "It is questionable whether these rules are appropriate in managing demand at this stage in our economic cycle."

In other words, we set in stone and endorsed in the Constitution a very specific response to very specific circumstances as if those circumstances would never change.

Watt acknowledged the truth that the formulae behind the rules are utterly opaque – as he put in the jargon he used to avoid the bluntness of this truth, “Estimates of the structural balance are non- observable.” More comprehensibly, he said: “The rules are too complex and too easily gamed. Moreover, our analysis has indicated that they can produce pro-cyclical outcomes as countries can expand spending too rapidly when they meet their Medium-Term Objectives. Also, they are not flexible enough to deal with country- specific circumstances – in our case severe measurement challenges and volatile corporation tax receipts.”

It is commendable for a senior civil servant to be so honest, but Watt’s decision to acknowledge the essential fatuousness of the framework that determines what Donohoe can and can’t do today raises two big questions. Why were citizens herded to the ballot box to give their blessing to rules that affect their lives but that are both incomprehensible and badly thought through? And when are we going to get a wider acknowledgment that the wider policy of which the rules were a part – inflicting great suffering on ordinary people while pouring public money into dead banks – was a disaster for democracy?

The Comptroller and Auditor General's figures, released last week, and showing a net cost of a staggering €34.6 billion for the State's failed effort to keep alive two deceased and diseased casinos (Anglo Irish Bank and Irish Nationwide), were met with a shrug of the shoulders. But the feral populism that has created such a profound challenge for liberal democracy has its roots in the wider determination to make citizens pay through austerity for a crisis created by their supposed betters. If we are not honest about what happened in those years, we cannot deal with its terrifying consequences.