Stephen Collins: Donohoe should not fear caution in framing budget

It is typical of Irish politics that most of the political pressure on Minister for Finance Paschal Donohoe in the run-up to the budget is to do the wrong thing rather than the right thing.

His own party’s TDs want tax cuts, Fianna Fáil wants cuts in the universal social charge, while almost everybody in the Dáil wants significant increases is public spending of all kinds, ranging from increases in the old age pension to massive investment in house building and extra spending on health.

It seems that the political class and much of the public have learned nothing from the crash and, whipped up by large swathes of the media, want a repeat of precisely the same policies that led to the crash of 2008.

There are some voices of sanity, led by the Irish Fiscal Advisory Council, who have pointed out the dangers of tax cuts and excessive public spending at a time when the economy has just recovered from the impact of the last crash.

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The problem, as former minister for finance Michael Noonan pointed out a few years ago, is that there is no political pressure of any kind for a prudent budgetary policy and the warnings of the fiscal council are drowned out in the demand for goodies of all kinds.

Self-inflicted disasters

This might be understandable if we hadn’t been here before but this country has endured two self-inflicted economic disasters since the late 1970s; but still the penny doesn’t appear to have dropped.

Instead governments since 2008, which have had no other choice but to cut spending and increase tax in order to rescue the country from economic disaster, are widely criticised for inflicting “austerity” on an innocent population as if there was some magic wand that would have made all our problems go away.

A book just published by the Royal Irish Academy, Debating Austerity in Ireland: Crisis, Experience and Recovery, examines recent experience from a number of perspectives.

One of the most illuminating contributions comes from professor of sociology at Maynooth Seán Ó Riain, who takes a critical look at the political cliche that “austerity” is linked directly to economic liberalism.

He points out that prudent, fiscally conservative budgeting is a feature of the northern European countries like Germany, the Netherlands and Scandinavia. “In the ‘social market’ economies fiscal prudence has historically been associated with the protection of the state and the public sector from the cycles of capitalism rather than the shrinking of the state to respond to those fluctuations and pressures.”

He provides a range of data to support his claim that the Nordic social democracies and the continental Christian democracies have traditionally run much more prudent and fiscally conservative budgets than the more economically liberal UK and Ireland, which have tended to swing from boom to bust.

The European Union fiscal treaty, which was approved by the Irish people at the height of the crisis in 2011, incorporated some of the key elements of good budget practice in EU rules but it seems that having backed the treaty most Irish politicians now want to forget it.

Instead of railing against these restrictions as the crisis eased, mainstream Irish politicians should have embraced them as the bulwark against future economic disaster and explained to the public why they are necessary, rather than allowing “anti-austerity” campaigners to hog the debate.

The latest exchequer returns published during the week, which reveal a small tax shortfall, show just how little room for manoeuvre Donohoe has in framing his budget.

Constraints

Donohoe has sensibly spelled out the constraints that will limit his capacity to dispense largesse next Tuesday. While in theory the fiscal space for next year is €1.2 billion some €900 million of that has already been allocated to cover the full-year impact of last year’s budget measures and the cost of the new public service pay deal.

That leaves just about €300 million for spending increases and tax cuts. One way the Minister could make some serious elbow room for himself would be to take a hard look at some of existing tax reliefs and concessions which were introduced for specific reasons that have outlived their usefulness.

For instance, the 9 per cent VAT rate introduced to boost the hospitality industry in 2011 has clearly had a positive impact but it is questionable whether it is required any longer, given the soaring cost of hotel rooms and current boom in the sector.

A move to bring the VAT rate back to the standard 13.5 per cent for the hospitality sector would bring in an extra €500 million to the exchequer.

Another tax increase about which there could be no argument would be a move to bring the excise on diesel into line with that on petrol. It was reduced by the Fianna Fáil-Green government but the damaging impact of diesel on public health, particularly on children, warrants an increase to at least the same level as petrol and that would raise another €250 million.

Whatever he does the Minister won’t be able to implement large tax cuts or spending increases. However, he should not fear accusations of being too cautious as prudence will serve the country best in the long term.