The Complexity of the Fiscal Options

SBP June 19th by Jim Power
Earlier this week the Irish Fiscal Advisory Council (IFAC) published its latest Fiscal Assessment Report. This body was set up as an independent assessor of Irish fiscal management on the back of Ireland’s bailout conditions. The theory is that having an independent overseer of how Government conducts policy in relation to taxation and public expenditure might or should ensure sensible and prudent management of the public finances. In the period between 2000 and 2007 these are two adjectives that could certainly not be used to describe how we managed our public finances. Presumably if such a body had existed during the first seven years of the century we would not have been treated to the debacle of the benchmarking of public sector pay; the total failure to control current expenditure; the removal of thousands of workers from the income tax net; and a fiscal policy that was generally very pro-cyclical. That is the theory at least, but in practice since IFAC was set up, the Government appears to acknowledge what the body is saying and then turns around and basically ignores most of its advice. If it had been set up in 2000, McCreevy and his successor in the Department of Finance would most probably have made a virtue out of ignoring the advice dished out by the body.

As always, the latest report contains a lot of very interesting material, but the headline grabber is the advice to Government to press ahead with the delivery of the planned €2 billion adjustment in Budget 2015, due to be delivered on October 14th. It puts forward three reasons as to why it would be sensible to pursue such a course of action. Firstly, to reduce risks to debt sustainability by putting the debt-to-GDP ratio on a firm downward path; secondly, to provide a reasonable probability that the requirement of a deficit of below 3 per cent of GDP is achieved in 2015; and thirdly, to protect the hard-won credibility of Ireland’s capacity to follow through on adjustment commitments.

To date we have shown an amazing capacity to follow through on adjustment commitments, but ‘austerity fatigue’ is very definitely setting in, as demonstrated very vividly in the recent local and European elections. It is one thing for the Council to issue this advice, but it is a very different and difficult matter to point out where exactly the €2 billion should come from. That is not the job of IFAC, but it would be interesting and instructive to see exactly how the body would envisage a further adjustment of €2 billion being delivered.

The Department of Finance is predicting a deficit just under 3 per cent of GDP by the end of 2015. That projection is heavily predicated on GDP growth of 2.1 per cent in 2014 and 2.7 per cent in 2015. If growth turned out weaker, the GDP part of the budget ratio would be lower and the borrowing percentage higher – this is a case of simple maths. However, tax revenues and expenditure are heavily driven by growth, so if growth turned out to be weaker, obviously tax revenues would be lower and pressure on social expenditure greater. Much does depend on economic growth.

However, economic growth cannot be viewed in isolation. It is actually the product of many factors, not all of which are fully understood by anybody, not to mention economists. Of particular concern at the moment is the impact that the proposed adjustment might have on growth. Given how fragile the economic recovery story is at the moment, and particularly the consumer side of the economy, there is a distinct, but largely unquantifiable risk that such an adjustment coming on top of what we have already endured since 2008, could have a very negative impact on economic activity and end up making the deficit worse rather than better.

There is in my view a simplistic argument to the effect that the Minister for Finance should opt for an adjustment of at least €2 billion in case growth turns out weaker than anticipated and the deficit higher than anticipated as a consequence. Surely there is a danger that if growth turns out weaker than expected, a budget adjustment of €2 billion would just make growth even worse and the deficit higher. An adjustment of €2 billion would not result in a commensurate reduction of €2 billion in the deficit. Fiscal multipliers are important, but such multipliers are not easily calculated, particularly in an economy that has endured such a dramatic shock in recent years and which is only now showing very tentative signs of recovery.

The economic impact of a further €2 billion adjustment would of course be heavily determined by the nature and quality of the adjustment. It is just not clear to me at the moment how such an adjustment would be constituted so as to do the minimum damage to the economy. I would like to see IFAC’s remit be widened to include detailed policy recommendations. Only then would we really be in a position to judge the soundness of its advice.

Department of Health Really is Angolan in its Nature

Examiner June 20th 2014 by Jim Power

It should come as no surprise to anybody to learn that politics is a very cruel and callous business. This week the Minister for Health, James Reilly was forced to reverse course on the medical card issue. The proposal to issue medical cards on the basis of medical need has been shelved and over 15,000 of the medical cards that were removed on the back of a review process over the past three years are now due to be returned. This is being viewed as a major back down by the Minister for Health and has added to the belief that his term in the current office is now very finite.

Apportioning blame to Minister Reilly for this latest debacle in the Department of Health strikes me as pretty shallow. My understanding is that the Minister for Health was opposed to the policy towards the removal of medical cards, but he was given no choice by the Minister for Public Expenditure and the Cabinet as a whole. I may be wrong about this, but we the public deserve to be told exactly how the policy was decided upon and by whom.

Many bodies currently analysing Ireland’s public finances have identified overruns in the Department of Health as a key risk to the attainment of a budget deficit of 3 per cent of GDP or lower by the end of 2015. Some observers and commentators are prone to vilify Minister Reilly for those overruns, and I can already envisage the media headline when the overrun for the year is published. However, before we rush to judgment, the facts of the matter should be remembered.

The reality is that health is probably the most important public service that the state is tasked with providing. It is also a reality that high quality healthcare is a very expensive and complicated service to provide. No country does it perfectly, and for those that come close to perfection, there are serious question marks over its longer-term sustainability and affordability.

Ireland spends around 8.8 per cent of GDP on health. This compares to 11.6 per cent in France. On the surface one might be tempted to be critical of the lower level of GDP spent by Ireland, but if one considers the age profile of the Irish population, then criticism might be less valid. Ireland has a very young demographic profile. At the moment the median age of the population is around 35 and just over 50 per cent of the population is under the age of 35. In 2011, 11.6 per cent of the population was over the age of 65. This is projected to rise to 16.2 per cent in 2026 and 21.6 per cent by 2046. In France, 23.2 per cent of the population is over 60 years of age, compared to 16.4 per cent in Ireland.

As populations age, the demand for healthcare increases and the amount of resources devoted to it also has to increase. If Ireland was currently spending the same percentage of national income on health as France is, then we would be in a really serious situation, given how much younger our demographic profile actually is.

Another fact is that in 2009, Ireland’s gross current spending on health was around €15.5 billion. This year, it is targeted at €13.3 billion and just €13 billion by 2016. Given that these cuts in health expenditure are occurring against a background of an aging population and a growing incidence of obesity and other lifestyle illnesses, it is no wonder that the quality of health provision is deteriorating so markedly and that draconian measures such as taking medical cards from needy elderly people are being instigated.

One could get very depressed about the future health service here in this country. The fashionable thing to do is to blame and vilify the current Minister for Health, but his immediate predecessors were treated no differently. Regardless of who is in the Department of Health, it is a total no-win situation. What we need to do is focus on preventative measures such as reducing dangerous consumption of alcohol and make smoking even reviled than it currently is. Prevention is better than cure, particularly if the cure is not up to much.

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