Like it or not, the budget debate is on. Let’s start by getting the sums right.
This article appeared Sunday Business Post July 6th 2014
We are now moving into the depths of the summer silly season, with our political classes either heading off to vent at the various summer schools and/or heading off on their summer holidays. The imminent cabinet re-shuffle and the banking enquiry will probably be the key topics of conversation over the coming weeks, but once we return to the harsh realities of back to school rituals and such like in late august, the annual budget will be just over six weeks away. Consequently those poor souls who are involved in the framing of the October document cannot wait until September and will be engrossed in the fractious process of building the budget over the coming weeks.
It is never an easy process, but is probably more complicated than normal this year. The political landscape for the government parties is not particularly favourable at the moment, and having implemented such a savage fiscal adjustment since 2008, all of the low-hanging fruit is now well gone and we are really up in the thick and prickly branches. The marginal pain inflicted by additional budget measures at this stage of the fiscal adjustment cycle is always going to be pretty severe and there are no easy choices. From a political perspective it seems clear that if more pain is to be doled out, it should be done so in a manner that will cost as few votes as possible. The moral, social and economic perspective may be very different, but political considerations generally hold sway in this country.
The debate to date has really been focused on the EU-imposed 3 per cent budget deficit target that is to be achieved by the end of 2015 and the €2 billion fiscal adjustment that was committed to some time back. This €2 billion adjustment figure will most likely dominate budget debate over the coming weeks, but this is missing the point. In the first place a 3 per cent budget deficit target has no scientific basis and was a figure that was effectively pulled out of the air by Ruairi Quinn and his colleagues back in the 1990s when the very flawed Stability & Growth Pact was negotiated. Secondly, the figure of €2 billion is being latched on to by both sides of the divide. Rather than focusing on 3 per cent target and fiscal adjustments of €2 billion, it would be much better to see a debate on the quality of the fiscal parameters rather than the quantity.
Taking €2 billion out of the economy next year will satisfy the fiscal hawks if it gets borrowing down to 3 per cent or lower next year, but we need to consider at what cost. Public expenditure is bad if it is wasteful, in the sense that value for money is not achieved. On the other hand, public expenditure is good if it focuses on the concept of value for money and creating positive structural change. So for example, the politically motivated benchmarking of public sector pay more than a decade ago was wasteful in the main and was not affordable even at the time. Did we get value for money? I think not.
On the other hand expenditure on areas such as IT infrastructure or education and training can improve the longer-term growth potential of the economy and is good expenditure. Likewise expenditure on measures that tackle crime, anti-social behaviour, the quality of healthcare, substance abuse, and social housing shortages can make a very positive contribution to the quality of life if well targeted.
It is clear to me that over the coming weeks we need to consider if we are able to spend public money wisely, and also to think more about outputs than inputs. We do not have a good track record in that regard. On the taxation front, we also need to consider if revenue raising measures would do more harm than good. It would be good to see more debate on the quality of spending and taxation, rather than getting hung up on spurious targets.
GROWTH PICTURE LOOKING BRIGHTER
The past week has been a good one on the economic data front. The live register experienced a further decline; the Exchequer returns surpassed expectations in the first half of the year; first quarter national accounts showed impressive year-on-year growth rates in all of the key components of expenditure; and thanks to changes in the treatment of R&D expenditure and illicit activities such as prostitution and the illegal drugs trade, 4.7 per cent was added to GDP in 2012 4.82 per cent was added to GDP in 2013. Given that that GDP is the metric against which various debt and borrowing ratios are leveraged off, this is good news. Furthermore, we now know that GDP expanded by 0.2 per cent last year rather than the previously reported decline of 0.3 per cent.
The Exchequer returns for the first half were good. They showed another significant improvement in borrowing and the tax take is running €221 million ahead of target. When delays in receipts due to SEPA are taken into account, the overshoot is closer to €500 million. Seven out of nine tax headings registered stronger than anticipated. On the expenditure side, net voted expenditure is running €119 million lower than expected. Extrapolating trends such as these is a hazardous exercise, but it could result in spending and revenues numbers up to €1 billion better than expected this year, assuming nothing untoward happens in the second half of the year.
It is certainly possible that the deficit could come close to 4 per cent of GDP this year, rather than the targeted 4.8 per cent. For next year, it could rather comfortably come in under 3 per cent. So while we will continue to debate the €2 billion, we can still achieve the targets we committed to with well less than half that adjustment. Michael Noonan might just be in a position to stand up in October and deliver the least severe budget since 2007. That would be welcome respite for hard-pressed taxpayers. Meanwhile, it is good to see most economic indicators moving in the right direction. There are obviously still many obstacles to overcome on the road to redemption, but it is getting better.