Paschal Donohoe will deliver something of a non-budget on Tuesday, October 8. There will be no reductions in direct taxation and virtually no increases in pensions and other social transfers. The spur for the minister’s caution is the risk of a no-deal Brexit.
It is a great pity that Mr Donohoe did not take the opportunity to do so little on his three previous outings. When he delivered his first budget, on October 11, 2016, a pattern was set which he has followed each year since, and but for the Brexit threat, would follow again.
The pattern has exonerated spending overshoots, notably in the Department of Health. The offenders are not merely forgiven but rewarded, as the minister augments the departmental allocation for the future.
Please log in or register with Independent.ie for free access to this article.
Log In
New to Independent.ie? Create an account
There has also been an annual round of reliefs on direct taxes and increased rates of payment on pensions and other social transfers. Despite strong underlying growth in tax revenues and a bonanza in receipts from corporation tax, these expansionary budgets ensured that the economic recovery has yet to produce an interruption to the onward march of public debt.
Each budget has disappointed the legions of lobbyists for lower taxes and higher spending and has drawn denunciations for stinginess from the Opposition benches.
The minister’s failure to promise across-the-board social welfare increases this time round inspired an over-excited headline-writer in the Irish Times last Friday to proclaim ”Brexit cuts to hit social welfare payments” – a measure of the expectations induced by earlier Donohoe budgets.
The ungrateful public has forgotten the minister’s inadequate generosity within weeks. More importantly he has also disappointed the Fiscal Advisory Council, an independent panel of experts established to help avoid mismanagement of the public finances.
The fiscal council was established informally in 2011 and became a statutory body under the terms of the Fiscal Responsibility Act in 2012. The title chosen by the legislators for the Act is revealing. There is an implicit admission that what had gone before was less than responsible.
In the late 1980s, careless budget policies pursued by successive governments for more than a decade precipitated a public finance crisis and a painful austerity correction. The loss of sovereignty involved in resort to the IMF was avoided on that occasion but 20 years later another bout of fiscal irresponsibility, supported on this occasion by reckless bank management and the collapse of the entire banking system, produced an even greater calamity.
This time the fiscal correction came too late, the Government could no longer finance itself and was forced to rely on the IMF and other official lenders for the first time since independence.
Over the last few weeks, the outgoing Central Bank governor, Philip Lane, his predecessor Patrick Honohan, and on Wednesday the fiscal council in its pre-budget report, have been reprising the facts of economic life for a small economy carrying a high debt burden.
The capacity to borrow is uncertain, things can go wrong in the sovereign debt markets quickly, and there is a continuing risk of being forced into an untimely policy of contractionary budgets.
Even when budget balance has been achieved, the mountain of inherited debt must be re-borrowed as some of it matures each year and the credit worthiness of the over-borrowed state is always contingent.
In recent years, the European Central Bank has been the single largest purchaser of government debt in Europe, driving down official interest rates and feeding complacency where it is least advisable.
This policy is highly unusual and should have been abandoned by now.
It was renewed by the ECB at its meeting in Frankfurt last Thursday and will quite likely remain in place for another several years, so there will be at least one willing supporter of the market for Irish debt. But the ECB resumed this policy because of the weak performance of the European and world economies and the continuing frailty of the eurozone banking system. It is simultaneously a source of relief and a piece of bad news.
The architecture of Europe’s common currency area has been improved but not fundamentally reformed since the financial crisis. There is inadequate capacity to handle a descent into crisis should a sizeable eurozone member get into trouble.
The most likely candidate is Italy, whose outstanding government debt, the largest in the zone, would overwhelm the system should the holders, domestic or foreign, decide to unload. There could be a re-run of the European sovereign bond meltdown of 2012 in far less favourable circumstances and the long-term durability of the common currency is not assured.
The fiscal council has focused on specifically Irish concerns, especially the reliance in recent years on buoyant but unreliable revenues from corporate taxes.
The charge sheet is straightforward: expenditure control has been weak but unexpected revenues have come to the rescue, creating the appearance of a safer budget policy than is merited.
If the extra revenues could be relied upon, and if the inherited debt pile was lower, there would be fewer reasons to worry about Brexit or the other uncertainties which abound. The current complacency echoes the satisfaction expressed so often during the bubble period when the budget appeared to be in balance but the revenue base, driven by transitory real estate and other taxes, collapsed quickly enough – with the assistance of the bust banking system – to destroy the solvency of the State.
This time the banks are smaller and under proper supervision, but the debt load is far higher and the vulnerability to uncertain tax revenues has been recreated.
There is no economic orthodoxy which says that governments should always aim for budget balance or that government debt is a badge of dishonour. The orthodoxy is the following: for a small and indebted economy, the risk of an involuntary resort to austerity, when the economy is already weak, is ever-present.
Holders of government debt, and future recruits, are volunteers, including the central bank in Frankfurt. If untimely budget tightening, austerity that deepens a recession, is to be avoided, there is a price to pay.
That price is cautious budget policy when things are going well, and things have been going very well indeed – 2020 will mark seven straight years of strong economic recovery in Ireland.
History teaches that this lucky period will come to an end, and last Thursday’s decisions from the ECB should be interpreted as a warning. If it is not Brexit, it will be something else – troubles in Italy, Trump’s trade wars, an international attack on alleged havens for corporate tax avoidance – take your pick.
Politicians in countries burdened with heavy debts are conscious that a few years of caution will principally benefit their successors, and that their own efforts to chip away at the debt overhang will not yield short-term applause.
It is tempting to ignore the prophets of doom. But the economic Cassandras in the Irish Central Bank, the fiscal council and the various external agencies preaching caution are not doing it for fun.
They will be encouraged that Cassandra was gifted but foolishly ignored. The princess of Troy enjoyed the priceless talent of true prophecy but was cursed by the gods.
She was not believed, and Troy was destroyed.
Source: Read Full Article
Home » Analysis & Comment » Colm McCarthy: 'We cannot blame Brexit alone for the pressing need to balance our books'
Colm McCarthy: 'We cannot blame Brexit alone for the pressing need to balance our books'
Paschal Donohoe will deliver something of a non-budget on Tuesday, October 8. There will be no reductions in direct taxation and virtually no increases in pensions and other social transfers. The spur for the minister’s caution is the risk of a no-deal Brexit.
It is a great pity that Mr Donohoe did not take the opportunity to do so little on his three previous outings. When he delivered his first budget, on October 11, 2016, a pattern was set which he has followed each year since, and but for the Brexit threat, would follow again.
The pattern has exonerated spending overshoots, notably in the Department of Health. The offenders are not merely forgiven but rewarded, as the minister augments the departmental allocation for the future.
Please log in or register with Independent.ie for free access to this article.
Log In
New to Independent.ie? Create an account
There has also been an annual round of reliefs on direct taxes and increased rates of payment on pensions and other social transfers. Despite strong underlying growth in tax revenues and a bonanza in receipts from corporation tax, these expansionary budgets ensured that the economic recovery has yet to produce an interruption to the onward march of public debt.
Each budget has disappointed the legions of lobbyists for lower taxes and higher spending and has drawn denunciations for stinginess from the Opposition benches.
The minister’s failure to promise across-the-board social welfare increases this time round inspired an over-excited headline-writer in the Irish Times last Friday to proclaim ”Brexit cuts to hit social welfare payments” – a measure of the expectations induced by earlier Donohoe budgets.
The ungrateful public has forgotten the minister’s inadequate generosity within weeks. More importantly he has also disappointed the Fiscal Advisory Council, an independent panel of experts established to help avoid mismanagement of the public finances.
The fiscal council was established informally in 2011 and became a statutory body under the terms of the Fiscal Responsibility Act in 2012. The title chosen by the legislators for the Act is revealing. There is an implicit admission that what had gone before was less than responsible.
In the late 1980s, careless budget policies pursued by successive governments for more than a decade precipitated a public finance crisis and a painful austerity correction. The loss of sovereignty involved in resort to the IMF was avoided on that occasion but 20 years later another bout of fiscal irresponsibility, supported on this occasion by reckless bank management and the collapse of the entire banking system, produced an even greater calamity.
This time the fiscal correction came too late, the Government could no longer finance itself and was forced to rely on the IMF and other official lenders for the first time since independence.
Over the last few weeks, the outgoing Central Bank governor, Philip Lane, his predecessor Patrick Honohan, and on Wednesday the fiscal council in its pre-budget report, have been reprising the facts of economic life for a small economy carrying a high debt burden.
The capacity to borrow is uncertain, things can go wrong in the sovereign debt markets quickly, and there is a continuing risk of being forced into an untimely policy of contractionary budgets.
Even when budget balance has been achieved, the mountain of inherited debt must be re-borrowed as some of it matures each year and the credit worthiness of the over-borrowed state is always contingent.
In recent years, the European Central Bank has been the single largest purchaser of government debt in Europe, driving down official interest rates and feeding complacency where it is least advisable.
This policy is highly unusual and should have been abandoned by now.
It was renewed by the ECB at its meeting in Frankfurt last Thursday and will quite likely remain in place for another several years, so there will be at least one willing supporter of the market for Irish debt. But the ECB resumed this policy because of the weak performance of the European and world economies and the continuing frailty of the eurozone banking system. It is simultaneously a source of relief and a piece of bad news.
The architecture of Europe’s common currency area has been improved but not fundamentally reformed since the financial crisis. There is inadequate capacity to handle a descent into crisis should a sizeable eurozone member get into trouble.
The most likely candidate is Italy, whose outstanding government debt, the largest in the zone, would overwhelm the system should the holders, domestic or foreign, decide to unload. There could be a re-run of the European sovereign bond meltdown of 2012 in far less favourable circumstances and the long-term durability of the common currency is not assured.
The fiscal council has focused on specifically Irish concerns, especially the reliance in recent years on buoyant but unreliable revenues from corporate taxes.
The charge sheet is straightforward: expenditure control has been weak but unexpected revenues have come to the rescue, creating the appearance of a safer budget policy than is merited.
If the extra revenues could be relied upon, and if the inherited debt pile was lower, there would be fewer reasons to worry about Brexit or the other uncertainties which abound. The current complacency echoes the satisfaction expressed so often during the bubble period when the budget appeared to be in balance but the revenue base, driven by transitory real estate and other taxes, collapsed quickly enough – with the assistance of the bust banking system – to destroy the solvency of the State.
This time the banks are smaller and under proper supervision, but the debt load is far higher and the vulnerability to uncertain tax revenues has been recreated.
There is no economic orthodoxy which says that governments should always aim for budget balance or that government debt is a badge of dishonour. The orthodoxy is the following: for a small and indebted economy, the risk of an involuntary resort to austerity, when the economy is already weak, is ever-present.
Holders of government debt, and future recruits, are volunteers, including the central bank in Frankfurt. If untimely budget tightening, austerity that deepens a recession, is to be avoided, there is a price to pay.
That price is cautious budget policy when things are going well, and things have been going very well indeed – 2020 will mark seven straight years of strong economic recovery in Ireland.
History teaches that this lucky period will come to an end, and last Thursday’s decisions from the ECB should be interpreted as a warning. If it is not Brexit, it will be something else – troubles in Italy, Trump’s trade wars, an international attack on alleged havens for corporate tax avoidance – take your pick.
Politicians in countries burdened with heavy debts are conscious that a few years of caution will principally benefit their successors, and that their own efforts to chip away at the debt overhang will not yield short-term applause.
It is tempting to ignore the prophets of doom. But the economic Cassandras in the Irish Central Bank, the fiscal council and the various external agencies preaching caution are not doing it for fun.
They will be encouraged that Cassandra was gifted but foolishly ignored. The princess of Troy enjoyed the priceless talent of true prophecy but was cursed by the gods.
She was not believed, and Troy was destroyed.
Source: Read Full Article