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Spring is in the air

Posted on May 03, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The late Robin Williams once declared that spring is nature’s way of saying ‘let’s party’. The arrival of the ‘Spring Economic Statement’ last week had a seasonal dimension to it: a heightened expectation in advance, a very predictable outcome, a dash of hope and sunshine but some lingering chills and showers.  The Statement – although lengthy and accompanied by the normal 60-page ‘Stability Programme Update’ – has one very noticeable and arguably welcome feature – its simplicity of message. The Statement can be summed up as follows:

“We have €1.5 billion to play with and we are splitting it 50:50 between additional spending and lower taxes. So, that makes €750 in extra spend and €750 extra in people’s pockets through income tax cuts. It works out at about €160 on average per child, woman and man in the country in tax cuts and the same again in extra spending for schools, health centres, public sector pay etc.

Now, what do you want us to do for the rest of this year within these limits? And, in case there is any doubt about there being limits this is the total spending money allowed under parental rules from Brussels. The folks in Brussels and Frankfurt are not jumping like spring lambs at the thought of the relaxing the strings by €1.5 billion (in fact they would much prefer a continuing dose of austerity but then they are not subject to the same electoral discipline as we are at home).”

Putting the choices this way and fixing what is available in total under (i) public spending and (ii) taxation is designed to shape and determine the debate about budgetary options in the coming 5 months leading up to ‘Budget 2016’. It is a clever innovation to do this because from the point of view of those setting the questions and determining the choices the following is achieved:

  • Expectations on all sides are managed
  • It would appear that there is something for almost everyone
  • Any additional ‘pay back’ for one group of recipients is being presented as a direct hit on some other group of recipients.

It was customary in boarding schools during the lean years of the 1940s for scarce butter to be given out to a head pupil at each table in the dining hall who was responsible for an even dividing out of the half pound of butter. This was an efficient resource allocation solution because the one dividing out the butter was likely to be extremely accurate in the task at hand.

  • So, you want additional pay? Then which area of the health or education service will we cut?
  • You say that additional taxes could be raised to pay for additional spending over and above the fixed allocation – but that is not possible because we told you that €750 million is the limit and that has been decided.

So, enter the world of REALPOLITIK where options are weighted up and the ‘best possible’ or ‘least negative’ outcome is aimed for by whoever has influence over the delivery of the Government’s Statement of intent this Spring.

The Statement puts everyone on the defensive to say where they think the priorities should be and what their claim is within the overall envelope.

There is a direct symmetry between this type of debate and the debate we have just had from 2008 to 2013. The debate in the lead up to each budget was determined by two questions:

  1. How much of a austere ‘fiscal adjustment’ was needed (there were those arguing for ‘more’, for ‘less’, for ‘slower’ or for ‘upfront’).
  2. How should the adjustment be split between (i) spending cuts and (ii) tax increases (so, we had the 2:1 people, the 1:2 people and then some ‘extremists’ who argued for 100% on the tax-increasing side).

Investment hardly got look in in this ‘debate’. It was just slashed as investment in public housing, energy and other areas was scaled back severely without much controversy.

Today, the debate has been reversed into the following questions:

  1. How much of a stimulus ‘fiscal easing’ is needed (there will those arguing for ‘more’, for ‘less’, for ‘slower’ or for none at all like the European Commission).
  2. How should the adjustment be split between (i) spending increases and (ii) tax cuts (so, we are likely to have the 2:1 people, the 1:2 people and then some ‘extremists’ who argues for no tax cuts whatsoever).

Setting up the stage in this way tilts the debate (some might say closes it down) and we experience the ‘tyranny of common sense’ because of ‘the way things are’.  Those calling for a gradual and incremental movement towards a higher overall level of taxation at an average European level are portrayed as idealists or even extremists and, in any case, not connected to the realpolitik which is governed by the imperative of votes, seats and the realities of a small open market economy not woolly ideas of the common good or the good society (could anyone possibly imagine, here, a declaration for a Just Society fifty years after it was launched?).

When the debate is set up and constructed in this way two straw men appear on the horizon: the completely unreasonable party of economists arguing for nothing but tax cuts and the completely unreasonable party of economists arguing for nothing but spending increases within some overall target of fiscal easing.

This type of debate is largely misleading. The bust and boom of the Irish economy is a far bigger driver of revenue and spending than any discretionary changes in spending and revenue. The latter are important but only of the bigger picture. More fundamental to a debate on the budget year after year is what sort of public services do we envisage in the future, how will it be managed and made accountable and how will it be funded?  You could be forgiven for thinking that such a debate has not even begun yet in this country. The Spring Statement, at best provided some very general information on the overall size of tax and spending envelopes from here to 2016. Beyond 2016 it looks like business as usual with a generous annual GDP growth assumption allied to a ‘steady-as-it-goes’ stance on spending and tax. In other words, the Statement is not a medium-term strategy as much as a short-term general statement of intent with an assumption of a gradual return to ‘normality’ after a bruising a decade of falling living standards, bust banks and unrelenting austerity.

But, just because a long-term social vision and medium-term economic strategy is missing from official publications should not lead us to think that we are not heading towards a particular outcome. We are. The outcome is a smaller state, fewer public resources per citizen, more privitisation and unrelenting downward pressure on wages in vulnerable sectors and among particular vulnerable groups of workers.

In relation to trends in public spending consider Chart 1 below which shows an estimate of real public spending (excluding payment of interest on Ireland’s hugely inflated socialised private debt) per capita of population from 2015 up to 2020 based on the totals for spending provided in the Spring Statement.

  

  Now, is a view that recommends no cuts in the overall level of taxation so extreme when we consider the direction of fiscal policy as indicated in the Spring Statement?  Taking account of population growth, modest inflation assumptions and using the projected spending numbers in the Statement we see a clear pattern of declining spending in real terms. So, while austerity appears to be over at least for some, there is another side to the story because spending will not recover to the extent needed to just maintain the overall level of real public provision – inadequate as it is in 2015.  Not only that but the direction of fiscal policy risks placing Ireland seriously out of line internationally where it is already a low-tax and low-spending society. Using data from the International Monetary Fund (Chart 2) the position is confirmed and entirely compatible with the Spring Statement. 

 

Source: IMF Fiscal Monitor, April 2015; Table A1 & Table A2

Set against an international comparison of EU member states for which data are provided by the IMF from the latest Fiscal Monitor, we see a continuing erosion in the ‘social wage’ in overall national income. The share of primary spending in GDP moves from second lowest in 2014 to lowest in 2015 - lower than that of Lithuania, Estonia and Lativa.  Ireland would become more baltic than the baltic states themselves!

 

Source: IMF Fiscal Monitor, April 2015; Table A1 & Table A2

Posted in: Government SpendingMacroeconomics

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