The budget process culminates on Tuesday with next year’s spending and revenue plans. So this is one of those times of the year when we hear from the Irish Fiscal Advisory Council making policy recommendations and signing off on plans.
he Fiscal Council was formed in 2012 amidst the debris of the financial crisis. While Ireland has been an extreme outlier in terms of impact, it wasn’t the only country looking for solutions to rising government deficits and debt, and from 2010 to the end of 2021 the number of fiscal councils globally doubled to 51.
Despite Council President Sebastian Barnes’ concerns that much of her advice was “going unheeded”, this has had an outsized impact on a body run on a tight budget of just €854,000 a year.
The Swedish council, modeled after the Irish council, receives over a million euros a year, while Denmark spends four times as much as Ireland.
Notable achievements include urging the Treasury to recognize overspending on healthcare averaging €590 million per year between 2015 and 2019 and including it in budget principles, getting the government to clarify the risks of over-reliance on corporate taxes and, most recently, a pledge that overall budgetary spending will not increase faster than underlying long-term economic growth of five percent.
However, given the dismissive reaction of the soon-to-be Taoiseach Leo Varadkar to the tax commission report last week, it is clear that the government is not taking medium- and longer-term budget planning seriously enough.
It doesn’t take doomsday thinking – believing that US multinationals will flee the country and take their taxpayers’ money with them – to see the risks to Ireland’s current economic growth and fiscal trajectory.
When the Fiscal Council was set up, the state had to go hand in hand with the International Monetary Fund and the European Union with a rescue package of 67.5 billion euros. The 2011 budget deficit was 13 percent of gross domestic product and as of July this year the spread between 10-year Irish debt and German debt was almost 12 percentage points.
It had to do anything to survive. After Ireland’s exit from the EU-IMF program at the end of 2013 and reaching a deficit below 3 percent of GDP in 2015, it stopped corrective EU measures.
Fast forward to today and there are no strict limits on what Treasury Secretary Paschal Donohoe can do, other than the Fiscal Council-inspired 5 percent rule being broken. Its coffers are brimming with corporate taxes beyond its wildest dreams and a post-crisis boom that has also boosted income tax and VAT revenues.
If it wants to borrow, it can do so at negative real interest rates, well below the pace of economic growth. He can borrow as much money as he wants for as long as he wants, and Ireland’s budget and debt ratios will still align well with EU rules.
Revenue has risen enough to allow the minister to exercise caution – running into surplus for the first time in a decade before Covid struck – while in fact spending lavishly.
As the middle of the Dáil term approaches, thoughts turn to elections and tax cuts rather than risk. If, as opinion polls show, the current government could lose power, then from a partisan point of view it makes sense to pass on unpopular decisions and leave them to the next lot.
Leaving less money in the pot also has the appeal of leaving less room for a new government’s own campaign promises.
Much of Ireland’s economic growth has come from demographic and education dividends that will not pay off in the future. Since the end of the crisis, we have seen growth more typical of emerging markets than a mature economy, thanks to foreign investment and profit shifting, as well as a decade of negative and near-negative interest rates.
All of this will subside as the bills for climate change and an aging population fall due. Here are the risks identified by the Fiscal Council and the Tax Commission, and the government has shown it is not serious about addressing them – delaying a new bad-weather fund and using corporate tax revenues.
The Fiscal Council fears these issues will “test the fiscal framework, including the Council, perhaps more than has been the case in the first decade since the crisis”.
One solution would be to leave budgetary management to a body of technocrats, as has been done in central bank policy, but that is neither desirable nor practical in a democracy. Aside from that, you could have the Fiscal Council provide the official economic forecasts used in the budget, as is the case in the Netherlands, where the CPB also plays a large role in assessing political parties’ tax and spending plans.
That would take up enormous resources – the CPB costs more than 15 million euros a year – and it has been a fixture since 1947. It’s hard to imagine this happening here, and to be honest economic forecasts are so often wrong that it would be a waste of time and money.
Instead, the Fiscal Council relies on its credibility and independence.
Both are valuable in an emergency like Covid. Budget watchdogs are often seen as sharp-eyed deficit hawks and part of a neoliberal state shrinking agenda. That is not true.
The Fiscal Council’s 2020 report on the pandemic advocated massive spending to prevent economic collapse. According to the Organization for Economic Co-operation and Development, she was “a trendsetter among peers in providing analysis to decision-makers when governments were unwilling or unable to do so”.
The Fiscal Council also recognizes the need to spend during the cost-of-living crisis, and if governments show they are heeding its advice, they can benefit from its coverage if things go wrong.
It’s unhelpful, if not surprising, that the budget debate here is still dominated by austerity.
In a way, the Fiscal Council exists to embarrass that government of the day to make the right decisions. This requires a political commitment from this government to implement its analysis. We can only do that if we hold the people we elect accountable.
https://www.independent.ie/business/budget/tax-plan-blowback-shows-our-budget-watchdog-needs-to-keep-on-barking-42007966.html Setbacks in tax plans show that our budget watchdog must keep barking