So, Have We Learned Nothing from the Crash? It Seems So

Last week the Irish Financial Advisory Council, IFAC, sounded warnings that Fine Gael/ Labour are slipping rapidly into the old Budgetary habits of Fianna Fail. Having lived through the consequences of what short-term, technically incompetent fiscal management can do to a country, this should set off alarm bells for every man and woman in the Republic.

Ireland, along with a host of other European countries, has a poor track record when it comes to responsible economic management. The results are bad for everyone – interest rate and price fluctuations, over-indebtedness, and a lack of long-term investment in things like water infrastructure and hospitals. Changes were required to the rules of budgeting, and to the culture in which those rules are used. The implications of the expert warnings in Ireland last week are simple – the rules are not being followed, and the culture has not changed.

The rules started to change in 1993 with the Maastricht criteria. France and Germany were the first to break them. On a side-note, the German establishment has taken a holier-than-thou attitude to the ‘peripheral’ eurozone countries throughout the recession, but were no fiscal saints themselves. And when condescending to Ireland over the need to pay one’s debts (owed in part to German banks), they omit that one reason their economy grew post-World War II was the massive debt write-down and restructuring agreement they received.

Maastricht was updated with the Stability and Growth Pact, followed by various enforcement procedures. The 2008 crash showed that this wasn’t sufficient. Ireland, for example, was running a budget surplus and had one of the lowest debt-to-GDP levels on earth in 2006. So enter new rules and coordination procedures, including the European semester, the fiscal compact and the ‘two-pack’. There are democratic and technical arguments for and against various aspects of this new budgetary framework, but the aim is solid – to stop governments letting short-term self-interest lead to bad decision-making and future economic and social crises.

Speaking at the Finance Committee on Thursday, Professor John McHale, chair of IFAC, summed it up as follows: “If respected, this (budgetary) framework provides an important safeguard against a return to the boom-bust cycle.”

So, how are we doing?

Not particularly well, it would seem. IFAC has levelled a number of serious charges at the Government, which can be broken into two areas – how Budget 2016 is being planned, and how medium-term planning is being done, or not.

Because Ireland has been in a bailout programme, we haven’t had to worry much about the new rules. Until this year, fiscal policy has been governed primarily by one rule – reduce the deficit every year to an agreed, and falling, percentage of GDP. To their credit, both this Government, and the last, met these targets. But then there was a very large stick being waved at them – meet the target, or we’ll cut off your bailout funding.

Now we’re out of the bailout programme, the stick is much smaller, and so here’s the real test: Has the culture really changed? Will we put long-term national interest over short-term party interest? No and no, it would seem.

Now that we’re out of the bailout and the deficit is below 3pc, a new rule kicks in – reduce the deficit by at least 0.6pc of GDP each year. IFAC points out that for the pre-election budget coming up, the Government is planning to miss the target by a half. They are also breaking the ‘letter and the spirit of the expenditure benchmark rule’ by factoring in more future tax revenue that is allowed.

On its own, this behaviour might be forgiveable. While Budget 2016 will see a deficit reduction of just 0.3pc of GDP, the plan shows that this would be made up for in 2017 and 2018. The political calculation is this: Meeting the target and following the rules would leave the Government with about €700m to play with in the upcoming budget. By missing the target and ignoring the rules, that jumps to €1.4bn. This means less room to manoeuvre in 2017 and 2018, but by then either other politicians will have to deal with that, or the current politicians can absorb the pain from the relative safety of the first two years of a five-year election cycle. And for now, that additional €700m can be carefully targeted towards swing voters. It’s not subtle, but if history is any indication of the future, it’ll save at least a few Fine Gael seats. If it managed to save, say, 10 sitting Fine Gael TDs, we’d be talking about €10m per seat. It would be interesting to see how much public money Fianna Fail used to spend to maintain theirs.

The trouble is, IFAC’s criticisms don’t stop there. They point out that, when it comes to three-year planning, policy priorities haven’t been linked to resources.

For example – these new houses the Government tells us it’s building – the money hasn’t been identified. In IFAC-speak, “multi-annual ceilings were introduced to address serious expenditure management problems.” Or, we’re back to making grand promises without figuring out how to pay for them.

IFAC goes further. They state that the Government hasn’t adjusted future spending requirements for a changing population. In response to spending plans for 2017 and 2018 they say that “such a sustained fall in government spending would be very challenging to achieve while maintaining current services and meeting the demands for increases in public services due to demographic and other pressures.”

The numbers are being fudged. This fudge allows the Government to promise tax cuts before the election, without having to show that these come at a price. Those advocating tax cuts, like Fine Gael, must at least accept that these come at the cost of fewer teachers, longer waiting lists, fewer gardai, and more children living without enough food. For me, the benefits of turning a relatively low tax economy into a lower tax economy are simply not worth that social cost. If for Fine Gael it has, then let’s have that debate, and let’s make sure the debate is based on the facts, and not the fudge.

At the 2012 Dublin Economics Workshop, AJ Chopra, who led the IMF team on its Ireland mission, spoke of the virtues of these new budgetary rules and ‘fiscal convergence’. I asked him about the potential democratic deficit of taking so much power away from national governments. He more or less shrugged it off. Afterwards, I asked a number of very competent and experienced technocrats and economists if they were concerned.

They were not. They were delighted that some discipline was, finally, going to be put on budgeting and fiscal management in Ireland.

But rules without culture are meaningless. Professor McHale put it very well on Thursday, when he observed that “rather than being viewed as something externally imposed on Ireland, the new budgetary framework should be seen as being in the national interest to the extent it underpins sound budgetary policy.” He’s right. But it seems we’ve a ways to go.

This article originally appeared in the Sunday Independent on June 14th, 2015.