John Bruton

Opinions & Ideas

Category: irish budget

THE IRISH BUDGET FOR 2014…. ARE WE ASKING THE RIGHT QUESTIONS?

OCTOBER 15 BUDGET WILL BE A DRAFT


Under new EU rules ,which entered into force on 30 May this year and which apply to ALL euro area states, whether in a bailout programme or not, each country must publish its draft budget on or before 15 October.
The Irish government will do so on the 15th. 
The European Commission will then examine the draft budget of all euro area states and must give its opinion before 30 November.

If the Commission detects severe non compliance with the Stability and Growth Pact, it will ask the state in that position to submit a revised budget. This possibility will exist for Ireland, whether or not it is a bailout programme.

The Commissions opinions will then be discussed in the Eurogroup of Finance Ministers, in December, where each Minister will be free to express opinions on the others budget.
The final budget of each country must be adopted by 31 December, up to which time, changes, within the overall numbers are possible.

This new process obviates the need for budget secrecy, which is an antique hangover from Victorian times.

THE DIFFICULT LEGACY OF THE 2001 TO 2006 PERIOD, WITH WHICH THIS GOVERNMENT MUST COPE 

The worst legacy from its predecessor, with which the present Government must cope, is not the bank guarantee.

It is the permanent increase in spending levels that it allowed between 2001 and 2008. The then Government agreed these permanent increases in spending  on the strength of revenues from the construction boom, that it had to KNOW were temporary.
For instance, between 2001 and 2006, number employed in the health service grew from 92000 to 112000.The number of items prescribed in the GMS went from 22 million items to 53 million in 2009. Are we any healthier for all that spending?
Number employed  in the Education sector increased by 25%  between 2001 and 2006, but our educational outcomes measured by the OECD’s PISA test went down quite badly.
Numbers employed in the civil service increased by about 25% too, but numbers in the top grade increased by 86%. These people and posts are mostly still there, even though the revenues that allowed for their recruitment have long disappeared.
Social Welfare rates of payment went up by 67% over and above price inflation between  2000 and 2006, and these rates remain in place.

LOOK AT THE NATIONAL BALANCE SHEET, NOT AT ONE YEARS FIGURES

The debate in the Irish media, and between parties, about whether the gap should be  closed this  year by 3.1 billion euros, or by a lesser figure, is beside the point.
Rather than looking at one year’s figures, we should  focus on the national balance sheet.

We should ask ourselves four questions

+ what are our likely revenues over the next twenty years, 

 + what is the value of our saleable assets, and 

+ what are our obligations, both in explicit debt repayments and rescheduling, 

+ but, just as importantly, if policies remain as they are, what will we have to pay over the next 20 years to keep the promises we will have made  in respect of

      incremental increases to pay,      pensions,      health services,      unemployment benefits and      education,


in light of trends in the age structure of our population and the (reducing) numbers of working age?

These may be among the questions Finance Ministers of the euro area countries will be asking about one another’s budgets, when they meet in December, before each of them finalises their budget for 2014.
The Irish Fiscal Council has estimated that, on the basis of present policies, ageing related liabilities of the Irish state are likely to increase by 5.4% a year up to 2060, as against a euro area average increase of 4.1% a year.

It also draws attention to big shortfalls in the Insurance Compensation area, the VHI, and even a possible state obligation for shortfalls in private sector pensions, arising from a recent Waterford Crystal case.

A recent EU Commission report on ageing  suggest that, between 2010 and 2040, on present policies, pension spending by the state will have to rise from  7.5% of GDP to 10% of GDP, and long term care expenditure from  1.1% to 1.9%.
Constantin Gurdgiev in the Sunday Times has claimed that most of the savings in public sector pay, in the Croke Park and Haddington Road Agreements, are liable to end and be reversed when the latter Agreement expires .
The OECD drew attention to the fact that one in five of Irish children are growing up in a home where no one is working. Will those children grow up to be able to support themselves, and pay taxes, or will they be dependent on the state for income support? That is a vital matter for everybody, not just for the families concerned.
In sum, what Ireland needs is a 10 year budget, and a 20 year balance sheet. Then people will see more clearly what has to be done and what needs to be changed in good time.

IRISH ECONOMISTS AND BUDGET….WHAT IS TO BE DONE?

Over the last few days, four different Irish economists have been offering their thoughts on the Irish budget, due to take place in October. Some are more realistic than others.
……………………………………………………………………………………………………………..
IGNORE THE IMF ADVICE?
WHAT ABOUT THE PRIMARY DEFICIT?
WOULD AUSTERITY REALLY BE EASIER DURING A BOOM?
ECONOMICS SHOULD BE GROUNDED IN REALITY, INCLUDING POLITICAL REALITY
…………………………………………………………………………………………………………….
 
DAVID MCWILLIAMS
 
David McWilliams in the “Sunday Business Post”, who has, in the past, favoured Ireland leaving the euro , urged the Irish Government, in preparing the 2014 budget, to ignore the advice of the IMF, the EU, and the ECB, to complete the programme of budget consolidation it and its predecessor had agreed with them, and instead stimulate the economy.
The IMF, the EU and the ECB are lending the Irish government money to keep services going, at rates of interest below market rates, so David’s advice is daring, to say the least.
 And Ireland still has a primary deficit, it is spending more on day to day spending than it collects in day to day revenue, even before it pays a cent of interest on past debts.
 David justifies his advice on the basis of the Household Budget Survey, which suggests that many Irish households are cutting back on spending, defaulting on rent payments, and drawing down savings to meet day to day expenses. A good part of the problem seems to arise, not just from debts, but from higher than expected bills, for which families had not adequately budgeted in advance, like university or school costs, or unexpectedly high utility bills.
Of course, an easier budget would leave people able to spend a little more in the shops, and that would boost Government revenues. But a lot of any extra spending power, generated by a “stimulus” budget, would also go out of the country on imports.
Another problem is credibility. If people believe the stimulus is only temporary, they may decide to save whatever extra they get, and not spend it. To the extent that that happens, there would be no stimulus to the economy, just an increase in the debts the taxpayer would eventually have to repay, assuming some was prepared to lend it to them.
Then there is an even bigger question mark over David’s thesis.
Where, and from whom, would the extra money he wants to spend, be borrowed ?

COLM MCCARTHY


As Colm McCarthy, in the “Sunday Independent”, points out, the government has been adding to the outstanding debt it owes at a rate of 1 billion euros per month throughout 2013.
 
 He claims
 
“Government revenue is still, after tax increases and expenditure cuts, running way behind government spending and the state is continuing to overspend on a grand scale”
 
He adds
 
“It is bizarre that continued borrowing, which will add to the debt mountain, is routinely described as austerity”
 
Colm is also critical of the notion that, once Ireland is no longer borrowing new money from the IMF/EU/ECB troika (hopefully next year), it will somehow be in the clear, and restored to full fiscal sovereignty.
As he puts it, all that would then happen is that the discipline, required now by” official lenders” (who are under some sort of political pressure to keep the government going), will then be replaced by the discipline of “volunteer lenders”, who will be under no obligation to lend any money at all, to Ireland.
These volunteer lenders would, he claims, be

 “easily spooked by signs of consolidation fatigue and political irresolution in over-indebted countries”. 
 
I believe they would also be easily spooked by the sort of advice offered by David McWilliams, because they would be afraid that, if it was followed, they simply might not get all their money back. And they have plenty of other places to lend it. As private institutions, they are not obliged to lend to any particular country.
Furthermore, even when Ireland has exited the EU/IMF/ECB programme, it will still be required to abide by the disciplines of the EU Fiscal Compact, approved by the Irish people in a referendum, and by close EU supervision which will apply to all members of the euro zone.
It is important to remember that the banks, who would be lending to Ireland once it had  exited the EU/IMF/ECB programme, would be lending money that ultimately belongs to pension funds, insurance companies, and savers , and they would have clear obligations to take every step to guarantee that they would get their clients money back, with interest.
Colm also points out that Ireland has to make substantial repayment or roll over of existing debts, in particular years in the near future, for example,
 12.7 billion euros in 2016,
 19.6 billion in 2019, and
 26.8 billion in 2020.

CONSTANTIN GURDGIEV
 

Constantin Gurdgiev in the “Sunday Times” analysed where the money Ireland is borrowing is going.
He says
“The two main current spending lines, social protection and health, are running at 65.2% of total voted current expenditure, up more than  four percentage points since 2010”, when they were “only” 61% of all voted spending.
In other words, these two departments are elbowing out  the others. He adds that health, social protection, and education combined, absorb 90% of all tax receipts.
He goes on to talk about the cuts that have been made so far.
He says
 
“Much of the current spending cuts hit temporary and contract staff, leaving permanent and more expensive staff protected.”
 
He says most the  “savings “ in public sector pay, achieved by the Croke Park and Haddington road agreements with the public sector unions,  are not sustainable, and will be reversed, when the latter agreement expires.  In this sense, they do not represent a permanent structural reform.
He advocates   cuts in long term unemployment benefits, and the means testing of state pensions and of medical cards for the elderly.

KEVIN O ROURKE
 

Meanwhile, on the excellent “Irish Economy “ website, Kevin O Rourke, formerly Professor of Economics in Trinity College Dublin and now in Oxford University, writes about the effect of austerity, and the fact that austerity, by reducing spending, thereby reduces government revenue somewhat, and is, to that extent, self cancelling.
He says
“This does not mean that fiscal consolidation is never necessary, but the time for it, is when times are good, not when times are bad”

Well, who could really disagree with that?
It is sound economics…..but unlikely politics.
When times are good, and revenues are nearly in surplus, it is, of course, theoretically easier to cut spending without real damage.
But in a democracy it is almost impossible, politically speaking, to do it, because voters, who might be losing some benefit, will point to the plentiful revenues, and say
 
“We do not need to do this, to meet some book keeping rule. We have the money, so we do not need to impose suffering on ourselves”
 
Politically, in my experience, it is actually MORE difficult to cut in a boom, than during a recession! In a recession, people will see the need for cuts. In a boom, they will not.
The science of economics, divorced from the art of politics, is not all that useful!



Powered by WordPress & Theme by Anders Norén

Enjoy this blog? Please spread the word :)