Framing budget around Brexit helps Government avoid real issues

Minister for Finance Paschal Donohoe and his officials have latched onto the idea that the Irish economy is at a "fork in the road".

One way, they say, leads to full employment, and comes with a risk of overheating.

Unemployment hit a post-crash low of 4.4 per cent last month, a figure that most economists think is tantamount to full employment here. When employers chase a shrinking pool of labour, wages get bid up. To pay for higher wages, firms must put up their prices, which in turn feeds back into further wage demands from out-of-pocket workers, creating a sort of negative feedback loop.

When such a wage-price spiral develops it can be difficult to halt, and usually results in a loss of competitiveness and a harmful downturn. To counter this governments are encouraged to temper activity by taking money out of the economy or, in Mr Donohoe’s words, “lean against the wind”.

Minister indicates tax cuts will be delayed in a no-deal Brexit

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The other path for the economy leads from a disorderly no-deal Brexit, a path Boris Johnson, the favourite to become the next British prime minister, has said he is willing to take.

This comes with the equal and opposite risk for the Irish economy of “underheating”. The shock of the UK exiting the bloc without a deal would result in a significant collapse in demand here. This would require the Government to double back on itself, and pick up the slack by spending more and/or stimulate spending by providing additional tax breaks.

Innocent victim

Mr Donohoe and his officials are fond of this picture as it paints Ireland as either the victim of its own success or the innocent victim of the UK's chaotic European policy, while allowing it to abstain from setting out a clear budgetary strategy.

It also frames the budget debate around Brexit rather than the pressing domestic policy issues of housing and health.

The Summer Economic Statement was intended to provide greater transparency around the budgetary process but in reality it hasn’t. The €700 million budget-day package for new measures targeted by Mr Donohoe is almost a carbon copy of last year’s €800 million number, which was eventually lifted to €1.1 billion come budget day.

Spending last year was also lifted at the last minute by €1.3 billion partly to accommodate another overspend in health, a perennial feature of the budgetary landscape here. This is what angered the Irish Fiscal Advisory Council. The fiscal watchdog has repeatedly claimed that the Government is failing to deal with budget overruns in health while using potentially temporary corporation tax receipts to paper over the cracks. Why isn't the Government setting out how it plans to deal with this issue?

Carbon tax

The Government’s actual budgetary manoeuvring is rarely flagged in advance and that’s still the case. The statement was also silent on what carbon tax increases are planned, or how the Government plans to pay the Christmas bonus for welfare recipients.

Even in the event of a no-deal Brexit the Government merely signalled it would allow a budget surplus morph into a budget deficit without specifying what active measures it would take. Irish Fiscal Advisory Council also believes the Government has underestimated the impact of such a scenario on the public finances.