Fintan O'Toole: Bad social policy makes for bad budgets

The point of a ritual is to reinforce our sense of what is sacred. The ritual of budget day is not meaningless. It carries a message: fiscal policy is what really matters and it must be elevated above all that other stuff. Things like housing and inequality and child poverty are all very well, but they are not the real thing. They are optional devotions; the budget is high Mass.

The State insists on placing fiscal policy in one box and social policy in another. The former, for the people who make decisions, is the serious adult stuff. The latter is the fluff for the cribbers and moaners.

So long as the system thinks like this, it cannot grasp the deep connection between good budgeting and good social values. It is stuck with a division that is entirely false and deeply damaging.

To test this, consider the ways in which Ireland’s finances are out of kilter with comparable countries. There are four big things that stand out. And every one of them points to the same underlying failure: a refusal to think about the fiscal implications of social values plays hell with the public finances.

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The first thing that’s different about Ireland’s finances is the awful level of public debt. At €41,000 for every man, woman and child in Ireland, it is the highest in the EU and third highest in the entire industrialised world, behind Japan and the United States.

Why is raw income so extremely unequal in Ireland and what should we do about it?

No small economy, in other words, has public debt on this scale. And we have it, essentially, because public policy treated a basic human need – the need for a home – as primarily a market commodity.

Bad housing policy was socially unjust, leaving huge numbers of people in housing need even in the midst of a housebuilding frenzy. But it was also fiscally disastrous. It created a property asset bubble and a casino banking system. And we are still, quite literally, paying for the consequences.

The second difference is that Ireland has the most unequal distribution of market income (income before taxes and welfare payments) in the developed world.

What this means is that the State has an enormous amount of heavy lifting to do just to keep inequality within any kind of decent bounds. In fact, the State does a tremendous amount of good work in remediating the inbuilt inequalities – more than most developed countries do. But the point is precisely that this vast effort is remedial, not structural.

Gross inequality

We have to spend a vast amount more on achieving a minimal social equilibrium than other countries do, leaving less to spend on creating fairer long-term structures. Paschal Donohue today, like all of his modern predecessors, is so busy making sure the ship is not sunk by gross inequality that he can barely think about the course of the voyage. And the underlying questions are not asked: why is raw income so extremely unequal in Ireland and what should we do about it?

The costs of meeting our commitments are simply being pushed down the road and we will face huge fines for our failures

The third difference is that Ireland is one of only four industrialised countries where, looking at the overall pattern since the 1960s, budgets are “pro-cyclical” – in other words, they inflate the economy when it is already expanding and deflate it when it is already in trouble. Or in other words again – those of Charlie McCreevy when he was minister for finance – “When I have the money I spend it and when I don’t, I don’t”.

This binge-and-purge mentality means that acute problems build up, money is thrown at them in good times, abruptly withdrawn when times are bad, the problems get worse, rinse and repeat. So, for example, we slash spending on preventive medicine or tackling child poverty, even though we know that properly sustained programmes in these areas will be very good for the public finances in the long run. Bad social values feed pro-cyclical budgeting in which money is spent either managing crises or deepening them.

Carbon emissions

The final difference is climate change. Carbon emissions from Irish households are the highest in Europe, nearly 60 per cent higher than the EU average. The 2018 Climate Change Performance Index puts Ireland in 49th place of 56 countries – making it the worst in Europe. And as well as being morally abysmal, this is fiscally reckless. It is a form of hidden borrowing – the costs of meeting our commitments are simply being pushed down the road and we will face huge fines for our failures. Why? Because sustainability is another of those fluffy notions, not serious enough for the fiscal grown-ups.

In each of these four respects, Ireland performs much worse than most other industrialised countries – which means that it is perfectly possible to perform much better. But we won't do so as long as the way we raise and spend money is seen to be a matter only for the serious people in the Department of Finance and decent housing, gross income inequality, fair and effective social infrastructure and environmental responsibility are outside the frame.

The ritual of budget day encourages us to think of the national finances as an annual festival. Until we change that mindset, the budget may be in autumn, but it will always alternate between carnival and Lent.