The Government will be constrained from adopting an expansionary fiscal policy – limiting its capacity for substantial tax breaks – until at least 2019, an economics seminar in Dublin heard yesterday.
According to economist Pat McArdle, the new European fiscal compact rules compel post-programme countries like Ireland to continue budgetary belt-tightening for a three-year period after the bailout.
Specifically, the rules – introduced through the so-called “six pack” – impose a cap on government spending, excluding debt interest and other adjustments, until the country’s budget deficit returns to zero.
Under these constraints, Minister for Finance Michael Noonan will be limited in how much he can give away in budgets for several more years.
This runs counter to the widely held expectation the Government will be able to adopt a more expansive approach to spending and tax in the near term. Mr McArdle was speaking at a seminar on Ireland’s economic policy after the bailout, hosted by the Institute of European and International Affairs: “The new rules include a hitherto little-known limit on spending which is likely to prove to be the most binding constraint we will face.”
Expenditure curbed
"On current projections, expenditure will have to fall again in 2015. While expenditure could grow by 1 per cent-plus in 2016, 2017 and 2018, this would be less than inflation, meaning in real terms it would fall. Thus it looks like it will be 2019 until expenditure can rise by more than inflation," he said.
Mr Noonan hinted recently he may consider tax breaks in Budget 2015, provided the Government hit its fiscal deficit targets, and economic growth projections were maintained.
In his address to the seminar, former finance minster and IBRC chairman Alan Dukes advocated a reconfiguration of how budgets in European member states were drawn up.
He suggested the Government should be required to submit draft budget proposals by October 15th, with the provision the European Commission can issue an opinion on the draft.
Budget committee
Mr Dukes also advocated the establishment of a dedicated budget committee in the Dáil.
Former research officer with the Economic and Social Research Institute Dr John Bradley said the financial crisis had overturned the world of US industrial hegemony and EU consolidation, within which Ireland prospered.
Ireland may retain its 12.5 per cent rate of corporation tax in the medium term, but its benefits may be eroded by actions in other member states, he said.
Delivering the seminar's opening address, Michael McGrath from the Department of Finance said the evolution of budgetary co-ordination and fiscal surveillance in Europe had advantages for a small, open economy like Ireland. This should bring more stability and sustainability to economic and budgetary policies across the euro area, he said.
