The European Union under the enhanced Stability and Growth Pact (SGP) has put in place a series of fiscal rules aimed at preventative action. Ireland until the end of 2015 was in the “corrective arm” of the SGP, which, strangely, meant that the political system had more flexibility than less. The rather undignified debate over the “fiscal space” during the election was more a reflection of wishful thinking than reality. The reality is stark: Ireland’s “fiscal space” is determined by external economic conditions, and EU fiscal rules mean that democratically elected governments have a limited capacity to influence fiscal policy.
As Prof John FitzGerald highlighted in these pages, the recovery is very skewed towards a small set of industries that in effect distort our balance of payments in a very positive way due to the attractiveness of our taxation environment. Once that distortion is removed the Irish recovery disappears. This is not a new phenomenon but it has been heartily ignored by the cheerleaders of the recovery.
A quick look at global macroeconomic and trade statistics indicate the uncertain external environment with respect to China, the anaemic economic recovery in Europe and the embracing of negative interest rates by Japan all indicate a global economy that is slowing, not booming.
Ireland’s successful exiting of the bailout has little to do with the successful policies of the troika and more to do with the unique externally-focused and flexible economy of Ireland. As it stands, Ireland will borrow money for 2016 and 2017 and while our debt levels are reducing, in 2016 it is estimated to be 94 per cent of GDP. Ireland has to reduce that figure through a combination of policy actions and growth to 60 per cent to comply with EU SGP rules.
The nature of the preventative arm of the SGP is that it attempts to ensure that all euro members maintain a structural balance (based on figures related to potential output, one of the most difficult statistics to calculate for an economy like Ireland’s). The objective of the SGP was simple: democracies are unreliable accountants; this will force them to improve.
Simple reality
The political posturing by the various parties at the moment ignores a simple reality – the politicians are not in charge, the rules are in charge. A Fine Gael minority government, a Fianna Fáil-Fine Gael grand coalition, a Sinn Féin coalition all will have to comply with European rules or face fines and further sanctions.
As much as there exists flexibility, it is at the margins, in an environment of economic policy hairsplitting that the Oireachtas is so poorly equipped to respond to successfully. The OECD found Ireland’s parliamentary budgetary structures the worst in its 30 rich country club. The Fiscal Council is still in its infancy and clearly treated with derision by the political establishment. There exists no independent parliamentary budget office and members are not given the training or tools to discuss the minutiae of budget decisions outside of conveying simple requests for more support or asserting anger at cuts. The reality is that the Oireachtas needs to dramatically improve how it engages with the €8.6bn “fiscal space” of 2017-2021 beyond a simple desire to figure out ways to spend it for maximum political gain.
Fundamentally, the expansion of the Irish debt-to-GDP rate over 60 per cent is where the complication lies. This locks Ireland into budget constraints into the future. In combination with the use of structural deficits rules (based on potential output figures that even the chief economist of the Department of Finance considers to be problematic) whoever becomes Minister for Finance will be looking for coins behind the couch as opposed to developing policies that would set Ireland on a sure economic footing 20 or 30 years into the future.
It is this penny-wise and pound-foolish European mentality that has me support Thomas Piketty’s proposal: all public debts of all EMU countries in excess of 60 per cent of GDP should be placed in a common EU fund with a moratorium on repayment until GDP growth reaches 2007 levels. Mutualise and GDP-index EMU crisis debt. This will require more coordination at the EU level but will give EMU countries the capacity to invest in the future (education, healthcare, infrastructure, addressing climate change) and address what remain unacceptably high rates of unemployment. Radical ideas like that are what the politicians can provide. The next government has a courageous choice ahead of them. Ultimately if they don’t like how the table is set, turn over the table.
Seán D Barrett is an Independent member of Seanad Éireann for Trinity College Dublin and a retired senior lecturer in economics from Trinity
