ANALYSIS:Even with four years of austerity, State spending will be €5 billion greater than income in 2015, writes DAN O'BRIEN, Economics Editor
NO BIG surprises. That sums up yesterday’s announcement on the size and broad composition of the next four budgets.
Following a €6 billion mix of spending cuts and new taxes implemented this year, a further cumulative €12.4 billion adjustment is in store over the next four years, including a €3.8 billion package in 2012.
But even with another four years of austerity, the imbalance between what the State collects in income and everything it spends will stand at over €5 billion in 2015. Barring an unexpected fillip in economic growth, it will be closer to the end of the decade before the books are balanced.
This relatively gradualist path will leave the public debt in mid-decade at dangerously high levels – of 114 per cent of GDP in 2015 – according to yesterday’s projections. In deciding on this path, the Government has eschewed the advice of many organisations, including the body it set up recently to provide advice on fiscal matters.
The Independent Fiscal Advisory Council argued that a €4 billion adjustment would be needed to meet the EU-IMF imposed deficit target next year (and it urged a €4.4 billion package to put the public debt on a faster downward trajectory).
In taking the decision it has, the Government is giving itself little room for slippage, although its low economic growth projections leave the potential for a positive surprise.
But the size of the Government’s adjustment decision cannot be criticised on any truly objective basis. There is no doubt that a larger adjustment would have a further dampening effect on growth. Measuring these things is far from an exact science, but there is a point at which austerity becomes self-defeating. There is a plausible, if unprovable, case to be made that Ireland’s fiscal adjustment has reached that point.
More generally, the new plan contains little indication of radical departures. For instance, the Government has made much of the need to make “strategic” capital investments, both as a means of raising the economy’s growth potential and of creating jobs. The Coalition – rightly or wrongly – believes there are plenty of projects that can achieve both objectives. Despite this, capital spending is to be cut sharply, having already been cut much more than other areas of expenditure.
A radical government, having undertaken a comprehensive review of spending (as this one has), would have cut less-productive spending and shifted the money saved into the capital budget. That appears very unlikely to happen on the basis of yesterday’s very broad figures.
Mildly surprising were the comments on income tax. The document provides much less certainty than might have been expected, particularly given that one of the cited reasons for providing more budgetary information earlier in the process is to reduce uncertainty for consumers and businesses.
The plan says that there will be no “substantial” changes in income tax announced in December. It goes on to say that “maintaining the current bands, credits and rates in the years 2013-15 will be dependent on making progress on expenditure reductions and tax changes in other tax areas”. A fat lot of certainty that gives.
The composition of the adjustment between spending cuts and additional taxes was closely watched yesterday. One reason for this was because the troika has not given a firm direction on the issue – as part of their emphasis on giving “ownership” of the plan to the Government. That meant that the Coalition had more freedom of manoeuvre than on many other issues. That, in turn, meant that decision could be read as an indicator of who is calling the shots in the Coalition.
In Fine Gael’s election manifesto, a ratio of 72:28 in favour of cuts was committed to. The Labour Party wanted a 50:50 breakdown. The outcome – an almost perfect splitting of the difference. Yesterday’s package over the full four years depends on cuts to achieve 62.5 per cent of the adjustment.
Curiously, however, the composition changes towards spending cuts over time, if not by a great deal. The report repeatedly cites international evidence on fiscal adjustments which points to expenditure-based adjustments being more effective in stabilising budget imbalances. The same evidence also stresses the importance of sequencing, with more of the spending cuts being done at the front end and more of the tax increases being implemented in later years, once growth is more solid. The Government looks like getting it back to front on this point.
There was also less analysis than might have been expected of the fiscal position on the basis of the EU-harmonised measures that markets watch.
Instead, almost all the discussion was based on the Ireland-specific, and narrower, exchequer deficit figures.
Even last December’s four-year plan gave projections for spending and revenues on an EU-harmonised basis. Yesterday’s document gave nothing.
Those details, and a great deal more besides, will emerge gradually in the weeks up to budget day on December 6th.