Budget spending must be firmly anchored in growth and tax revenue

As the summer fades the annual Budget season is getting into full swing as people lobby for their priorities to be included in the Ministers’ speeches on September 27th. Budget 2023 will be exceptional as the Government manages the largest surge in energy and food prices since the 1970s. A delicate balance will be needed to support the economy and the most vulnerable households without adding to inflation.

However, Budget 2023 will also be a landmark as it is the first since the Government introduced its new rule for spending last year. The rule aims to keep core spending in line with the underlying growth of the economy and tax revenues, helping to keep the national debt on the necessary downward path.

In the Fiscal Council’s assessment, this should help put the Irish public finances and economy on a steadier footing and reduce the risks of the painful budgetary cutbacks seen during past recessions

While the Summer Economic Statement sensibly signalled some temporary deviation from the rule in 2023 due to the exceptional level of inflation, driven by higher energy and food prices, the Government has appropriately kept close to the spending rule and signalled its intention to follow it in future years.

Following a rules-based approach is a big change from the previous approach of setting the Budget based on choices made each autumn. When finance ministers rely solely on their own discretion, Irish and international experience shows that this often leads to short-termism in decision making: too much borrowing and policies that tends to amplify rather than dampen economic cycles.

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The Government’s commitment to an appropriate domestic spending rule is therefore welcome. In the Fiscal Council’s assessment, this should help put the Irish public finances and economy on a steadier footing and reduce the risks of the painful budgetary cutbacks seen during past recessions.

The new spending rule, however, could be strengthened to make it more effective. Too often in the past, Irish governments have introduced rules without any real commitment. This includes the two short-lived attempts since the 2007 banking crisis to have a domestic debt rule and a rainy-day fund which accumulated no funds.

As well as that, in the earlier years, compliance with the EU budgetary rules too often focused on formal compliance: whether or not the public finances were genuinely on the right track was less of a consideration.

The main priority for strengthening the new spending rule would be to recognise the role of measures that raise taxes. Higher taxes should allow governments create more space for additional spending. Such a rule would give governments a wider range of policy tools to tackle problems, including the cost-of-living crisis. The rule should be put on a statutory basis, both to make it more binding but also to encourage its design to be fully developed. Priorities for its design include making it explicit that it is a ceiling on the level of spending rather than the growth rate and extending it to cover the whole of Government rather than just the portion of spending that is part of the Exchequer. Exchequer revenues account for ¾ of total general Government revenue and expenditure.

Experience shows that — without a solid fiscal framework to act as an anchor — this can leave the public finances adrift

By setting the overall amount of spending over the coming years, the spending rule could help to achieve multiyear budgetary planning and better value for money. The focus should move away from haggling over each Budget towards a more strategic approach to how spending is prioritised and how public services can be delivered more efficiently. This would help to plan for long-term challenges such as ageing and climate change. While more information is now provided in Budget documents, setting out what the Government plans to spend in each Department in the coming years within the overall envelope set by the rule could help.

A common concern about rules is that they limit the ability to deal appropriately with unpredictable events like the Covid pandemic. Of course, no simple rule can cover every possible contingency. That is not their goal. They can act as an anchor for sensible planning in normal times and provide useful signals during exceptional periods. Sound rules-based systems allow for some flexibility as the EU has done in recent years and as the Government proposes this autumn. The Fiscal Council can play an important role in making sure that any deviation from the rules is justified.

It is tempting for any finance minister to give themselves as much flexibility as possible on Budget Day. But experience shows that — without a solid fiscal framework to act as an anchor — this can leave the public finances adrift. The Government should use this Budget to strengthen the spending rule and build on the reforms it has put in place.

Sebastian Barnes is chairman of the Irish Fiscal Advisory Council. The Fiscal Council is the State’s Independent budgetary watchdog responsible for assessing the Government’s forecasts and its overall budgetary stance