'Ireland already has one of the lowest levels of Government expenditure inEurope, and our poor public services reflect that. Despite our new foundwealth, we are doing little to remedy inequality'. The cyclical fiscal policy pursued by Charlie McCreevy makes the economic downturn more painful, writes Ruairí Quinn
There is a well-known theory in economics called the "political business cycle". Governments tend to spend money before an election, and retrench after it. We are now witnessing a prime example of that.
A Government which committed itself to the tightest spending limits at the beginning of its first term, then engaged in a massive spending splurge in the 18 months before the recent General Election. Now, they are back to the post-election cutting stage of the cycle. Not alone are these recent cuts bad economic management, but they are also unfair and completely dishonest.
Remember the urging to "party on"? At the height of the boom, Mr McCreevy cut taxes and stoked-up the economy. The result was increasing inflation. Now that the economy is in a down-swing, he is cutting expenditure.
The effect is most evident in capital spending. In the boom times, the Government began the necessary process of increasing spending on infrastructure. Now that Government finances are tighter, they are cutting back severely on infrastructural spending. So, having pushed up construction inflation in the past, they are now failing to grasp the opportunity which a slacker construction sector presents to progress the roads programme without the cost inflation of recent years.
This "pro-cyclical" approach to economic management is simply bad economics. Pro-cyclical fiscal policy may intensify periods of growth, but it means that recessions, when they come, are more painful. In particular, it makes for a more inflationary and less competitive economy. The Government is essentially adding to inflation in good times, thus making the deflationary process more painful and prolonged. The Stability and Growth Pact agreed among Eurozone countries calls for neutral or counter-cyclical fiscal policies. As the European Commission's recent report on Public Finances in EMU 2002 has pointed out, Irish fiscal policy is among the most pro-cyclical in the EU. Now, the Government is once again embarking on that path.
Cutting back on infrastructure spending at this point is putting our future economic prosperity at risk. Without this investment, the Irish economy cannot continue to prosper. If this means Budget deficits, then so be it. The Commission has recently acknowledged the need for a more flexible Stability Pact, which takes account of the circumstances of individual countries. With the second lowest debt ratio in the EU, Ireland can well afford to run modest deficits to fund crucial infrastructural projects. The signals coming from Brussels make it clear that a case for modest borrowing to fund capital projects would get a favourable hearing. There is no need for the McCreevy stop-start approach.
Of course, we all share in the collective memory of what happened in the past when Government deficits went out of control. Having served in Government in the 1980s, I know only too well the pain involved in correcting such deficits. But we cannot allow this memory to become an irrational obsession.
There is a world of difference between modest deficits to finance projects which increase the productive capacity of the economy, and the massive deficits to fund current spending which we experienced in the early 1980s. To fund Ireland's major infrastructural needs from current taxation would put an intolerable burden on public services. As the recent UN Human Development Report makes clear, Ireland may be fourth in the world in GDP per capita, but it profits us little in terms of broader measures of prosperity. We rank only 18th overall, largely because of low levels of government spending on health, education and social welfare. Ireland already has one of the lowest levels of Government expenditure in Europe, and our poor public services reflect that reality. While the Government deploys its usual tactic of quibbling with unpalatable UN statistics, the reality is clear. Ireland has historically been an unequal country, in line with its low level of development. Despite our new found wealth, we are doing little to remedy that inequality. Instead of channelling the fruits of growth to create a fairer society, through five budgets FF and the PDs have (as the Combat Poverty Agency has clearly shown) benefited the rich at others' expense, and neglected public services. Now, they are once again embarking on a programme of cuts, which will impact on health, on education and on other public services. The losers, once again, will not be the friends of Ansbacher, or holders of offshore accounts.
THESE latest cuts are also fundamentally dishonest. Throughout the recent election campaign, Fianna Fáil consistently argued that there would be no need for cuts. When Labour proposed measures such as smaller contributions to the National Pensions Reserve Fund, or modest increases in business taxation, we were loudly condemned by Fianna Fáil. They consistently denied there would be any need for cuts or tax increases. Mr McCreevy clearly stated that the health service would be the number one priority, while the Taoiseach promised to end hospital waiting lists within two years.
The naked cynicism with which they misled the Irish people is now clear. Their pre-election splurge is being financed by a mini-budget by stealth, with the burden being placed on public services.
In the cruellest and most cynical move of all, they have also cut overseas aid by €32 million. With famine once again stalking Africa, the Government has shown that the risk of bankruptcy which it faces is more moral than economic.
Ruairí Quinn is leader of the Labour Party