The ESRI has warned the Government not to play politics with our economy, but is it happening already? asks Marc Coleman, Economics E ditor
Fool me once, shame on you. Fool me twice, shame on me. The tendency of politicians to pull the wool over our eyes is one thing. Our repeated willingness to let them do it is another matter. Last Monday the Economic and Social Research Institute advised the Government to avoid a pre-election spending splurge. Doing so might win votes, but would leave it vulnerable if the economy deteriorates in 2008.
Here the ESRI was engaging in what is called political economy. Like some branch of medicine, this branch of economics studies a whole range of symptoms of bad policy- making: the tendency of governments to lavish money on lobby groups, the tendency to go on pre-election spending binges and many, many more. At the root of all these symptoms, however, lies a common disease: the short memories of the electorate.
In 1982 a by-election took place in the Dublin West constituency. Just before polling, residents of a new housing estate in the constituency complained that trees had not been planted in the estate as promised. Just before polling the trees were installed. Just as quickly, they were removed again.
Twenty years later this happened on a far grander scale. The Government introduced different rates of stamp duty to offset the advantage held over owner-occupiers by investors. The move was popular and brought house price growth down to single-digit rates of growth. But property investors were unhappy with the move and in the year following the election it was reversed.
And instead of a smooth indexing of income-tax bands each year, no band increases have occurred in the first three years of this Government. The last Budget contained significant increases in the standard rate band. You can expect the next one do the same.
On a macro policy level, government spending rose by 17 per cent in 2001, the year before the last election. In 2002 the economy skidded in response to September 11th, tax revenues fell short of expectations and the government was left with a hole in its accounts. Pre-election largesse was reversed in the form of cutbacks in spending and indirect tax increases.
And of all the bag of tricks ever devised by governments throughout history to sweeten the electorate, SSIAs are perhaps the most audacious.
The present Government is not the only government to engage in electorally motivated economic policies. Previous governments - including Fine Gael and Labour coalitions - have done so as well, but with less success. Most political parties rely on the assumption that voters suffer from what is called "fiscal illusion".
This means that they tend to see a pre-electoral increase in government spending as a free lunch; ignoring the cost in terms of taxes levied today or interest paid on the debts in the future.
Politicians exploit fiscal illusion by giving the electorate what they think it wants; jam today paid for by taxes tomorrow. The result of such electoral opportunism is that budgetary outcomes don't describe smooth and regular outcomes, but deteriorate before elections. This is not necessarily a large deficit in the pre-election year.
Certainly in bad times the opening budgetary position is usually in deficit - even before the government comes along with its election spending plans - and the effect of those plans is an even larger deficit. But in good times such plans may still be consistent with a surplus, albeit one that is smaller than it should be.
Another distortion of budgetary behaviour is caused by the role of powerful lobby groups. Political economists devote much study to how well-organised groups can extract a higher share of an economy's income by lobbying the government to give it favourable treatment. This can come either in the form of a direct transfer of resources, or in the form of restrictions on competition.
Two examples of this are benchmarking and, more recently, the three-year rule relating to the pharmaceutical sector.
The creation of the first benchmarking body before the election gave public sector voters an incentive to vote for the Government because it promised once-off pay increases to the public sector. This policy involved a direct net transfer of resources from private sector taxpayers to public sector workers.
But although the former would be negatively affected by the higher tax burden, their negative reaction to the policy was limited by the fact that - as a political group - they are less organised and self-conscious. Public sector workers are, on the other hand, very well organised and highly conscious of their own interest.
As well as being an example of lobby group politics, benchmarking also illustrated how this phenomenon can interact with distortions arising from the influence of the electoral cycle. The decision to postpone the recommendations of the second benchmarking body until after the election prevented private sector voters from being antagonised until after the votes were counted. But the establishment before the election of the benchmarking body itself, coupled with strong endorsements from public sector union leaders, gave public sector workers enough incentive to vote for the Government.
Now a second benchmarking body has been established. Once again, it is not due to report until after the next election. The Government has talked down the prospect of any significant further pay awards being granted to the public sector. But once re-elected, it might feel braver.
The composition of the second benchmarking body - a large majority of its members are from a public service or trade union background - suggests that as before its recommendations will take little account of the private sector's opinion.
Individually, of course, we have among the most intelligent and informed voters in the world. The next election will tell whether these individual traits survive the collective act of voting or whether, en masse, voters have the memory of goldfish.