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Election aside, we must face the truth about financial constraints on highly indebted State

about 15 hours ago

Arthur Beesley

Minister for Finance Michael Noonan: Fine Gael’s manifesto must say how its spending and tax plans would be funded. Photograph: Bryan O’Brien / The Irish Times




The Irish Fiscal Advisory Council has put it up to the Government parties and their rivals in opposition to set out plausible medium-term plans for the economy in their election manifestos. In a sense we’re flying blind right now. It’s not yet clear what any party will say. They’re all holding fire until the campaign proper, which is fast approaching.

With recovery under way in earnest, however, much of the early talk surrounds proposals to eliminate the universal social charge (USC). No surprise there. The USC is the vehicle through which workers paid for the crash. It is the most obvious target as politicians look around for means of giving “something back” to the people. This would be the payback for all the pain.

But the fiscal council’s report on Budget 2016 stands as a clarion call for a deeper assessment of the scope in coming years to cut tax further while at the same time paying for all the services required by an expanding but ageing population.

Notwithstanding its grave reservations over the increase in supplementary spending this year, the council finds that the budget for 2016 complies with domestic and European fiscal rules. When it examines the outline fiscal plan for coming years, however, the council finds that the figures don’t stack up.

We do budgets year by year, so the system tends to correct such shortcomings with up-to-date data in real time rather than years in advance. In question until polling day, however, is the credibility of the political proposals to run the State for the next five years. The only extant plan to date is outlined in the Department of Finance forecasts in the budget book. In the fiscal council’s account it’s not quite the finished article.

Here’s what it says: “The Government’s projections for the deficit and debt in Budget 2016 from 2017 onwards are based on mainly technical assumptions and do not present a realistic picture of the public finances over the medium term. The budget forecasts again show an implausibly large decline in the ratio of non-interest government spending to GDP over the medium term.

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“The forecasts fail to show how the Government intends to use the fiscal space that will be available in the coming years to reduce the deficit and debt while implementing its stated policy commitments and accommodating spending pressures.

“Analysis in this report shows that funding current levels of public services in future years and accommodating likely expenditure needs would absorb the majority of the estimated fiscal space available after 2016.

Very difficult “Further tax cuts would make it very difficult to fund these expenditure pressures while complying with the rules.”

These are major concerns. From the perspective of Fine Gael and Labour, who will campaign on grounds of fiscal competence and economic stability, it is absolutely critical for their manifestos to substantiate how their spending and taxation plans would be funded, while maintaining compliance with the rules.

After all, we’re talking here of fiscal rules adopted in domestic law after a referendum. The council’s assessment suggests the fiscal situation in coming years will be a lot more constrained than some people would have you believe.

Whispers from political operatives suggest that one of the prime messages they’re picking up in private polls is that no one wants the next administration to jeopardise the turnaround with risky fiscal promises. After years of trauma it’s easy to see why that might be so.

But as the Government parties prepare to campaign on the basis that they won’t blow the recovery, it’s all the more incumbent on them to present a viable medium-term plan which accounts for the concerns set out by the council.

All of these prerogatives are no less urgent for Fianna Fáil, which must demonstrate it really has learned the hard lessons of its failings in pre-crash times.

For Sinn Féin the question arises as to whether it can present a credible fiscal plan to underpin recovery and copperfasten the turnaround in the public finances.

The looming election calls for honest and open debate about the choices facing the State and the people it serves.

Too many mistakes were made in the past to allow for lax fiscal planning now and a return to the easy politics of soft promises. Election razzmatazz is one thing. Truthful acknowledgement of the financial constraints on the highly indebted State is quite another.

Facing up to the latter could be the biggest electoral test of all.