Throwing money at Ireland’s social problems hasn’t worked in the past – The Irish Times
A central conundrum for the State is not whether to follow Boston’s growth model or Berlin’s social model, as it used to be framed, but how to leapfrog decades of underinvestment in areas like housing and health without being financially reckless.
As head of the Irish Fiscal Advisory Council (Ifac) Sebastian Barnes warned the Oireachtas Finance Committee last week putting too much money into the economy too fast risks being self-defeating in terms of bidding up prices and rents.
Doubly so if the economy is running at close to capacity.
“We have high inflation, we have record low unemployment, we have big capacity constraints around housing and investment,” Barnes said.
With the Government predicting €65 billion in budget surpluses over the next three years, the tension between budgetary policy and economic policy, two distinct things, couldn’t be greater. They’re effectively pulling in different directions.
We have arguably the worst housing problem in Europe and, in theory, the money to address it but as Barnes warns, simply throwing money at the problem has the potential to not only fail but to make matters worse. We need to be strategic in how we deploy these resources.
Barnes and his Ifac colleagues appeared before the committee to talk about the EU’s fiscal rules, in abeyance since Covid but now set to be rolled out again in a slightly revamped format. They will still tie member states into keeping within certain debt and deficit limits. 60 per cent of GDP (gross domestic product) in the case of debt and 3 per cent of GDP in case of deficits.
Ireland is, however, unlikely to be constrained by the new rules because of the inflated nature of its GDP numbers. Ireland’s debt ratio was 45 per cent of GDP at the end of last year well inside the 60 per cent threshold. On a more appropriate GNI* (gross national income) basis, Ireland would have a debt ratio around 83 per cent, putting it over the 60 per cent limit and under an obligation to take corrective action. But under the commission’s one-size-fits-all approach only GDP measures are considered.
“Given the use of GDP, Ireland will most likely be classified as a low-debt country,” Barnes said. Compliance with the deficit rules will also continue to be helped by “surges in corporation tax receipts”, he noted.
Ireland will essentially be left to its own devices financially, unscrutinised, says Ifac, a far cry from the Troika days when every move had to be vetted by our creditors.
In the absence of a stick from Brussels, the budgetary watchdog wants the Government to adhere closely to its recently adopted 5 per cent spending rule, which limits Government to annual spending increases of 5 per cent.
There are two basic and perhaps overly simple assumptions underpinning the rule, namely that the long-run growth potential of the Irish economy is 3 per cent and that inflation will average about 2 per cent (3+2=5).
Ireland has long needed to depoliticise its budgetary policy, wishful thinking perhaps but there are measures like the spending rule that can be adopted to stop governments and fiscal policy amplifying the economic cycle.
“The spending rule should be asking choices about what we want to do and what the country is gonna look like,” Barnes said. “It’s a social choice whether you want to have higher taxes and higher spending and better public services or whether you want lower taxes and to accept the consequences that come with that,” he said. “Running the public finances in an unsustainable way or overheating the economy shouldn’t be a choice.”
Ireland has had a chequered history of managing the public finances. In the 2000s, government spending was allowed to grow dramatically on the back of what turned out to be temporary tax revenues.
When the housing bubble burst, revenues from VAT, stamp duty and income tax dried up, forcing a painful fiscal adjustment. During that period up to €20 billion of additional revenue was put into the health service with little to show for it.
Lessons have been learned from that period, the Government has been open and honest about the risks – in particular the concentration risk – attached to our current corporation tax surge.
The fiscal crash and burn of the 2000s is undoubtedly driving Minister for Finance Michael McGrath’s decision to set a new savings vehicle to park these windfall receipts.
The ideal scenario would be to stash a significant chunk of these receipts in a sovereign wealth fund and to use the returns to address pressing social issues like housing. To avoid the politicisation of these processes, the fund, the annual level of receipts to be set aside and the spending allowed each year may need to the put on a statutory footing. Norway’s sovereign wealth fund provides a template.
At the committee, Sinn Féin finance spokesman Pearse Doherty said that Ireland’s spending was low compared to other European countries. He noted that Germany’s general government expenditure as a ratio of GDP was 51.3 per cent; Denmark’s 50.8 per cent; France’s 59 per cent while Ireland’s was just 24.8 per cent. When adjusted to the more appropriate measure of national income GNI*, it was still only 45.2 per cent, below our European peers.
“We’re significantly behind and if people want their health service fixed … we do need to get more in line with our European competitors,” he said.
Trying to excise the legacy of Ireland’s underinvestment in public services, infrastructure and housing while not being wasteful or overheating the economy is the most pressing challenge facing Government.