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How small is the fiscal space? That’s Leo Varadkar’s big headache

Posted on July 05, 2017 at 01:56 PM

In yesterday's Irish Examiner, Brendan Howlin wrote about why fiscal space will be a headache for Leo.

AS I write, harried officials in the Department of Finance are looking down the back of every sofa in Merrion Street.

The National Economic Dialogue (NED) took place over two days last week and the fiscal space isn’t nailed down. The new Taoiseach, Leo Varadkar, is talking about hidden fiscal space. That’s a far cry from the budget transparency we were promised.

After all, the NED is supposed to discuss what to do with the money available on budget day.

Forget Shane Ross and the judges. This is the real mess on the Taoiseach’s plate.

The Programme for Government promised a new way of devising budgets. In the spring, the Government would publish an overarching economic statement, giving the broad budgetary parameters.

This would then be examined by a dedicated Oireachtas budgetary oversight committee, and, in parallel with events such as the National Economic Dialogue, there would be a public and transparent debate around each budget.

Last year was a poor start. The spring economic statement became the summer economic statement, giving the Oireachtas much less time to debate the ramifications. This year is even worse — we’ll be doing well to see the summer economic statement before the Dáil recess, meaning there will be no real debate on the budget until September.

So much for a brave new world.

As things stand, allowing for the carry-over costs from last year’s budget, we are being told there is only €300m-400m left in the pot for new budget measures this year. And a third of this will be kept for tax cuts, further depriving healthcare, education, and childcare of the funding they so clearly need.

The Taoiseach is already talking about putting up some taxes to bring others down further. This could mean taxing the poor to fund reductions for the better-off, even though lower earners are more likely to be up early in the morning.

And on the subject of health, Mr Vardakar wouldn’t settle for a couple of hundred million when he was minister. Now that he isn’t, does it not matter so much? Has the new Minister for Finance and Public Expenditure and Reform, Paschal Donohoe, only a few chocolate buttons to hand out to the Independents? That’s what they’d have you believe.

Nearly three-quarters of the nominal fiscal space, nominally €1.2bn, has already been deployed. So there isn’t enough space left to keep anybody happy, never mind everybody happy.

At this rate, Mr Donohoe is going to need to find a magic porridge pot for his team in the Department of Finance. They’ll need one a bit like the one they got their hands on last year.

During the general election, the fiscal space for 2016 was estimated to be in the region of €500m. By the summer of last year, it had miraculously doubled to €1bn.

And I asked, at the time, was that it? Had the moving fiscal space been finally nailed down? It had, said Mr Donohoe and then-finance minister Michael Noonan. It had not, though. In the last week before budget day, they found another €300m. So, between budget day, 2015 and 2016, the fiscal space grew by 125%. That’s some magic porridge.

For the Government to put together a budget this year, I suspect that magic pot will have to be used again. Health expenditure has increased by over half a billion each year in recent years.

The all-party committee on the future of healthcare wants to go further. The Government isn’t in the ball park.

There will be a little more money for health next year. Some of the demographic pressures are already provided for, and don’t impact on the fiscal space. But if anything substantive is to be found, it’s difficult to see where funding for an increased old-age pension is coming from, never mind tax cuts.

I’ve said, for some time now, that the Government should have been raising the fiscal space issue with the European authorities.

The new rules are supposed to facilitate sensible budgetary planning. But we have to deal in chocolate buttons this year, because we hit some notional structural deficit in 2018, whereas, next year, the fiscal space grows to €3bn, according to the last available figures.

So much for phased and sustainable spending increases.

Nobody knows more than me the importance of fiscal sustainability. We never want to get back to where Fianna Fáil led us 10 years ago.

But hiding under the table, for fear of a lightning strike, is not a strategy, either. And nor is turning political economy into basic book-balancing. You cannot talk about growth, next year, in the region of 4% and not deliver a reasonable portion of it to the Irish people.

We all know that easier budgets will follow this one. We also know that we were promised a new way of doing our budgets, but that greater secrecy has become the order of the day.

For now, we just have to hope that Mr Donohoe manages to find that magic porridge pot. If he doesn’t get cooking soon, this budget won’t be worth bothering with at all.

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