During the depths of a crisis, the regular economic updates from the troika were worth a read. There was considerable pressure on the government here from the European Commission, the ECB and the IMF behind the scenes and the published updates were used to try to push the cabinet to carry through on promised reforms.
As the EU and IMF had lent us €67.5 billion and the ECB was in the hole for billions extended in special liquidity supports to our banking system, we could hardly ignore what they were saying. In the early years the advice was pretty blunt – keep cutting spending and raising taxes.
Now we have exited the bailout, repaid the IMF and are on track to pay down the remaining EU loans. The troika has long gone, but its members are still keeping an eye on us. The IMF’s latest statement on our economy this week did not attract the same attention – and one to come shortly from the EU institutions visiting this week probably won’t either. Big brother is still watching, but we feel we don’t have to pay too much attention any more.
And now the question of what Ireland “ should “ do is more complicated, too. What do you tell a state with weird economic data, a kind of an economic boom under way, but still suffering the wounds from the crash? The question is all the more important this year, when – for the first time since the crisis – we look set to have significant leeway in the Budget within the rules set down by the EU .
The message from the IMF and from the head of the European Stability Mechanism (ESM) – the euro zone rescue fund – Klaus Regling, in an interview with this newspaper is clear. It is to take it handy. Put some money away for the rainy day – perhaps a bit more than is planned. Broaden the tax base. Spend on infrastructure, but keep a tight rein elsewhere.
Medium-term target
It would be a surprise if the European Commission, ECB and ESM officials here this week say anything different.The Government is already discussing the budget outlook with European Commission officials. It hopes they will conclude that Ireland is continuing to meet its medium-term target for the budget deficit. This would mean budget policy would be now more about what we should do, rather than what we must do under EU rules.
The IMF argues that budget policy should become “countercyclical”, which means spending a bit less and taxing a bit more in good times to allow the opposite to happen when times are bad. It means doing what is possible to avoid the old boom and bust cycle.
The IMF says we should aim for a small budget surplus next year and not stimulate the economy via the budget. At the moment, the Government does not foresee a small surplus until 2020.
So what do we know for certain? First, the economy is growing strongly and does not need a boost from the budget. There are big problems in areas like housing and other areas of infrastructure where spending is needed. But if we up government investment, add additional day-to-day spending and cut the tax burden, we risk adding fuel to an economy where some sectors may already be overheating.
We also need to leave ourselves some leeway when growth slows. This can still be done while meeting the extra spending commitments of the new national investment plan. But it would mean not splashing the budget cash elsewhere and raising some extra money via taxes. One likely route would be not adjusting tax bands and credits fully for inflation, a stealth tax increase at a time of rising wages.
Calm expectations
Minister for Finance Paschal Donohoe has tried to calm expectations and has promised to put money aside in a rainy day fund. But he will come under intense pressure to cut taxes and hike spending right up to the limit of the EU rules. After all, Budget 2019 was meant to be the one when we finally had some leeway and lobby groups have been queueing up to claim a share.
We need to realise that we simply can’t push the envelope to the limit of the rules each year, particularly when the economy is growing strongly.
There is no exact science to budget advice. No one knows what growth will be like or how events like Brexit will play out. But we need to put ourselves in a position to weather the next slowdown in growth without having to hike taxes or cut spending and without interrupting the national investment plan.
This means that the IMF is right. We need to stop borrowing now, at the top of cycle and move the budget into surplus. If Budget 2019 turns into a pre-election giveaway, just six months out from Brexit , then we will really be rolling the dice.
