In the depths of the financial crisis, in November 2010, the then government published a plan for how Ireland would escape the deep recession. Within weeks we had to apply to the European Union and the International Monetary Fund for assistance. In the bailout agreement at the beginning of December 2010, the EU and the IMF basically endorsed the plan the government had just announced.
At the time, looking at the details of the plan, I felt that it was unduly pessimistic about the public finances and the chances of recovery. However, when I said this to people in the Department of Finance, their reply was that, because of the severity of the crisis, the minister and the department felt that it was best to be pessimistic. Whatever government was in power following the imminent election would find it very difficult to go back to the Irish people to prescribe even harsher medicine if things proved worse than expected.
We were both right. Every quarter while the troika was in town, our economy, and especially the public finances, outperformed the targets in the government plan. However, the department was also right: it was better to err on the side of pessimism. There proved to be a major benefit, both nationally and internationally, to consistently underpromising and then overdelivering.
In the current pandemic-induced economic crisis, the department has, once again, decided that prudence suggests a more conservative approach to forecasting, while acknowledging that things could turn out better than expected. While things could always prove even worse than they forecast, the possibility of pleasant surprises on the public-finance front over the next 18 months could help lift spirits.
The Irish Fiscal Advisory Council (Ifac) report published on Wednesday reflects this, stating: “there is considerable upside potential to the department’s relatively cautious assumptions”. If things turn out better than expected, then Ifac estimates that the public finances could possibly return to balance by 2025, while the department is still projecting a small deficit.
Unrealistic
Whoever is right on their forecasts, Ifac also highlights a number of serious problems with the department’s public-finance numbers. While the department may be conservative on its forecasts for this year and next year, its numbers for 2025 and beyond are unrealistic. Ifac repeatedly focuses on the fact that the commitments in the programme for government are not reflected in the forecasts for expenditure.
In recent years, Ifac has done valuable work examining the implications for the public finances of the ageing of the population. This is one area where forecasting is on firmer ground as you don’t need a model to tell you that we will all be a year older next year. The Ifac work shows that, for the foreseeable future, the Government will have to spend increasing sums on pensions and healthcare for our ageing population. These numbers should definitely be included in the medium-term projections.
Similarly, the department numbers do not factor in the indexation of tax bands and allowances, which is Government policy, nor is there provision for major policy initiatives such as Sláintecare. Just to keep services constant, Ifac estimate that the Government will have to spend an additional €2.1 billion each year, before any policy improvements are included.
Climate change
Finally, no provision is made for the very large investment that will be needed to deliver on the Government’s commitments on climate change. UCC’s Marei Institute estimates that an additional €30 billion will need to be spent on the electricity system by 2030. While this will not directly affect the public finances, it is an indication of the kind of sums that will be needed. The Government’s economic service estimated that, at current support levels, the rollout of electric cars could cost the Government €10 billion by 2030. Finally, revenue from corporation tax is also likely to fall in coming years.
All of this suggests is that, while we will weather the current Covid-related storm, there are huge challenges ahead if we are to maintain high levels of support for the increase in our elderly population; to house our young and not so young population; to provide a high-quality health system; and to seriously tackle climate change.
Last week the Economic and Social Research Institute published a prescient paper on the ways we could raise additional tax revenue. It is pretty clear now that, given the ambitions expressed by the Government and the wider political system, a rise in the tax burden will be essential, not to repay debt, but to deliver on public services.
