Dublin Economics Workshop:The Exchequer cannot meet the full costs of financing healthcare and funding pensions in the future without undermining the prevailing commitment to a rigorous fiscal orthodoxy, economist Colin Hunt told the economics workshop.

Governments now faced the costs of funding an ageing Ireland. With limited prospects for greater fiscal austerity in the future, the next stage in Irish fiscal policy development had to focus on finding the most efficient means of financing healthcare and funding pensions, Mr Hunt asserted.

Until earlier this year Mr Hunt was economic adviser to the Tánaiste and Minister for Finance, Brian Cowen. He has since joined Macquarie Bank as division director responsible for its Irish corporate advisory activities.

In surveying the budgets of the past 30 years Mr Hunt found a progressive tightening of the fiscal screws. After the budgetary crises of the 1980s, policy initially focused on restoring order to the public finances. The policy target then became the elimination of the current budget deficit. Thereafter, the evolving fiscal orthodoxy demanded debt reduction allied to continuing restraint in public spending.

The fiscal orthodoxy of today required the simultaneous attainment of broadly-balanced budgets, high rates of capital investment and an annual contribution of 1 per cent of Gross National Product to the National Pension Reserve Fund, Mr Hunt said.

"The current generation of taxpayers appear eager to reduce the debt accumulated in the past, to bear the cost of financing current services and to invest in the future in infrastructure and pensions. They are repaying the debt of their ancestors and building a public wealth for their descendants," Mr Hunt continued.

In his assessment of the budgets of the past 30 years Mr Hunt noted that Irish ministers for finance had been keen to present themselves to the public as both responsible and prudent. But prudence was not interpreted as curbing public spending growth or slowing the advance of public sector pay. Instead, it was defined as balancing the books. The size and directional shift in the Exchequer Borrowing Requirement was taken as the ultimate arbiter of prudence, Mr Hunt said.

As a result, any conceivable increase in public spending could be seen as prudent so long as it was balanced by an equal increase in public revenue.

Mr Hunt awarded gold stars to two ministers for finance - Ray MacSharry and Albert Reynolds - for restoring probity to the public finances.

"If we had to pinpoint the decisions which restored stability to the public finances, they were the plans to limit supply services spending growth to 2 per cent in 1987, to cut that spending by 4.5 per cent in 1988 and to keep supply services spending broadly unchanged in the following year.

"The restoration of fiscal probity was the direct result of decisions taken by two ministers in the 1987 to 1989 period", Mr Hunt said.

It was also Mr Reynolds, Mr Hunt noted, who, as minister for finance, started the process of sustained tax cuts which had culminated in the low personal income-tax rates we enjoyed today.

Thereafter, ministers for finance had adopted a broadly pro-cyclical fiscal stance, epitomised by Charlie McCreevy's view that when the money was there, they spent it. However, Mr Hunt noted, pro-cyclical spending policies had been pursued in a manner consistent first with moderate borrowing and subsequently with broadly-balanced budget outturns.

The pro-cyclical tenor of Irish fiscal policy mirrored the experience of other developed countries and was most pronounced in the sphere of pubic capital investment.

More recently, the introduction of multi-year capital envelopes and the commitment to allocate an average of 5.4 per cent of GNP annually to capital investment over the life of the current National Development Plan 2007-13 should counteract the inherent pro-cyclical bias of public capital spending, Mr Hunt said.

In terms of future budgets, Mr Hunt concluded that current spending growth would remain pro-cyclical in the years ahead.

In other words, any expected weakness in revenue will lead to actual restraint in current spending growth within the context of a broadly-balanced budget.

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