This morning the Fiscal Council has issued an important report which comments on the Government’s projections of economic growth and which also recommends accelerated measures to bring our budget back into balance. There is a thread on the report on IrishEconomy.ie. This blogpost just focuses on the overall budget adjustment which is only one aspect of the Fiscal Council’s report. It should be said that the Council believes that there is downside risk to the Government’s projections of GDP growth.
The Fiscal Advisory Council is a new body set up last year and which will be placed on a statutory footing once the Fiscal Responsibility Bill is enacted into law shortly. The role of the Council is to comment on Budget measures in the context of how those measures will return Ireland to fiscal health – “fiscal health” is where the taxes earned by a country are in balance with what that country spends on its public sector and welfare. The Council has five appointed members who don’t draw a wage but the Council has an annual budget of around €600,000 for support.
The table below shows the budget adjustments by year between 2013-2015 as (a) set out in the Memorandum of Understanding with the bailout Troika and (b) as recommended this morning by the Council.
Ireland had a deficit of about €13bn in 2011. This year it will be about the same. This is obviously an alarming state of affairs which will result in disaster if nothing is done, and the Government plans to bring the deficit annual deficit down to €5bn in 2015 – in other words we still plan to spend €5bn more in 2015 than we collect in taxes.
Whenever the subject of annual budget adjustments is brought up on here, there is debate about the numbers, and I hope the above table helps explain the three sets of numbers – the first is the additional annual measures and in 2013, for example, we are to have €3.5bn of additional measures which, for sake of argument, might be €500m from a new property tax, €700m from increases to PRSI, €300m from reduction in tax allowances for pension contributions, €500m from means-testing allowances, €500m cut from capital programmes and €1bn cut from the cost of running the public sector. In 2014, using the Government’s plans we will need adjust an ADDITIONAL €3.1bn so property tax might be increased from €500m in 2013 to €1bn in 2014 and we will need find €2.6bn of remaining measures. In 2015, again using the Government’s projections, we need adjust an ADDITIONAL €2bn. So in 2015 compared with today, we will need adjust €8.6bn in that one year alone. That is a HUGE figure but remember our annual deficit is presently an even BIGGER figure of €13bn. And the cumulative total that the Government intends taking out of the economy in 2013-2015 is €18.7bn. Again a colossal number, but that is the reality.
The Council recommendation is the same as the Government’s in 2013 but the Council wants to see a faster balancing of the books and therefore recommends higher adjustments in 2014 and 2015 that are contained in the Memorandum of Understanding. The Council recommendation will see an annual adjustment of €10.5bn in 2015 compared to today and would remove a total of €21bn from the economy in 2013-2015. Again, an absolutely colossal number.
How did it get so bad? The collapse in our economy took place in 2008 with property-related income plummeting whilst welfare and public sector costs were left high and dry. Since then the Government has increased taxes and reduced spending, but five years into the crisis, we still have an annual deficit of €13bn. Some of the deficit is attributable to the cost of bailing out the banks, but most is down to the boring fact that our annual taxes plummeted.
On a political note, the Council’s recommendation this morning will ensure that Budget 2014 and Budget 2015 are just as tough as An Taoiseach’s Enda Kenny’s “toughest budget of this administration” in Budget 2013. At the end of 2015, Ireland is going to be a very different place to the Ireland of today.
As previously opined on here, Ireland doesn’t have natural enemies with whom war is a possibility, so we don’t have a strategic military threat, but we do have a strategic economic threat in that we are spending FAR MORE than we earn, and the sooner that threat can be eliminated or at least minimised to a relatively harmless level the better. On the other hand, if we take too much too soon out of our economy, we can destroy our economy and society. It’s a balancing act and this morning’s report from the Fiscal Advisory Council is a courageous attempt to deal with the biggest threat facing this State.