The Stability Programme Update, the latest economic and fiscal projections, signals the start of the budgetary politics that will inform the next Government. In particular, it shows the level of money available for the Government for spending increases and tax cuts. Speaking in the Dail yesterday, the Finance Minister stated:
‘On foot of these changes, my Department currently estimates the net fiscal space to be somewhere in the region of €10 billion to €11 billion over the period 2017 to 2021.’
Remember all that stuff about the fiscal space during the election? It was stated that there would be €8.6 billion available over the next five budgets. This has been increased by approximately €2 billion due to changes in the complex calculations. So, we have €10.5 billion.
An extra €2 billion: sound good? Not really – not when you look at the detail.
Let’s compare two main budgetary projections that were presented in Budget 2016 – only a few months ago – and the current projections published in the Stability Programme Update: investment and expenditure on public services (Government consumption).
Spending on investment and public services has been revised downwards in the current projections. The differences may seem small but it puts the increased €2 billion in ‘fiscal space’ the Minister referred to in perspective.
For instance, in the budget last year the Government projected investment spending over the five years to be €25 billion. They have revised this downwards to €23.5 billion – a cut of 6.2 percent. We’d have to increase investment by €1.5 billion just to get back to the projections in the budget – and that was already one of the lowest levels of investment in the EU.
Regarding expenditure on public services, over the five years the Government has revised this downwards by nearly €4 billion. Get the picture? Now let’s factor in inflation (using the GDP deflator – unfortunately, we don’t have an inflation projection for public services).
For public services to keep pace with inflation, expenditure would have to rise by €2.2 billion by 2021
The Government projects base-line (i.e. doesn’t factor in any money from the fiscal space) public service spending to rise by €700 million.
This leaves a shortfall of €1.5 billion – and this doesn’t fully account for demographic factors (a growing elderly population will require more health spending, for example); nor does it count the general rise in population which will require more services.
Of course, spending on public services will rise –because some of the fiscal space will be used to that effect. But think on this. In 2021, we’d have to increase spending on public services above the Government baseline projections by €15 to €19 billion just to reach the long-term EU average expenditure. Though one would have to factor in prices and demographics, that put’s our under-spending neighbourhood in some perspective.]
So how much do we really have to play with over the next five years?
During the election the Irish Fiscal Advisory Council estimated that the €8.6 billion fiscal space was over-stated. They claimed that when you factored in inflation and demographic changes, the true fiscal space was €3.2 billion. We’ll run with that figure.
The Minister’s announcement of an extra €2 billion means we now have €5.2 billion.
Now let’s restore the cut in investment spending the Government made, €1.5 billion, or €300 million per year.
Here’s where it gets really interesting – and it involves our old friend, Irish Water. In the Government’s Capital Programme, water investment was estimated to be €4 billion over a six-year period; or approximately €650 million per year. BUT: this was ‘off-the-books’ – in other words, it didn’t impact on the deficit since it was assumed that Eurostat would rule Irish Water as a market corporation.
However, if we are to have that investment it will have to come through public finances (unless the Government intends to re-introduce charges based on household use of water – what’s the chance of that?).
That investment – which is absolutely necessary – would require an additional €650 million. That’s another chunk out of fiscal space (though it should be remembered that the calculation of fiscal space for investment is slightly different than the rest of the budget).
But Irish Water isn’t finished with us yet. The Government has put current spending back on-the-books (cost of Irish Water minus investment). However, if they factored in revenue from household charges, they will have to revisit that. If charges are abolished, this could leave a hole of €280 million in these projections.
In short, after inflation and demographic changes, after investment and water investment, there is little fiscal space left. While we have to await more detailed estimates from the Department, the amount of money available to the Government would be €4 billion. And if we are start cutting taxes, the pressures on spending will increase.
We need a new dialogue – an honest one – on public finances. Housing, health, education, infrastructure – if we want to create a modern European economy its’ not just a matter of not cutting taxes, we will have to raise them.
Either that or we can close our eyes and bump along the EU bottom, thinking we’re going great guns when in fact we are falling further and further behind – economically and socially.
Now what political party or social force will have the vision and courage to deliver that message?