Avoiding the R Word
• GDP is not adequate to measure
the economy. GNI* is
increasingly used. However, it is
selectively used. Budget
projections showed that GNI*
will go into recession next year.
The Minister focused on GDP.
• The R word is avoided.
• Going out to 2024, GNI* will be
sluggish. Growth will be at the
level of Eurozone levels over the
last four years. In Europe that
growth has been called
2.8 2.7 2.62.5
2.0 2.1 2.0
2019 2020 2021 2022 2023 2024
Real Growth Projections: 2019 - 2024 (%)
A Disorderly Scenario: A Big Gamble
• The budget faces two ways. In a disorderly scenario, with the economy
heading towards recession, the Government is putting all its counter-
cyclical eggs in a €1 billion Brexit contingency fund. These supports
are intended to limit the damaging impact of a disorderly Brexit and
strengthen enterprises’’ ability to grow sustainably post-crisis.
• But what if it doesn’t work – if the recession is longer and deeper than
expected (the Department of Finance believes a larger impact is highly
likely). There is little firepower left. Capital investment is higher than
projected in the Stability Programme Update but this could reflect
higher prices and costs (the National Children’s Hospital, the privatised
rural broadband network).
• The Government is taking a big gamble basing everything on the Brexit
An Orderly Scenario: The Face of Prudence
• But if a deal is done and the
economy survives the next year
relatively unscathed (even with
a deal, there will be an
economic hit) what are we left
with? Real spending cuts over
the next few years.
• This is not a new projection.
The Government has projected
similar real cuts in the Stability
Investment Public Services Social Payments
Increase in Real Public Spending per Capita:
2019 - 2024 (%)
• The reduction in social payments is particularly worrying. Pension
payments alone will increase by €1 billion every four to five years from
demographic changes – not including payment increases. What
happens to rate increases and other social protection programmes.
• These projections show the Government to be ‘prudent’, cutting debt,
taking the heat out of the economy while maintaining all that good
productivity stuff (i.e. investment).
• But this comes at a price. The majority of social protection payments
will be cut by 1.3 percent in real terms. Public services will be
squeezed . And minimum wage workers will have to wait.
• The Government is postponing the minimum wage increase to avoid a
burden on businesses under a disorderly Brexit. However, under
current legislation employers with financial difficulties can postpone
the increase for up to a year – so businesses already have an inability to
pay clause. The postponement is aimed at businesses who can afford
to pay the wage increase.]
A Triumph of Political Economy
• The real news about the budget is not the details. Commentators used
phrases like a ‘non-event’, ‘no-change’, ‘steady as she goes’, ‘safe’. This
was a potential no-win budget given the Brexit unknown. In football
terms, the Government scored an away draw. This budget won’t win
votes but it won’t lose votes. There will be an election before any fall-
out. And Fianna Fail was co-opted through the negotiations.
• The Department of Finance listed three likely high-risks: housing
supply, climate change and concentration of corporate tax revenue.
And yet there was little blowback at the lack of housing investment;
little criticism – apart from green activists – at the alarming lack of
supply-side measures; and with the budget surfing on a corporate tax
bubble, there was . . well . . . almost nothing done or said about it.
• The Government got away with it. Budget 2020 was a triumph of
Upside Down Fiscal Cycles
• Government helped by ill-informed commentary on pro-cyclicality.
• We are lectured about pro-cyclical policies, how we should have started
‘cutting back’ when the economy started growing; how we should be
running substantial surpluses. The application of this theory falls apart
with Ireland’s fiscal cycles.
• We are stuck in upside-down fiscal strategies. Yes, the right-side up
approach would be to reduce spending increases and reverse tax cuts
as the economy recovers (the temporary VAT cut and restoration was
an example of that).
• But you do that when fiscal strategy expanded during the preceding
downward cycle. That didn’t happen here. We cut back during the
Cutting in the Downturn
• Therefore, public spending has
struggled return to 2008 levels.
• Current spending fell from 40%
of GNI* in 2008 to 35% in 2018.
• Some commentators suggested
we should have been ‘slowing
down’ and putting the counter-
cyclical brakes on since 2015.
Yet real current public spending
only started rising in 2016.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Real Public Expenditure per capita: 2008 -
2018 (100 = 2008)
Public Sector Payroll
• Since the recovery the Government has been attempting to climb two
mountains: restore real public spending and reduce the debt.
• To make matters worse, they added another smaller mountain –
cutting taxes, especially during the early years of the recovery.
• This makes the task of pursuing a rational cyclical strategy especially
• The Government is stuck in a pro-cyclical trap – having pursued
irrational policies prior to the crash and, then, during the recession.
Pro-cyclicality has become embedded in public finances. This is the
reason why the Government struggles with the deficit.
• The Government has had to rely on a corporate tax revenue bubble to
make the budget arithmetic work – but this is high-risk according to
the Department of Finance.
• The government has also been
helped by exaggerating the
dangers of our debt levels. Yet,
in the last 7 years Irish debt has
fallen by 66 percentage
points. No Eurozone country
can match that.
• Some complain we have not
significantly reduced deficit
levels since 2015 – yet debt
levels have fallen by 24
• Excluding bank debt, our public
debt levels would be lower than
the Eurozone average.
Debt as a % of GDP Debt as a % of GDP (excl. Financial
Debt Excluding Financial Institutions
Support: 2018 (% of GDP)
Eurozone Ireland (GNI*)
Old-School Rules are the Best Rules
• The Government’s approach to the pro-cyclical trap it is to suppress
government consumption (public services) and social payments.
• A progressive approach would adapt the Golden Rule to the current
fiscal rules – balancing the current budget over the life-time of the
business cycle while borrowing for investment.
• Unfortunately, we will have to make do with a silver rule – since the
Fiscal Rules require that most investment is financed by current
income (similar to forcing households to finance home or car
purchases out of current income; or businesses – financing expansion
or R&D out of current income).
• The Fiscal Rules allow us a one percent deficit as our debt is now
Maastricht-complaint. We should take advantage of that.
Maximising Our Fiscal Space
• The Government is intending to
drive the balance well above the
levels allowed by the Fiscal Rules.
Over the next few years we will be
allowed billions of Euros more in
spending than the Government is
providing for in their projections.
• A progressive fiscal strategy
would be rooted in maximising
the fiscal space available,
balancing different measurement
such as modified income (GNI*),
potential GDP, etc.
2020 2021 2022 2023 2024
Government Projections Net Lending 2020 -
2024 (% of GDP)
The Government’s Rationale
• So why is the Government not pursuing this space? From last year’s
Summer Economic Statement:
The fiscal rules are currently unhelpful . . . A full and literal application
of the fiscal rules would involve the adoption of pro-cyclical policies not
remotely appropriate to our position in the economic cycle. That is
why fiscal space is increasingly an inappropriate concept. . . . the fiscal
rules would damage our economy; that is why policy will no longer be
formulated on the basis of ‘fiscal space’.
We went from the Fiscal Treaty referendum where the Fiscal Rules were
the only thing preventing economic Armageddon to a situation now where
they are deemed dangerous. In truth, this position suits proponents of a
small-state, low-tax, low-spend economy – using the Fiscal Rules to
suppress social spending and abandoning them in order to continue that
An Alternative Strategy
• Nothing inherently progressive about borrowing. It is a tool. We
should use the fiscal space available to provide us the time to introduce
reforms to sustain long-term macro-economic stability and growth.
Shift tax from labour and the productive economy to capital, wealth,
property, and unearned income: net assets (wealth) tax, treatment
of capital and labour income equally, substantial increase in
inheritance and gift taxes, etc.
Shift towards higher environmental taxes combined with a
withdrawal of environmentally damaging subsidies.
Shift from income tax to social insurance; to provide security to
people in critical times of need: illness, unemployment, family life,
back to education, old age, etc. A low-tax, high-insured economy.
Greater reliance on government consumption (public services) to
drive living standards rather than private consumption.
A Supplementary Budget
• In the event of an orderly Brexit, the Government should bring in a
supplementary budget in the new year. Variables will change – higher
growth, lower/no deficit, lower debt, more fiscal space.
• There would be no bad optics for the Government – as they based the
current budget on a credible worst-case scenario which didn’t arise.
Main points of supplementary budget:
1) Increase social protection payments to at least the level of price rises,
2) More resources for public housing construction
3) Climate repair supply-side measures
4) Living Wage payments of childcare workers (the sector is at point of
breakdown due to poverty wages and precarious working conditions).
• There would be other needs and suggestions.
Beyond Fiscal Fundamentalism
• A progressive strategy will go beyond orthodox fiscal fundamentalism–
pulling tax-and-spend levers once a year to achieve long-term macro-
economic stability. Such stability requires layers of institutions and
practices that go beyond the budget. It requires structural change.
• Workplace democracy – through collective bargaining and other
initiatives - can help tackle low pay, precarious contracts and the
gender pay gap. Outcome: higher revenue, reduced public subsidies
and a more stable ‘wage-led’ consumption.
• Further, it would drive productivity, innovation and efficiencies in the
private and public sectors which would have a significant, identifiable
and positive impact on fiscal policy.
• If Budget 2020 does nothing else it should provoke progressives and
trade unionists to take fiscal policy seriously.