Back in 2005, Colin Hunt and I shared the same pay grade. The trajectories of our earnings have followed slightly different paths since. We were both aides in the 2002-07 government. He was advising Brian Cowen, the finance minister, and I was advising Michael McDowell, the justice minister.
While working for Cowen, Hunt, now the AIB chief executive, did an academic study of the cyclicality of Irish budgetary policy between 1969 and 2003 for The Economic and Social Review. In theory, governments should spend more and tax less when their economies are weak and operating below potential. They should spend less and tax more when their economics are, like today, strong and at close to full capacity. They are aided in these goals by “automatic stabilisers”.
For example, without needing to change rates, tax revenues rise as the economy strengthens while welfare spending grows as the economy falters.
For the period covered by his study, straddling finance ministries occupied by Charles Haughey, John Bruton, Bertie Ahern, Ruairi Quinn and Charlie McCreevy, among others, Hunt argued that automatic stabilisers were “efficiently counter-cyclical”. In other words, they boosted the fiscal impetus in times of economic weakness and weakened it in times of strength.
Hunt found that feasible discretionary government consumption growth operated independently of economic fundamentals. It neither worsened nor ameliorated the economy’s boom-bust cycle. He also argued that feasible discretionary investment growth was strongly and “deliberately” pro-cyclical.
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Two years later, Hunt could put all this into practice in helping to prepare the 2007 national development plan. It envisaged €184 billion of investment over the ensuing seven years.
As an adviser to McDowell, then also the tanaiste, I was marginally involved in that plan’s preparation. Bottom line: for decades, government budgetary policy has exaggerated the ups and downs of the business cycle by being pro-cyclical.
A 2019 study, Cyclicality of Irish Public Spending, done by the Irish Government Economic and Evaluation Service, examined the 1996-2018 period. It found: “All components of spending have tended to increase in times of economic growth and decrease in times of economic contraction.” In other words, it’s not just investment spending that’s pro-cyclical. The study highlighted how cyclical capital spending “ranged from 26 per cent growth in 1998 to a 30 per cent decline in 2011”.
At the International Monetary Fund’s annual meeting in Morocco this month, Gabriel Makhlouf, the Central Bank of Ireland governor, said he would have taken a “less expansionary” approach to the 2024 budget. He warned the fiscal package risked undermining efforts to cool inflation. He queried the merit of some short-term household measures, such as one-off welfare payments.
Like the government’s decision to set an eviction ban for private renters, the short-term political impact of the decision was positive. Yet how will the government eventually reverse out of this policy? In practical political terms, it will be very hard for any government to cancel these payments in future.
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Makhlouf also raised concerns about the government’s decision to break its own spending rule, meant to limit growth in public expenditure to 5 per cent, saying: “It devalues the rule unless you can explain — and the way the government is explaining it is that a lot of these measures are one-off.”
Leo Varadkar, the taoiseach, responded by telling The Irish Times the rule could be changed “depending on the circumstances”. It’s not much of a rule then if it was adopted in 2021 and discarded in 2023.
Andy Farrell, the Ireland coach, called the Rugby World Cup quarter-finals “big boys” rugby. Several state bodies have been set up to promote good economic management and contain costs in our economy, including the Irish Fiscal Advisory Council, the Central Bank and the National Competitiveness and Productivity Council.
But with the state coffers overflowing and an election fast approaching, the big boys in government decided that the rule they had so recently adopted didn’t matter a damn — and neither did the concerns of these important bodies.
There is an irony here. To counter the pro-cyclicality of budgetary policy, the 2019 report said: “It may be prudent to supplement Ireland’s requirements under the EU fiscal rules with a domestic expenditure framework/anchor that supports sustainable expenditure policy in a way that reduces reliance on estimates of the cyclical position of the economy which are known to be problematic.” Well, it looks like we tried that and it didn’t last long. The insatiable electoral focus of the Irish political class saw to that.
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The latest budget adds to the less than illustrious record of pro-cyclical Irish budgetary policy. It deploys rinky-dink accounting that divides spending into artificially constructed “core” and “non-core” elements. Yes, Michael McGrath, chartered accountant — I’m looking at you. The budget raises core spending by 6.1 per cent, well above the 5 per cent limit that the government set itself. And there are plans to breach this rule again in 2025 and 2026. This is extraordinary.
Before he became the UK’s chancellor of the exchequer, George Osborne was a key Conservative strategist. According to The Economist, one lesson he drew from the party’s defeats of 2001 and 2005 was the “baseline theory of politics”. When opposition parties devise spending plans, the media judges them against the government’s medium-term fiscal plans. These plans may be entirely notional “but the media and voters would still treat these numbers as the starting point for any discussion of fiscal policy”.
In the 2015 election, the Tories promised £40 billion of post-election spending cuts, equivalent to 2 per cent of national income, or €5 billion in current Irish terms. When the opposition Labour Party failed to match this goal, the Conservatives argued that a Labour government would lead to higher taxes and more borrowing. Once the Tories were re-elected, the plan for sharp spending cuts was quietly discarded.
Instead of using the 2024 budget to pin Sinn Fein down on future budgetary restraint, the government has invited the opposition to follow its bad habits by projecting repeated breaches of its own spending rule. Dumb economics. Dumber politics.
PS:
Evidence that we live in a self-indulgent age is the low level of attention given to improvements we can make in our lives that are conceptually simple but require discipline to sustain.
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Imagine the demand for a drug that improved your brain health, helped to manage your weight, reduced the risk of disease, strengthened your bones and muscles, and improved your ability to do everyday activities. This drug cuts the risk of cardiovascular disease, diabetes, infectious diseases and some cancers. It even extends your life expectancy.
The “drug” that confers these benefits, according to the US-based Centers for Disease Control and Prevention, is regular exercise. It contends: “Only a few lifestyle choices have as large an impact on your health as physical activity.” And everyone can experience the health benefits of physical activity, regardless of age, ability, shape, size or ethnicity. The only thing standing in the way is laziness.
There’s another “drug” that can improve our lives: marriage. It “is the most important differentiator, with a 30-percentage point happy-unhappy gap” over the unmarried, according to research by Sam Peltzman, a University of Chicago economist. He adds: “No subsequent population categorisation [race, age, wealth, etc] will yield so large a difference in happiness across so many people.” Clearly, it requires more than discipline and fortitude to sustain a marriage, but it does require those characteristics.
We live in an era of self-indulgence and instant gratification. But exercising regularly and sustaining a successful marriage can be investments in delayed gratification that bring rewards significantly greater than any costs.
