Promising tax cuts and increased spending just doesn’t add up

Posted: March 15, 2015 in Economy, Elections, EU, Fiscal Rules, Recovery

Have you ever heard of the expenditure benchmark? Do you know how to calculate a structural deficit? Can you explain the interaction between the debt and deficit rules?

If the answer to these questions is no, don’t worry. You are obviously a well-grounded person with a good work life balance.

If the answer is yes, well you clearly need to get out more.

Either way these fiscal rules are going to shape your life and that of your family and community for years to come.

But what are these rules, how do they work and where did they come from?

The Maastricht Treaty heralded the introduction of the Stability and Growth Pact in 1998. Member states had to keep their deficit to 3% of GDP and debt to 60% of GDP.

The maths behind these targets was pretty arbitrary. Support from politicians and economists was mixed, with some saying that the rules were inflexible, especially during times of recession.

But at least the targets were tangible and measurable.

The real problem was that hardly anybody kept to the rules. Some of the worst offenders were the larger states such as Germany and France, who insisted on the introduction of the rules in the first place.

During the first seven years of their operation only eight member states fully complied, Ireland being one.

From 2003 the EU as a whole and the Eurozone within it were in breach of the rules.

Something had to be done.

For the technocratic geniuses in the European Commission the answer was to tighten the rules.

In 2005 changes included country specific targets against which member state progress towards the rules could be assessed. It was also agreed that windfall revenues, such as those from sale of state assets, should be used to reduce debt rather than invest in social and economic development.

In 2011, amidst the panic of the Eurozone crisis, even greater surveillance of member states budgets was introduced and tougher sanctions for those who breached the rules.

Key changes included the introduction of an Expenditure Benchmark tying increases in public spending to growth rates averaged out over 10 years and a Debt Break requirement to reduce the portion of debt above 60% of GDP by 1/20th annually.

Failure to comply with these rules could result in fines of up to 0.2% of GDP and 0.5% of GDP respectively.

These tougher rules were given added legal weight when they were enshrined in the Austerity Treaty in 2012. Though the real significance of that treaty was the introduction of the so called Golden Rule requiring member states to maintain a structural deficit of 0.5%, a target which is neither tangible nor measurable.

Taken together the Expenditure Benchmark, the Debt Break and the Golden Rule place significant restrictions on member states budgets.

The Expenditure Benchmark and Golden Rule will only start to apply to Ireland 2016, with the Debt Break coming into force from 2019.

So these are the rules within which spending promises made by political parties in the run up to the next general election will be made.

But what do them mean in practice?

In reply to a parliamentary question by Sinn Féin Finance spokesperson Pearse Doherty on December 3rd last year Finance Minister Michael Noonan set out governments projected growth in spending through to 2019.

He said that that Government could spend an extra €400m in 2016 followed by an additional €1.5bn on average in each of the following three years.

The 2016 increase is already effectively spent as the Minister has made clear his intention to further reduce the marginal rate of income tax by 1% and raise the entry point by €1000, at an estimated cost of €405m.

This means that there will be little or nothing else for government to ‘give away’ in Budget 2016.

It also means that if they want to cut taxes and keep to the rules then they will have to limit spending increases to €1.5bn annually from 2017.

Given the demographic pressures that impact on a range of government services from health to pensions this means that there will be very little to offer in terms of increased investment or improvements in services.

So when you hear a politician promising to spend more on health or education or childcare while at the same time promising to cut taxes, chances are they are making promises they can’t keep.

Even if Michael Noonan secures some additional flexibility in the application of the Expenditure Benchmark, on the back of the decision by the European Commission not to sanction France and Italy for their breaches of the rules, it is unlikely to give him much room for real social and economic investment.

And this is where the real problem lies. Our social and economic infrastructure is in desperate need of investment.

Addressing the crises in our health, education, childcare, water and housing systems –to name but a few- requires additional investment.

Reversing the rising levels of poverty, deprivation and inequality requires additional investment.

Reducing our reliance on carbon fuels and promoting environmental sustainability requires additional investment

Ensuring that job creation is regionally balanced and provides people with secure and well paid employment requires additional investment.

Building a better fairer Ireland requires additional investment.

No government can generate the levels of investment that our society needs unless they are willing to increase the tax take as a percentage of GDP and renegotiate the design and application of the existing fiscal rules.

Failing that we will continue to live in a two tier society in which access to secure well paid employment will be determined by age, gender, nationality and address while access to housing, health care, childcare or education will be determined not by a persons need but by their bank balance.

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