Spring unsprung - Village Magazine

38May 2015

ITH po-faced pomp the Government has

launched its mutli-annual ﬁscal pro-

gramme, aspirationally titled ‘The

Spring Statement’. A lengthy, over-

manned delivery of the programme

required the strenuous eﬀorts of a score of civil serv-

ants, economists and two ministers to energise the

public imagination. Yet, for all this eﬀort, it smacked of

the vintage  “A Lot Done. More to Do” election

slogan of Bertie Ahern.

The strenuous eﬀorts ﬁzzled out before the speeches

started, for the Spring Statement sounded like self-con-

gratulatory pre-electioneering loaded with promises of

the future that rely on a heavy dose of hope and faith,

rather than sound fundamentals.

The political timing was good as there is Spring in

the air, in public perceptions of the economic recovery.

But there is still an arresting chill in the way house-

holds are feeling improvements in their own lives.

Energising people to buy into a new economic plan in

such an environment requires two things: strong vision

and focus on reality.

Both were lacking in the Spring Statement.

Ignoring the reality that the state continues to

borrow to fund its liabilities, there were promises of

pay rises for public-sector employees and tax cuts for

working people. All underwritten by growth forecasts

that were driven by an optimism not seen since the

days when a soft landing in the property sector was

still showing up in the Department of Finance’s tea

leaves.

The growth and recovery bit in the Spring Statement

was a sort of comic relief that none of us really needed

and few of us really enjoyed. It was also nauseatingly

predictable: we’ve heard this song so many times in

recent years. Based on Department of Finance projec-

tions, the Irish economy is expected to grow on

average by .% annually between  and . To

make things sound more plausible, the Department

referenced in its projections the IMF forecasts from

October . Alas, a couple of weeks before the

Spring Statement publication, the very same IMF came

out with revised forecasts, putting Irish real GDP

growth at an average of .% annually for the same

The unreforming

Spring Statement is

over-optimistic and

spendthrift

Constantin Gurdgiev

OPINION

INTERLOPER

Spring unsprung

May 2015 39

period. The diﬀerence between the two forecasts

amounts to a not insignifcant . percentage points

over the - period.

Diﬀerences in forecasts aside, the Spring Statement

is projecting growth in Ireland to shift away from

exports toward the domestic economy. In line with

this, the Government is expecting investment to rise

.% in , .% in  and on average by %

annually between now and the end of . Domestic

private consumption is expected to grow at .-.%

in - and at just over .% annually for the

rest of the period.

Strangely, all of this growth is going to happen with-

out anything new happening in the economy generally.

Those who traditionally generate demand for new

investment and the supply of goods and services –

entrepreneurs – are simply absent from the entire

document. Another engine for

domestic growth – SMEs – is men-

tioned only in passing, in the

context of already published

plans.

Trending alongside the entre-

preneurs, the self-employed also

got no mention in the documents,

except for one instance referring

to the timing of tax receipts. The

ﬁscal-fodder class – part-time

workers, sole proprietors and the

self-employed – are simply not

considered worthy of Govern-

ment attention, for their votes can

be easily coerced: any alternative

to the political status quo would

mean only higher tax burden on

them, so there is little option but

vote back the existing

mediocrities.

The only growth-focused vision

in the Spring Statement ended up

in the Annex to the document.

Instead of oﬀering anything new it simply rehashed the

already published National Reform Programme of

, and Europe  targets that focus Government

pro-growth agenda on yawn-inducing “areas” of

“improving active labour market policies”, which

entail “reducing costs and improving the eﬃciency of

legal services”, while targeting “employment, R&D,

climate change and energy, education and poverty”.

In short, there is nothing new, nothing tangible,

nothing that can capture public imagination. The

Spring is soggy, wet and grey, according to the

Statement.

Chart 1: Real GDP growth, deviation from the world

(percentage points)

Chart 2: Income and Corporarion Tax share of total tax revenues

(percent)

Source: Author’s own calculation based on data from the Department of Finance and IMF

1992 1994

Ireland (IMF 2015)

Ireland (SPU 2015)

Euro area

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

-1

-3

-5

-7

Source: Author’s own calculation based on data from the Dep[artment of Finance

1984

CGT & CAT, Stamps

Income Tax

Corporation Tax

Value Added Tax

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Noonan

mentioned

just one ‘red

line’ policy

item, the

inviolable and

sacred 12.5%

corporation

tax. Everything

else is an

IOU based on

“if – then”

conditions”

“

40May 2015

If-then promises

Still, whilst any growth vision remains lacking,

launching the Spring Strategy, Minister Noonan said

the government is in a position to implement another

expansionary budget this year and every year out to

 “if this is deemed prudent and appropriate”.

The “if” part – crucial as it may be - is hardly

enforceable, once the train of spending rolls out of the

station. The Government does not strike a year-on-

year pay and pensions deals with the unions. It signs

multi-annual commitments. The Government does not

launch investment projects that can be unwound in the

future – as the botched ones from the past, such as the

Poolbeg Incinerator and Irish Water, exemplify. Once a

Government pet project goes up or rent-seeking vested

interests secure public funding, it takes a national

emergency to cut that funding.

Which brings us to the question as to who will gain

from the Spring Statement.

According to Minister Noonan the state has, this

year, “ﬁscal space of the order of €.bn and up to

€.bn… for tax reductions and investment in public

services”. So, “the partners in Government have

agreed that [this] will be split : between tax cuts

and expenditure increases …in Budget ”.

Does this breakdown make much sense? No. Over

- the cumulative decrease in the deﬁcit can

be broken down into:

• 50% from increased tax revenues,

• 14% from GDP growth,

• 9% from a reduction in net Government expenditure

and

• 27% from other factors.

And over recent years, taxes on ordinary incomes

have underwritten most of the ﬁscal adjustment, while

taxes on corporate proﬁts and capital largely stag-

nated despite record high proﬁts being booked via

Ireland by the multinationals.

Job-creation and wealth-creation both require

reducing the burden of State and taxation on the self-

employed and early-stage entrepreneurs. Domestic

demand growth - that allegedly contributes two thirds

of  growth and more than three quarters of 

growth – requires reducing household and corporate

debt and stimulating domestic investment, preferably

not in property. These too went unmentioned in the

Spring Statement.

Bertie Redux

Meanwhile, Minister Noonan warned that returning

to the days of “if I have it I’ll spend it” or the “even if I

don’t have it I’ll spend it” policy stance taken by the

opposition over the past four years, was by far the big-

gest risk to economic growth and job creation. He may

be right, but his plan for expansionary Budgets into

 is a policy stance consistent with “I might have it

tomorrow, so I’ll spend it today”. “We must never

again repeat the boom and bust economic model”, said

the Minister.

In tangible policy terms, however, to-date, the Gov-

ernment has projected the same policy approach to

growth as its predecessors – targeted supports and

old-fashioned tax incentives for its clients. Just as

before, levelling the playing ﬁeld for companies and

entrepreneurs, getting rid of ineﬃciencies, reducing

political inﬂuence on public contracting and ending

tax-and-spend redistribution of resources from con-

sumers to protected sectors are not popular with the

current Cabinet, any more than they were with Brian

Cowen, Bertie Ahern, and their predecessors.

Aptly, in launching the Spring Statement, the Minis-

ter for Finance mentioned just one ‘red line’ policy

item, the inviolable and sacred .% corporation

tax. Everything else is more of an IOU based on “if

- then” conditions.

Minister Noonan also adumbrated a promise to

“give people security around their income and their

pensions”. But it is very hard to see how this can be

achieved, given the lack of any serious progress on

dealing with legacy debts, and the : split between

tax reductions and proposed expenditure increases in

Government budgets.

Giving Irish taxpayers back €-m in Budget

 will do little, as the Government takes out of

their pay water charges, and as increases in the Local

Property Tax assessments loom.

This is before we consider the pesky ‘if’ in the above

formula for Government IOUs. Consider the growth

scenarios underpinning the Spring Statement

projections.

The Department of Finance says little about actual

interest rates, but does project relatively benign debt-

related costs through . This may be optimistic.

The Department says that: “While unlikely in the short

term, higher policy-induced interest rates would have

a dampening impact on Ireland’s economic activity.

Simulations suggest that a  percentage point increase

in policy interest rates could reduce the level of GDP by

almost ½ percentage points by ”.

Here’s the bad news: current ECB rates are some 

percentage points below the pre-crisis average. If we

are moving out of crisis, that average is moving closer

and closer in time.

Incidentally, the Government growth forecasts do

not hold up to scrutiny when it comes to exchange

rates outlook either. The Department assumes that the

Euro-Sterling exchange rate will remain at current

benign levels through , unchanged on .

Euro-Dollar exchange rates are expected to improve

slightly in  compared to  and then remain

the same into -.

Should the exchange rates reverse the recent deval-

uation of the Euro, the contribution of our net exports

to future growth will fall.

Despite the combined eﬀorts of two departments

and two ministers, the Spring Statement amounted to

little beyond electioneering. Promises of public spend-

ing and wage uplifts – irreversible commitments by a

Government desperate to shore up the collapsed

Labour vote, were oﬀset by promises of undeﬁned tax

cuts. Certainly, the civil service output of papers,

statements, programmes and plans is up dramatically

on the pre-crisis average. The bad news is: there isn’t

an ounce of new thinking there. •

OPINION Constantin Gurdgiev

Alas, a couple of weeks

before the Spring

Statement publication,

the very same IMF

came out with reduced

forecasts, putting Irish

real GDP growth 2015-20

at an average of 2.9%

“