So much for the quietest budget in recent years: Today the IFAC has unloaded a bombardment on Budget 2019.
It’s the toughest criticism of a budget since November 2015.
And for a Government that has spoken a lot about ending the boom-bust cycle of Irish economic history, the most wounding criticism is that it is repeating the mistakes of the past and setting up precisely the kind of boom-bust pattern we have experienced before.
In particular it criticises the budget for increasing spending well beyond appropriate levels – or even the levels the Government’s own plans targeted.
The finger of blame points clearly at the inability to contain spending in the health department.
On average that failure to control spending cost €500 million a year since 2014. For this year (2018) that figure will be €600m, after savings in other departments are taken into account. That means the 2018 out-turn in health will be some 9.3% higher than the spending ceiling set in the previous budget.
So far the Government has been getting away with these kind of increases because corporation tax is rolling in – again in ways it wasn’t expecting or planning for.
Budget 2019 ‘not prudent economic management’ – IFAC
Irish Fiscal Advisory Council report
Ideally these extra revenues would be used to reduce debt, creating more space for the Government to run a deficit and spend money during the next downturn.
This is the so called counter-cyclical approach much talked of over the past decade.
But if the Fiscal Council is right, we are heading for a repeat of the old style pro-cyclical policy: pump up spending when the economy is booming (“when I have it I spend it”, as Charlie McCreevy famously said), then revert to austerity when the downturn comes, cutting spending and increasing taxes, and making the recession worse.
The Fiscal Council has been warning of these dangers for the past two years, but now seems to have lost patience with a government that has dropped all pretence of sticking to the fiscal rules and its own budget plans, as set out in the Stability Programme Update and the Summer Economic Statement.
The last time it laid into a government like this was in November 2015, in its assessment of the pre-election Budget 2016. Is Budget 2019 also a pre-election budget?
While other small European Economies have already decisively moved into budget surpluses to prepare for the next downturn, the Irish Government has spent the benefits of ultra low interest rates and very rapid employment growth (bringing extra taxes and lower social welfare spending) on day to day spending.
Interest rates will go up, a recession will come along, unemployment will rise, revenue will fall, companies will not always declare record profits, some will go bust, Brexit could make it a lot worse, as could a trade war or radical international tax changes.
All of these things could happen at the same time. The resilience of the public finances – and their ability to protect the wider economy in an economic shock – is not as good as it could have been.
On past form there will be more spending over-runs in 2019.
For a start there is no funding provision for the Christmas social welfare bonus of about €300m. And then there is that long established €500m annual health overspend. It’s not hard to imagine circumstances in which a big hole could open very quickly in the public finances.
The Fiscal Council says there is still time to turn it around – just about.
Its job as a budget watchdog is to shout warnings when budget policy is about to go off the rails.
Today’s report is a 179-page warning about our budget vulnerability.
Don’t say you weren’t warned.