Jim Power: Prudent policy to come face to face with political reality
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A prominent US economist once said that “the first law of economics is scarcity; there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics".
This recognises the reality of politics where the long-term doesn’t extend beyond the next election, because pragmatic politicians and want-to-be politicians realise that to achieve anything or to affect policy change, one first of all has to get elected and attain power. To get elected, one has to do what one has to do, and very often a populist approach has to be adopted that will rarely tick too many boxes in a purely economic sense.
In recent weeks bodies such as the ESRI, the Central Bank and most notably the Irish Fiscal Advisory Council (IFAC) have warned the Government against engaging in fiscal profligacy – or in simple English to avoid the temptation to spend too much money or cut taxes too aggressively.
This argument has economic logic. The economy is doing reasonably well and doesn’t need fiscal stimulus. Witness the early 2000s when a finance minister infamously said that when he has the money he will spend it and when he doesn’t, he won’t. That is a recipe for disaster, unless the spending is on capital infrastructure investment which can improve the longer-term growth potential of the economy.
There is also a recognition that once government expenditure is committed to, it can prove very difficult and deeply politically unpopular to claw that spending back if conditions change.
It is very easy in the current environment of extreme tax revenue buoyancy to spend money and still run an Exchequer surplus. The risk is that income tax and corporation tax in particular are very dependent on a small number of very large multinational companies. The bodies warning about fiscal prudence are sensibly making the point that if any of those companies see a change in fortune, Ireland could be left with a significant fiscal hole.
However, this ignores political realities. A general election must be held by March 22 next year. After Fine Gael and Fianna Fail performed better than expected in the recent local and European elections, and a poor showing from Sinn Fein, there is obviously a very strong temptation to call an election.
This will be a political call and there is no certainty that an early or later election would deliver electoral success for Government.
My sense is that the Government should deliver the budget in early October and call an election for three weeks later. In Budget 2024, the Government announced a package in excess of €14.2bn and still managed to deliver a budget surplus. Based on what we've seen so far this year, an even larger budget package could be delivered while maintaining a surplus.
The two main parties of Government would hope that two successive very generous budgets could convince enough voters to stick with an apparently successful administration, so why take a risk by handing the reins over to a populist party that has been making all sorts of promises over the past four years? Who knows how the electorate might behave but that is the big call that Simon Harris now has to make.
It seems certain that the fiscal purists will be ignored and a profligate approach to the management of the public finances will persist. It would be nice if there was a greater focus on the quality rather than the quantity of public spending. In relation to taxation, it is clear that a small segment of the working population pay the bulk of income tax, and for those workers the burden is very significant, it would be nice to see some easing of that burden.