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Budget Ritual and Reality

John Bradley

In calm and predictable economic weather, budgets can be rather dull affairs. But while most of the ways that organised interest groups in society seek to promote their sectional advantage are well hidden from view, during the budget process these societal trade-offs take place in full view and in stark fashion. The annual budgetary process starts with the preamble in the media, now elongated to many months of frenzied speculation, leaks, hints, kite-flying and argument. Organised interest groups lobby government in public and – no doubt more effectively – in private. Political positions inside the government are squared, and pre-budget arrangements are agreed.

When budget day eventually dawns, there follows the gala performance, with the Minister of Finance, in these days of coalition government accompanied by the Minister for Public Expenditure, posing uncomfortably with the electronic version of the speech which he then proceeds to read in excruciating detail to the packed Dáil chamber. Then the opposition spokespersons attack the budget, the details of which they have just received and cannot possibly have absorbed. Later in the evening radio and television media engage in an orgy of debate and argument over the most controversial and newsworthy features. On the following day national newspapers devote enormous space to further comment and provide ready-reckoners to permit every possible combination of single and cohabiting citizens to work out how their livelihood is likely to be affected. Then gradually the whole circus drifts away and a kind of post-budget peace descends, interrupted only by second thoughts during the formal votes on the implementing Finance Acts in the Dáil.

Our most recent Budget 2015 followed this general ritualistic pattern but was different in one vital aspect. In a sense that we should not yet get too excited about, it represented a partial restoration of economic policy sovereignty after more than four years when almost all economic policy decisions were dictated to the Irish government by the international institutions who had bailed the nation out of imminent, self-inflicted bankruptcy. During those years of externally enforced austerity everyone fully understood that when the Minister delivered his budget to the Dáil, he was in much the same position as hostages of the Islamic State who are obliged to denounce ritually to camera the actions of their own governments. Perhaps with the saving grace that in the budget speech the gun or the sword that ensured compliance to the captor’s will remained out of view. But we all knew it was there.

For Budget 2015 the crude coercion by gun and sword was removed, but the Minister was still obliged to function within a wider set of EC-agreed constraints for the members of the euro zone, designed to prevent any premature and ill-considered (but presumably popular) dash to higher public spending and lower tax rates that might again destabilise the public finances. Borrowing had to remain low and the debt burden reduced.

For the recent budget it is ironic that the economic policy experts in the institution that had been set up by the Minister during the early years of austerity to provide budgetary advice, the Fiscal Advisory Council (FAC), had issued very stern warnings in the days before the budget of the absolute necessity to continue with austerity in the form of yet further cuts in expenditure and absolutely no lowering of tax rates. The FAC logic seemed to be that if there was any conceivable risk of circumstances arising in the future that might precipitate a need for cuts, best implement them now. However, saner political logic prevailed. With a modest resumption of growth, and with tax rates pushed, and effectively remaining, higher than the pain threshold, tax revenue buoyancy was likely to permit a very minor increase in public expenditure at a time when Ireland’s growth had been boosted by a rapid UK recovery and had outperformed the slow-growing euro zone economies.

However, we now live in an EU that is very different from the pre-recession world, and Irish budgets are framed accordingly. An urgent requirement for tighter oversight and control by the centre (EC and ECB) over economic and financial governance at the individual member state level had been precipitated by the international banking crisis of 2008 and subsequent global recession. In the cases of some particularly vulnerable EU states, domestic financial and fiscal crises unfolded and the consequences posed an existential threat to the very survival of the euro.

The institutional designers of the euro zone in the 1990s had never anticipated having to face a crisis of the kind that unfolded during the past six years. Light touch budget oversight by the European Commission, combined with local regulation of national banking systems, had worked for the decade prior to the crisis. However, it was then cruelly exposed as inadequate to handle the banking failures and budgetary problems that crippled Ireland, Greece, Spain, Portugal and Cyprus, and even threatened to engulf Italy. The protection of the euro required a series of major programmes of financial assistance by the EC, the ECB, and the IMF which were implemented for extended periods in some member states, including Ireland, accompanied by close and intrusive external oversight of domestic budgetary matters with binding constraints placed on national fiscal autonomy.

In media and popular discussion these binding constraints quickly came to be characterised as a process of “austerity”, since they mandated drastic and painful actions to reduce fiscal imbalances through combinations of public expenditure cuts, tax increases and the sale of state assets. However, these remedial actions had the inescapable consequence of reducing economic growth in the targeted vulnerable member states at a time when there was little or no buoyancy in the global economy that might have partially offset some of the negative impacts of national austerity. Although the manner in which austerity was negotiated and implemented remains an area of controversy, there is now a grudging acceptance that the fiscal restructuring, in conjunction with financial aid packages, at least prevented further deterioration or collapse in the public finances of the assisted states and has permitted a slow return to fiscal balance and the resumption of growth. The social costs of austerity, which had to be borne in the main by the citizens of the assisted states, were considerable and served to undermine popular support for EU institutions. But even here, Euroscepticism is more virulent in the larger, wealthier states such as the UK, France, the Netherlands etc than it ever was in the “bailed-out” states. Even in Greece, the state most seriously affected by austerity, there was a broadly based understanding by its citizens that life within the euro zone, however austere, was less risky than the uncertainties that they would face in a life outside the euro zone.

It is with a certain grim realisation that I reflect on the fact that I have lived through three catastrophic Irish recessions that were largely or completely self-inflicted. The crisis in the mid-1950s occurred in a Europe that was recovering rapidly from the devastation of WW2, but where Ireland continued to isolate itself behind high tariff and other stultifying trade barriers. The crisis of the early 1980s was caused by a wildly extravagant misapplication of Keynesian budgetary expansions, leaving the economy completely vulnerable to the onset of the second OPEC-inspired global recession. The crisis of the late 2000s was caused by a complex mixture of bad budgetary governance and failure to regulate the local banking system, leading inexorably to an unsustainable property bubble and precipitating first a banking collapse, followed shortly after by a loss of fiscal sovereignty. So when it comes to creating and then dealing with serious fiscal crises, Ireland has previous “form”.

There will always be scope for internal debates about how any adjustment should be carried out, particularly in terms of its likely distributional consequences. But during times of serious fiscal crisis, domestic policy-makers always lose, either explicitly or implicitly, large elements of the policy autonomy that they could exercise under more normal conditions or when they had anticipated during good times the need to face challenges during bad times and had made the necessary preparations.

The really important question that we will face in the coming years is whether we can trust governments in Ireland to take wise budgetary decisions that are in the wider, long-term interests of citizens rather than in the narrow, short-term interests of politicians, organised lobby groups and powerful banks. The antiquated and often dysfunctional nature of our public institutions and the dreadful lack of openness in decision-making leaves us vulnerable to a future re-run of self-inflicted economic disaster.

3/11/2014

John Bradley was for many years a research professor at the ESRI and now works as an international consultant in the area of economic and industrial strategy. He regularly advises the European Commission, the World Bank and other international organisations and governments on policy issues related to promoting long-term economic growth and development.

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