It is a cliché in sports to say that teams should always focus on the process rather the results. Doing the right thing will generate the rewards. Failure is associated with focusing on the rewards without doing the hard work away from the spotlight. This general election campaign reminds of this important point. Over the course of the campaign the focus of attention has been on spending the fruits of the recovery. Parties have promised different splits between spending and tax cuts, and have disagreed on the size of the so-called fiscal space.
This is the wrong emphasis and voters should not be fooled into thinking this is the most important issue to be decided. The critical economic issue in this election is not how to spend the fiscal space, but how to create the fiscal space.
There has been a lot of confusion regarding the fiscal space. What it means in simple terms in the projected amount available to the government if the economy grows at the expected rate and after we satisfy new European spending rules. The emphasis should be on the big ‘if’ in the middle of that description. If the economy does not grow at the expected rate then the fiscal space shrinks; if the economy flat-lines then the fiscal space could fail to materialise at all.
It is forecast by the Department of Finance that the fiscal space available to the government over the next five years is €8.6bn, and it is probable that changes in the deficit rules agreed with the European Commission will add a further €1.5bn. This is not a maximum or a minimum, it is simply a prediction. The final amount of space can’t be known with any degree of certainty at this stage. In addition, in the global economy right now there are more than enough potential threats that should make us cautious on our own economic performance.
That’s why the key factor in the decision to be made on February 26 is which party’s plan is most likely to keep the recovery in place. This is the process. The fiscal space will then take care of itself.
The recovery, obviously not felt by everyone yet, was hard won. It is very difficult to overstate just how far the Irish economy has come from the depths of the recession. It is just over 5 years since Ireland entered the troika programme since it was unable to borrow at market rates. There can be no question but that the bailout was successful in that the economy survived and indeed has thrived since then with unemployment down, net migration down, and wages up. The effect of the cuts in public services that came as part of the correction in our public finances undoubtedly hit poorer people hardest. This must be the case since these are the people that rely on public services the most.
It is right that the recovery in the economy would generate the revenue to redress the damage done to public services during the recession. Voters should consider which plan is most credible for the restoration of these services, though of course it is important to attach a warning that with the prevalence in Ireland of coalition governments, election manifestos can be described less as promises and more as opening bargaining positions.
With regard to tax, it is relevant to note that Irish people do not pay high levels of income tax, compared to other OECD countries. The Irish income tax system is among the most progressive in the developed world, so that those on lower incomes pay much less in income tax than the average OECD low-income earner. Those on higher incomes (such as those earning in excess of 167% of the average wage) pay more than then OECD average. Proposals to weight spending out of whatever fiscal space materialises away from tax cuts is a sensible approach in this context.
We all have a difficult decision to make on February 26. The Irish economy is recovering but fragile. The recovery is not being felt by all of us. The decision is whether to keep with the same government in the hope the recovery will continue and will be shared more fairly, or whether a new approach is needed to spread the results of the recovery more quickly. The economy is a critical point right now, we need to think and choose carefully.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.