Echoes of bust to be heard in boom
We live in a society, not an economy, the argument goes. A fuller truth, however, is that a modern society needs an economy to prosper and a modern economy needs a stable society to function. In the decade during which the economy failed, society suffered greatly through the implementation of harsh austerity. During those years, there were times when the normal functioning of society was threatened. Thankfully those days, by and large, have passed, although the ills within society are still far from settled. It is to be welcomed, however, that the economy is now in good shape. It should follow that the ills within society will be resolved. In the absence of stable public finances, however, that will not happen. Worse than that, those threats to the normal functioning of society may re-emerge.
The State’s budgetary watchdog has strongly criticised the Government for “repeatedly” missing its own financial targets and for failing to manage the public finances in a prudent manner. The Irish Fiscal Advisory Council has said improvements in the Government’s underlying budgetary position have effectively stalled since 2015, despite the favourable economic climate. It has claimed that Budget 2019, which allows for a €4.5bn spending increase next year, was €1.1bn above a target the Government set down only four months earlier in its summer economic statement, and was “not conducive to prudent economic and budgetary management”. The council also said repeated failures to prevent “unbudgeted spending increases”, most notably in the area of health, over several years had left the State’s finances exposed to the next downturn. Last week the Government approved a €645m supplementary budget to cover overspending in the HSE this year, using a substantial portion of the State’s corporation tax windfall to plug the hole in its health budget. The HSE has now exceeded its allocation by almost €2bn in the past four years. The Fiscal Advisory Council has said the Government is growing spending at an unsustainable rate and is failing to use the upswing to insulate the economy against the next downturn. It has said that while risks to the economy are not as high as they were in 2006 and 2007, “there are echoes of it”. This is an alarming statement, which should serve as a warning to the Government and all policymakers.
In defence of the Government, the Taoiseach, Leo Varadkar, and the Finance Minister, Paschal Donohoe, while acknowledging the criticisms of spending, said this was done for good reason because of the need for spending in housing and health. In itself, this has echoes of the boom-time governments which pointed out that opposition politicians had urged it to spend more. Both men also said that the European Commission had found the budget compliant with the Stability and Growth Pact.
The warning signs are there, however. When these warnings are set against the risks associated with Brexit, global trade wars and a slowing world economy – a natural downturn in the cycle is coming – then the Government must take heed. When the Government has it does not necessarily mean it should spend it – or spend it all. It would be unforgivable should another boom be blown. We live in a society, but its stable functioning is driven by a healthy economy.