A timely warning shot
The Irish Fiscal Advisory Council (IFAC), the independent body established to advise the Government on budget policy, has fired a warning shot ahead of the election of a new Taoiseach and the announcement of a reshaped cabinet. There is no money to try to stimulate economic growth in the budget, it says, and no reason to do so anyway, given the pace of economic expansion. Budget policy has been, if anything, a bit too lax over the past couple of years, it argues, and we need to get back in full compliance with EU rules.
It is a message which the new administration will not entirely welcome, particularly given the extent of the demands it faces for new spending. The Government is already in difficult public pay talks and faces demands to hike significantly the level of investment in social and economic infrastructure. Squaring this with the council’s warnings that we might even be heading for overheating in some sectors will be no easy task.
Behind this lie some important questions about how we should handle the public finances in the years ahead. Minister for Finance Michael Noonan has said that Ireland should aim to reduce the ratio of debt to GDP to 45 per cent, below the EU’s obligatory target of 60 per cent. This has been criticised as likely to not leave enough cash for investment – and the man set to be elected Taoiseach, Leo Varadkar, suggested during the Fine Gael leadership campaign that a 55 per cent target was more appropriate. On the contrary, the IFAC says that given the distortions to our economic data, even 45 per cent may not be low enough.
This may sound like a dry academic argument but it will go to the heart of how we manage our public finances in the years ahead. It is clear that we need to invest more in housing, broadband, roads, hospitals and other infrastructure – and that the State has a role here. But we need to manage this properly, in a way which achieves value and does not endanger the public finances. In putting a focus on the continued risks from our high national debt level, the IFAC is performing a valuable task.