2020 will see an election held in Ireland. By all accounts the election is imminent. The 2020 election will be fought, as all elections are, on the basis of promises. That part of the electorate who show up to the polling stations gets to decide the next government, and it will do so partly on how much credibility it chooses to attach to the promises of the various parties.
The electorate will also make its decision in a markedly different macroeconomic context to 2011, and even to 2016. Given where the current government started from, the macroeconomic situation could not really be much better.
The number of people in employment has never been higher. Inflation is relatively low, growth in incomes is a feature of many workers’ experiences, personal consumption is up, house prices seem to be finally moderating, and the government is spending the proceeds of a taxation exercise that has actually doubled in under a decade. The state’s spending on current, capital, and pay has rarely been higher in any category. The latest figures from the Department of Finance show the government choosing to move quickly towards a surplus, while clearly showing their understanding of the risk to corporation tax revenue arising from changes at the EU and OECD levels coming down the line. Bullet point 4 of the press release, which is repeated elsewhere in the latest Finance discussions, is particularly interesting. It simply says:
Implementation of OECD BEPS initiative will likely result in a decline in corporation taxation receipts, making the need to account for reduced revenue essential. Department of Finance
An electorate looking only at the macro aggregates would most likely return some version of the current government, or another coalition version with an almost identical policy mix. So why doesn’t the government get some measure of praise for its handling of the economy? Paschal Donohoe and his colleagues have chosen to tighten before an election. To call that rare is an understatement.
Over on Twitter, IBEC’s Gerard Brady posed the question below, and the echo chamber podcast posed it as well. Obviously these polls aren’t statistically significant, twitter is not reality, and it is just a small indicator, but it’s roughly what you’d expect at the higher end. The likelihood of the government getting a fair crack of the whip for its work seems relatively low.
One might argue that fiscal tightening like this is mere posturing ahead of an election, but the fact is that the opposite behaviour—spending like it was going out of fashion–would be far more advantageous electorally. Also, fiscal tightening is behaviour economists would praise any finance minister for at this point in an economic cycle, absent an electoral contest.
There is a curious lack of symmetry in the public commentary on the economy between praise and criticism, and this is something I’d like to remedy.
Let’s be real about it: the 2016 election showed voters don’t really connect with positive macroeconomic measures like GDP (or its newer cousin GNI*) the way readers of this blog might. Issues at a more micro level dominate, and that is completely fair.
It is also fair to say macroeconomic figures obviously matter. How much they matter, the credit working on getting the macro issues right, to the public is a testable hypothesis, and the election might well provide us the answer.
Naysayers can, will, and should point to the plethora of cock ups and plain old policy failures that have happened since 2016. Lord knows I have, in the pages of the Sunday Business Post and now The Currency. The health and housing situations have not improved at the speed the public want them to. Some large capital spending projects have been poorly executed. All of those are true, all are important. The country’s emergency rooms are bursting. Homelessness remains a scandal. It is not for me to defend the government’s record on these matters. I’m not a strategist for them, or for any other party.
I would however like us to acknowledge that spending more on housing, health, or education or at a faster rate would imply more deficit spending, and further endanger the economy at a moment when the risks from corporation tax falling off a cliff are high, not to mention Brexit and a host of other macro risks might take a chunk of our growth with them, should they come to pass. In this context, choosing not to do some things and to focus on attaining some class of a surplus should be praised. And it is not. I have a problem with that.
Anyone wanting credibility in the forthcoming election should be prepared to talk about the trade-offs inherent in governing an economy like ours, and justify their choices. The trade-off doesn’t quite boil down to “invest by borrowing and spending on infrastructure to increase quality of life” vs “prepare for future shocks by driving increased budget surpluses”, but it’s not far off. Whichever vision the electorate plumbs for is fine, but the trade-off has to be explicit. Journalists and commentators should be prepared to call out parties advocating vast spending increases and lowering taxes just to attain high office. I want to believe we live in a country where endlessly repeated stupid three-word slogans and unsustainable fiscal phantasies have no place.
Musgrave’s 1959 framework applies to the Irish economy. It says that any government must make sure its finances are in reasonable shape, have some view towards resource allocation, and have a stance on resource redistribution. Undeniably, the first objective has been met. The resource allocation and resource distribution pieces seem to me to be where the arguments are going to be during the next general election. Here again the parties of government can make their arguments for themselves.
I’m all for robust criticism where it is warranted, but I think where praise is justified, it should be given.