The ESRI’s SWITCH model analysis of the distributional impact of the budget is now available (Irish Times article here). It will come as no great surprise to anyone who actually looked at the numbers that the budget was a good deal more progressive than much of the early commentary suggested. Given the importance of political acceptance under the current circumstances, I cannot understand why the Government did not have this analysis completed in advance and released on budget day.
In addition to the budgetary strategy itself, I hope the Government are hard at work on the political strategy for the four-year plan. Unfortunately, it seems chances are fading of a limited degree of political consensus to support the credibility of the plan. As I have written before, I think it will be essential that people focus on the overall fairness on the package rather than on individual measures that particularly target them — there will be lots of the latter for all of us. The ESRI’s SWITCH model is the best tool available for establishing the allocation of burdens for the plan as a whole. Tim Callan and co-authors show the power of the model at today’s Budget Perspectives conference: paper here; slides here.
In the UK the new government appear to realise the importance of the overall perception of the fairness of package, and the debate there is more advanced. Philip Stephens has a nice piece on the politics of fiscal adjustment today’s FT. (As a read it, it is hard not to think of the damage done by Mr. Sutherland’s fly-in pontificating.) Using the example of changes to child benefit, Stephens captures well the challenges involved with coming up with a package that is widely viewed as fair:
Fairness, of course, lies in the eye of the beholder. Though it might seem entirely reasonable to most people that those earning more than £44,000 a year or so should lose child benefit, the anomalies thrown up as between two- and single-earner couples appear less so. What will ultimately matter, though, is how the nation comes to see the spending package as a whole.
We may know more after the weekend. The title of Brian Lenihan’s Keynote Address at the DEW 33rd Annual Economic Policy Conference in Kenmare is “Current Issues in Political Economy”.
Pat Kenny’s Frontline made for depressing watching last night. The first segment focused on the level and composition of the fiscal adjustment for the next four years with an emphasis on next year. Credit to Dan O’Brien and the others on the panel for being brave enough to be specific about where they would cut.
But given the size of the needed adjustment, I worry that this formula of focusing on specific adjustments one-by-one is just not going to work. For each proposed adjustment – means testing child benefit, cutting public–service pensions, introducing a property tax – the affected group will focus on the negative effect on them and will inevitably try to shift the burden.
Recognising the size of the overall adjustment, I think it is better to start with a plan for the overall distribution of the burden across the income/wealth distribution. The pain will need to be spread broadly but progressively. After recent budgets, the ESRI has provided an excellent analysis of the distributional implications of tax and benefit adjustments using its SWITCH model. This tool could be available prior to the budget to evaluate alternative four-year plans. The key is to make people think about the overall effect on them in the context of how the overall burden is being shared. My sense is that there is recognition a large adjustment must take place and most are willing to play their part — but only if assured that others are bearing their fair share. The alternative of arguing about specific cuts in isolation of the overall distribution of the pain is probably doomed to failure.