After an election campaign marked by extravagant promises that went way beyond what is prudent given global economic threats, now is the time for wiser counsel to prevail when it comes to the programme for government. What is agreed between the parties needs to be realistic about what the public finances can afford, and what the economy can deliver.
Yesterday’s timely report from the Fiscal Advisory Council provides a vital framework for approaching this task. The advice of the council was largely brushed aside in drafting manifestos. Now cooler heads need to take greater heed of its expert insights.
It’s in the interest, not only of the country, but of the incoming government, that the economy performs well. There may be enough economic turbulence ahead without unforced errors that would harm the economy and jeopardise their re-election prospects.
The first important advice from the council is that the new government should set out suitable rules to guide spending and taxation choices for the coming five years – and stick to them. Those rules should provide for a steady but affordable improvement in public services, and avoid the need for big cutbacks late in the life of the next government if the external environment deteriorates.
The second piece of advice is that the government, at the beginning of its term, needs to get to grips with how health spending is planned and managed. Big overruns in the health sector in recent years have been accommodated because tax revenues were buoyant. But unplanned expenditure has not meant commensurate improvements in services, and has sometimes gone to lower-priority areas. Instead, a steady improvement in services should be planned and implemented on the basis of clearly-established priorities.
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The council also advises that the government take into account the uncertainties about future global economic developments. Norway, for example, has saved much of its revenue from North Sea oil to be ready for a future when that oil bonanza is no more. The government will need to plan how it would manage a possible dramatic reduction in the windfall revenues from corporation taxes. Ireland doesn’t want to risk a fiscal crisis if corporation tax revenue falls sharply, possibly in response to changes in US tax arrangements. The council also warns that Ireland needs to diversify its economic portfolio, and grow other sectors of the economy. We are currently relying on a handful of multinational firms in a couple of key sectors for a huge share of government revenue.
Of course, in negotiating a programme for government, it is natural that each party will seek to deliver on its election promises. The easy, and lazy, approach, is to aggregate all the manifesto proposals of the future partners into a composite programme. A much better approach would be if each party negotiated to exclude the less wise promises from the other party’s manifesto. That would minimise the risk that the resulting agreement inflicted unnecessary damage on the economy.
In the final election debate, Micheál Martin indicated that, if things got choppy, he would avoid cutting taxes. Simon Harris indicated that he would slow the roll-out of new services. Adopting a bit of both approaches could help trim manifesto promises to fit what the economy can actually deliver. Ideally, the programme for government should explicitly state that all commitments are contingent on the wider economic picture, and the pace of planned delivery should also reflect that.
All parties billed increased investment in housing as their top priority. While there are substantial funds available, there is a lack of capacity to deliver, which needs to be tackled. Our economy is short of building workers. Without tackling bottlenecks, extra spending will just push up construction inflation. Most voters want to see more housing supply, and greater affordability, not higher house prices.
Productivity in Ireland’s building industry is low. The council points out that Ireland is slow to embrace modern methods of construction, and the model of off-site manufacturing and on-site assembly of new homes. This needs to happen at scale, something only the Government can deliver on. Building timber-frame housing in factories is not only speedier and easier to regulate for quality, but it also saves on emissions-heavy cement, and so benefits the environment. It’s a win-win.
If the new Planning Act doesn’t deliver more certainty, and quicker decisions, urgent remedial action will be essential.
In a fully employed economy, producing more houses, for example, will require some reduction in growth elsewhere to free up the necessary labour. The programme for government must respect this reality.
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