Doing the right thing on Public Finances
Speech by Brian Hayes MEP to the annual dinner of the Chartered Institute of Management Accounting, Conrad Hotel, Dublin, Friday June 9th.
With €50 billion of Irish debt to be repaid in the next 3 years, the Fiscal Advisory Council is right to advise caution.
“Next week Ireland will have a new Taoiseach and a new Minister for Finance. It will be a big change, not just on the domestic political stage, but also internationally in terms of Ireland’s recognisable political figures.
“For the past six years Enda Kenny and Michael Noonan have been the international face of post-crisis Ireland. They worked as a tremendous double-act, especially in Brussels, and are highly regarded for what they achieved. Ireland is now in a much stronger position thanks to their calm and reassuring leadership. Michael Noonan is the second longest current Finance Minister and Enda Kenny the fourth longest serving Prime Minister. We owe them both a huge debt of gratitude.
“A new Taoiseach and a new Irish Finance Minister will have to hit the ground running. Eurozone politics is really a constant interplay between Prime Ministers and their Finance Ministers. An interplay between the European Council and the Eurogroup. The new diplomacy in Europe is essentially financial diplomacy. The Eurozone crisis not only created a new financial governance but also a new political dynamic. The relationship between heads of government and their finance ministers is absolutely crucial in signaling to the EU and the world what Ireland’s future direction is.
“We are just seven years away from the worst effects of the financial crisis. Ireland has come back strongly. Our economy is performing well above the EU average. On the jobs front – unemployment has fallen rapidly. Next year our budget will be balanced. Investment has returned and the banks are slowly returning to the private sector.
“My central message this evening – is that we cannot take for granted the recent turnaround in Ireland’s fortunes. We have to prepare for times when the economic conditions may not be so favourable. And at all times be prepared to guarantee that the public finance position is never compromised for short term political gain.
“We have learnt the hard way. Twice in my lifetime, I have seen a failure to correct the public finance position only to produce sustained economic hardship for our people. The economic history of Ireland is littered with missed opportunities since independence. In short, we must be cautious and prudent particularly given the twin dangers of a hard Brexit and a protectionist United States under Trump. In the same way that the benign and favourable conditions in the UK and the USA helped us emerge from the crisis, both key markets may well prove more difficult in the years ahead. We must be prepared for that.
“Yesterday’s election result in the UK could put our public finances in more potential jeopardy. There is added uncertainty for the whole Brexit process and the chances of no final agreement being reached between the UK and the EU have just increased.
“That’s why this week’s report from the Fiscal Advisory Council is so important. And of course it’s the task of the Fiscal Council to advise and the Government to decide. But it is equally important that the government has regard to what is being said.
“I see 5 golden rules that’s we should try to follow in relation to public expenditure.
– Growth in public expenditure must be lower then where real GDP growth is within the economy.
– Any increase in public expenditure should be heavily skewed towards once off capital investment and not towards reoccurring current expenditure.
– We should measure our public expenditure against similar sized EU economies and benchmark what we spend against what other member states spend.
– We need to put money aside each year, either through additional pension provision of a rainy day fund, for future liabilities.
– We need to make use of all EU opportunities for public expenditure use. We have not used the EIB’s investment plan to good effect so far. These opportunities offer huge potential for infrastructure investment.
“The mistakes of the past cannot be repeated. In ten years (1997-2007) public sector pay and pensions trebled from €7billion to over €20billion. It now makes up a third of all government expenditure and any increase in pay must be matched by not just improved efficiencies and work practices, but further reforming public sector pensions.
“There will always be pressures to spend more. Extra spending doesn’t necessarily mean better services for citizens. It’s a constant exercise of appraisal of projects and new financial commitments to arrive at the right result.
“The idea of a Rainy Day fund after 2019 where €1 billion would be saved away for an inevitable downturn – makes sense from a number of perspectives and sends out a strong message internationally. The question is whether we should wait until 2019. Would it make more sense to start saving now by building up a fund as a counter-cyclical measure? The other important thing to ensure is that we move away from within-year spending – we must stick to annual budgetary plans and resist temptation to splurge any windfall gains on current expenditure. Such gains should only be used for savings in a Rainy Day fund or to pay down our national debt.
“Whatever about expenditure one thing we need to be fully aware of is our national debt. Over the next three years – €50 billion of Ireland’s national debt has to be repaid. Effectively as a country we will be asking the NTMA to work on behalf of every Irish citizen in re financing that amount of debt at the best price available.
“Getting our debt levels down must be a priority for this and the next government. I fully agree with Michael Noonan in not spending any of the proceeds from the sale of AIB. We should part save it especially for future pension liability, and part write down the national debt. The markets are watching and will interpret the use of AIB proceeds for expenditure purposes as a warning sign from Ireland. That in itself could increase the cost of Irish debt – negating any advantage of selling AIB.
“Another area of concern has to be around sustaining taxation levels across all heads. For the PAYE sector which is now contributing €19 billion of all tax by comparison €12 billion ten years ago, there is some limited scope for reform. Already this year a small gap in expected tax revenue has emerged. While I’m confident that this position can be rectified – we have to be vigilante. Of greater concern is the fluctuating nature of the Irish Corporation tax take. What would happen if this tax Head under performed by €1billion or more? In the last three years, Corporation tax receipts increased from to €4 billion to €7 billion. It’s a position that we need to monitor closely, especially given the views of the new US administration when it comes to company tax reform there.
“The new Taoiseach and the new Finance Minister need our support in keeping the government on track and bedding down the recovery which is clearly underway. Yes, we face risks. Not of our making. And the EU in responding to Brexit has to and will help us deal with the fallout from Brexit. But we should not impose upon ourselves new risks, self-imposed risks. At this stage in the economic development of Ireland, what is needed is a strong hold on public finance. Doing the right thing now will pay dividends in the future. Let us not forget the legacy of stability and calm that Kenny and Noonan have left us.