Economic Policy; The Budget: dodging a dilemma
The economic background to Gene Fitzgerald's first Budget could scarcely have been less favourable. Government borrowing was 145 per cent of GNP and the annual deficit on the balance of payments was more than £700 million or 9 per cent of GNP. For the second successive year the borrowing targets set in the Budget had been missed by large margins; in each case, actual borrowing far exceeded planned levels. There was a lot of measured comment about the incontrovertible deterioration in the national finances, much of it responsible and non-partisan.
But in addition to the problems arising from the severity of the recession and the state of the finances, Mr. Fitzgerald was faced with the fact that an election must take place by June 1982 and more than likely earlier.
The dilemma was obvious. Would he confound the political pundits and take the first difficult steps down the road to financial propriety? Or would he present an election Budget, postponing yet again decisions which ultimately have to be made and adding further to the already pervasive air of economic unreality?
Towards the end of his speech, Mr. Fitzgerald made the following appraisal of his own Budget:
"Exchequer borrowing will, as a result of this Budget, be reduced from last year's figure of 14 per cent of GNP to 13 per cent this year. This represents substantial progress. It might be argued that, ideally, the reduction in the. . . borrowing requirement should be greater. However, harsh measures could cause severe hardship and unemployment. . . . . . particularly at this time of world recession. That. . . is also the view of the more responsible commentators (who) recognise that appropriate remedial action should be effected over time."
It will be recalled that the 1979 and 1980 Budgets contained borrowing targets of 1O per cent of GNP but they proved to be elusive. The target for 1981 is less ambitious but, on the face of it, seems to involve some move in the right direction.
But before accepting the Minister's self-appraisal, and assessing his strategy, prudence dictates that the revenue and spending estimates on which the Budget is based be subjected to close scrutiny: the credibility of Budget estimates is a casualty of the experience of recent years. The result of such a scrutiny is disturbing.
The Government's pre-Budget estimates of revenues have been a source of controversy in the last two years. This year, however, the estimates of tax revenues have been widely regarded as realistic and by some as even conservative: without changes in rates, income tax revenues were expected to increase by 21 per cent and the total tax yield by 15 per cent.
However, there appears to be a highly optimistic estimate of revenue from non-tax sources. The Post Office strike of 1979 badly disrupted the flow of funds to the Exchequer. In 1980, the Government expected to collect the lost Post Office revenues and estimated that it would collect £268 million in total from that source. The amount obtained was £202 million. Undeterred by this outcome, the Government produced an estimate of £284 million for revenues from Posts and Telegraphs for 1981, an increase of 40 per cent over the 1980 out turn. Part of this projected increase was attributed to further recovery of outstanding Post Office receipts from 1979!
It is the estimates of current spending, however, which have been greeted with the greatest scepticism. Before the effects of the Budget measures are allowed for, current spending was estimated to increase by only 9 per cent in 1981. These estimates allow for the payment of the second instalment of the National Understanding; the increase in expenditure on non-pay items is restricted to 3 per cent in a year in which the forecasted inflation rate is around 15 per cent. A similar expenditure - pruning exercise formed the basis of the Book of Estimates for 1980 but, as the large number of supplementary estimates testifies, the Government failed to control its current spending which exceeded its post-Budget estimates by over 5 per cent.
This year's estimates seem unlikely to fare much better unless there is a serious effort made to treat them more as cash limits than vague aspirations. Already the representatives of the Health Boards are lobbying the Minister for Health about the effects on services later in the year of keeping expenditure within the estimates - and it's only the beginning of February.
As a result of the revenue and spending estimates, Mr. Fitzgerald's declared opening deficit was £524 million. If the non-pay element in current spending had been budgeted to increase in line with prices - allowing no real growth - the deficit would have been above £650 million. The major provisions of the Budget were the increases in Social Welfare payments, estimated to cost £111 million net, various concessions to farmers costing £35 million and the changes in personal income tax costing £60 million. In addition an extra £80 million was allowed for special pay increases in the public sector above the terms of the National Understanding.
To offset these net spending increases, amounting to almost £290 millions, the Minister raised indirect taxes by an estimated £129 million and he announced increased Post Office charges which will yield £35 million. A change in the date on which corporation taxes must be paid is expected to yield a once-for-all increase in revenues of £66 million. When Departmental Balances of £45 million are taken into account, the current deficit would have been, on the Minister's reckoning, £540 million. However, a further £25 million was subtracted from the deficit: this was attributed to the savings expected to be achieved from "rationalisation in the public sector". As a result the Minister could claim that he had lowered the current Budget deficit in nominal as well as in real terms.
Grounds for doubting the realism of the opening deficit were discussed earlier; some aspects of Mr. Fitzgerald's speech provide further grounds for doubting the final deficit. Last year a sum of £100 million was set aside for special pay increases in the public sector; it proved to be quite inadequate. This year a sum of £80 million has been allocated for the same purpose.
Had the Minister, in announcing this, made a commitment not to exceed it under any circumstances, the estimate might have gained credibility. But his actual words can scarcely have struck terror into the hearts of the public sector unions:
". . . . in the present critical situation, (the Government) would hope that public servants would have regard to the greater degree of security attaching to their employment and be prepared to moderate, or not to press, claims which they otherwise would consider justified. I would earnestly ask all concerned to consider the matter seriously in the national interest. Failure to respond to this appeal will regrettably mean the imposition of further taxation and reduction of services."
It appears that the Minister would be willing to increase the burden on the general tax-payer rather than simply to say "no" to special claims in the public sector.
Scepticism about the £25 million saving due to public sector rationalisation has been voiced by a number of commentators. If greater efficiency is achieved in the public sector it will be reflected in the final expenditure figures for the year. It would be more appropriate to claim credit for it then, than to include an apparently arbitrary figure in the Budget speech; its presence seems to be largely for its cosmetic effect on the stated current deficit.
The Government has placed great emphasis on its plans for capital spending in 1981. It adopted the unusual step of publishing them twice in January: first, in summary form, in the "Investment Plan 1980" and then, in greater detail, in the traditional Public Capital Programme. The proposed increase in the capital programme is 36 per cent over the actual 1980 level. Of the £1733 million to be spent on the programme, £781m. or 45 per cent is allocated to infrastructural investment. The ESB and the telephone service are the two major recipients, significant allocations also go to the road construction, sanitary services and transport facilities. Industrial credit and promotion is allocated £334 million or 19 per cent of the total; two-thirds of this amount goes to the IDA. Planned investment in social programmes is £386 million, 22 per cent of the total and most of the residual is allocated to investment in agriculture.
Before considering the implications of public spending on such a large scale for Government borrowing and the economic outlook, the question of the quality of the investments being undertaken must be asked. It has been observed that impressive levels in Ireland have not been accompanied by equally impressive growth rates of GNP, thus begging the question of the nature of the investments undertaken. Of the investments proposed for 1981, it's hard to argue with those in roads, business telecommunications, electricity generation and some other areas. What the Investment Plan and Public Capital Programme do not provide, however, is evidence that a systematic effort has been made to weed out all projects whose return doesn't justify the expenditures.
There was one significant novelty in the Investment Plan, which was the proposal to involve the private sector in public investment projects. The exact nature of private sector participation was left vague; the possibility of wholly private ventures as well as joint ventures was mentioned. The vagueness did not prevent the Government from putting a figure on the amount of money it hoped to raise from private sector involvement - it is £200 million.
When the Government's expected current Budget deficit is combined with its plans for capital spending, the result is the amount of money that has to be raised by borrowing on other (non-tax) means. The Government estimates this to be £2335 million in 1981, 26 per cent more than the 1980 out turn. Of this amount £207m is provided by Exchequer internal resources and the European Regional Development Fund. In his Budget speech, Mr. Fitzgerald announced that the Exchequer borrowing requirement was £1296 million, 13 per cent of GNP. It may be asked where the remaining £832 million will come from.
There are two sources, one familiar and one novel. The familiar one is the State Companies and Local Authorities. The State Companies have been borrowing at a rapidly growing rate in the last two years. There was a 29 per cent increase in 1979 and a 58 per cent increase last year. By the simple expedient of increasing the amount of (state guaranteed) borrowing undertaken by the State companies themselves rather than by the Exchequer, on the companies' behalf, the Government can effect an apparent reduction in Exchequer borrowing. This happened in 1980 and. will happen again in 1981; it suggests that Public Sector borrowing is the economically relevant magnitude to consider. (A. Murphy, Irish Times, January 29).
The novel financing device is none other than private sector participation; if the £200 million were added to the Minister's figure of £1296 million, the level of Exchequer borrowing in 1981 on a basis comparable to that in 1980 would be £1496, or 15 per cent of GNP. As already noted, the Investment Plan and Mr. Fitzgerald's speech gave no clear information on exactly how the £200 million was to be raised from private sources, nor, of course, was there any discussion on the implications for the financing of the Exchequer borrowing requirement. Basically it involves substituting one form of Government borrowing for another, unless the Government plans to pull out of a number of its current activities.
If the new type of borrowing proves to be cheaper than the old, well and good. What is objectionable about the way in which this item is treated is that it is a transparent attempt to convey a misleading impression of the time scale of borrowing arising from the Budget and the public capital programme. If the likely excess of actual over budgeted current spending is also taken into account, the Exchequer borrowing requirement could exceed the record level of 16 per cent of GNP achieved by the National Coalition in 1975 and public sector borrowing will be over 20 per cent of GNP.
The macro-economic impact of the Budget will be expansionary. The scale of public spending is such that there will be an increase in employment, although it will be some time before this is reflected in the unemployment figures. Its implications for the Balance of Payments, how ever, are serious.
The current payments deficit in 1980 turned out to be over £700 million. A deficit of this size - 9 per cent of GNP - in the depth of a recession must threaten the viability of the Irish pound's exchange rate in the EMS in the medium term. In 1981 the deficit will increase, as the Minister himself acknowledges; the current deficit could well exceed £1000 million.
The strategy of stimulating the economy in a recession is usually regarded as the appropriate one. But the current recession in the Irish economy is an unusual one. It is accompanied by an extremely large balance of payments deficit and a serious imbalance in the nation's finances. Mr. Fitzgerald has chosen to ignore these two problems in formulating his Budget. His own appraisal cannot be accepted; in no meaningful sense has he reduced borrowing and, in fact, he has done the opposite. The budget shows the determination of the Government to face up to the challenge of ignoring the state of the country's finances.
No analysis of the Budget speech would be complete without a reference to the Minister's rebuke to the critics of Government policy. "There has been a lot of loose comment about the so-called disorder in the national finances. Much of it has been irresponsible and partisan but to those commentators who are genuinely concerned I would say this: the supplementary expenditures sanctioned last year represented for the most part deliberate and considered departures from budgetary policy to meet the needs of the emerging economic situation."
The fact that public sector pay increases were the largest single factor contributing to the overrun of current spending in 1980, helps to put the Minister's reassurance into context. It is also fair to remark that anxiety about disorder in the finances was forcefully expressed by the Taoiseach himself in his broadcast in January 1980: to quote him yet again, he stated that: "As a community we are living (away) beyond our means. . . we have been borrowing enormous amounts of money, borrowing at a rate which just cannot continue. . ."
Unfortunately, it has not just continued, it has been exceeded. The growing disorder in the national finances is the result of irresponsible Government. How this has distorted the general perception of the economic constraints that face the country is shown by the popular reaction that the Budget did not give enough away.