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Ireland and UK on different paths to same destination


Chancellor George Osborne's figures are open to correction

Chancellor George Osborne's figures are open to correction

Dan Kitwood

Chancellor George Osborne's figures are open to correction

It was a bit of a puzzle, following the recent British budget. The Chancellor, George Osborne, kept getting contradicted by something called the OBR and the media were quoting the contradictions more than they were the Chancellor.

The mysterious OBR is the Office for Budget Responsibility, which was set up in an attempt to avoid another fiscal train wreck like the one presided over by Gordon Brown.

There is an equivalent body in the Irish Republic - the Fiscal Advisory Council (FAC). This was established to help prevent anything like the Ahern/Cowen fiscal wreck happening again.

But you will not have seen the FAC disputing the contents of Michael Noonan's Budget in December. The two bodies have different briefs.

The OBR actually makes the economic forecasts on which the Chancellor frames his budget and then it says whether his sums add up.

The Irish council also makes forecasts, but the Department of Finance does its own and then bases the Budget upon them. It also judges progress towards the Government's fiscal targets and comments on the results, but in six-monthly reports, not on Budget Day.

Last week the council produced its second report. The first one said that the budgetary targets, harsh though they were, were not tough enough to deal with the budgetary problems. Mr Noonan said he did not agree and that seemed to be that.

This is not quite how it was meant to be. The council has a legal basis and is supposed to be part of the budgetary mechanism, not just another hurler on the ditch.

One might have expected the Department of Finance to produce a detailed explanation as to why it believed that its own corrective programme was sufficiently tough.

Now the council has re-done its own analysis of the question and come up with slightly different results from last time. These may be more to the Irish government's liking, but the need for more serious engagement with government policy remains.

This question of how much "austerity" may well be the defining political issue of the next few years. There is probably a lot of confusion behind the poor compliance with the household charge, but there is a lot of resistance too. That may be a sign of things to come.

A much larger property tax is in the EU/IMF agreement, along with other tax rises and cuts in payments. One can see the makings of the kind of political crisis which usually breaks out at some point in such a rescue programme, as public resistance meets the implacable force of outside lenders.

The FAC still believes that the austerity programme is not severe enough, although it has softened its stance since its October report because the economy has not performed as well as was hoped six months ago.

That is significant. It puts the council at odds, not just with the Government over the speed of correction, but with the troika (or at least the EU/ECB part of it) over what to do if growth is less than expected. And the council is a child of the EU.

Commissioner Olli Rehn has already indicated that the EU is not minded to change deficit targets, irrespective of how the economy is performing. If growth is less than forecast then, by implication, there must be further tax rises and spending cuts, even if these depress the economy further.

The council takes a different approach. In its last report, it advised that the Government should aim for a deficit of 1% of GDP by 2015, rather than the 2.9% set out in the programme. Now, because of weaker growth, it suggests that 1.7% would be in order.

So although the council thinks the government programme is not tough enough, paradoxically it also believes that it should be more flexible. Better, it says, to aim for an agreed, plausible set of changes to taxation and spending and stick to that, even if weaker growth means deficit targets are missed.

In a report not notable for colourful phrases, it even says the country must "avoid chasing its tail". The FAC only proposes and the troika disposes but Michael Noonan might like to think about treating it a little more seriously.

It is proposing something which any sensible government should welcome and its advice can carry weight with the troika, precisely because it is part of the regime which they, in their different capacities, wanted to establish. The IMF bit may already be sympathetic.

The problem with the austerity programme is that despite all the complaints about its severity, it is based on fairly cheery forecasts for growth from 2013, yet still leaves a deficit of almost 3% of GDP by 2015.

That is a slow road to restoring balanced finances. The longer the road, the more likely people are to tire of treading it.

Based on the same growth forecasts, FAC's preferred deficit would see annual government revenues exceeding ordinary spending by 4% of GDP in 2015.

That would require a further €3bn (£2.5bn) of "austerity" than is presently planned, but if achieved, this would provide a strong platform from which to argue for a reduction in the country's accumulated debt burden - or even more freedom to do something about it unilaterally.

If the cheery forecasts do not materialise, flexibility becomes a serious issue. If growth is one percentage point lower than forecast over three years from 2013, a further €5.5bn (£4.5bn) in corrections would be needed to meet the troika targets.

There is every chance that the official forecasts will not materialise. Now may be the time to speed up the structural adjustments to taxation and spending and argue that achieving them on time should be the target, rather than a deficit based on some particular percentage of an unpredictable economy.