It is now received wisdom that the Irish authorities pursued bad or at least inappropriate economic policy in the years before the 2008 crash .Fiscal policy is usually seen as one culprit, with Budgets perceived as fuelling the boom rather than dampening down economic activity. Fiscal policy should have been counter-cyclical, it is argued, with the government of the day seen as culpable in not’ doing the right thing’. If we ignore the hindsight bias present in such analysis it also begs a simpler question- what if the electorate does not reward prudent policies and prefers what by normal economic criteria would be considered reckless ones?
In Ireland’s case the counter-cyclical argument is that the government should raise taxes and/or cut discretionary spending when the economy is growing too fast ( leaving aside the problem of establishing what is sustainable growth at the time). Yet commentary on the Budget and the monthly Exchequer returns is predicated on exactly the opposite- strong growth in tax receipts is seen as opening the door for higher public spending and ‘ a giveaway’ when next the Finance Minister delivers his Budget address to the nation.
A glance at the 2007 general election manifestos, for example, shows that all the main political parties envisaged tax cuts and further strong growth in exchequer spending . Were the politicians being irresponsible or simply rational, based on the belief that electorates want higher spending and lower taxes and will not reward a government which indeed adopts a counter cyclical policy, even if the need for that was perceived clearly at the time ?
There are additional constraints other than the electorate, although perhaps not well understood by voters. One is the fiscal rules imposed by membership of the euro, and these have tightened considerably since 2010, including the stipulation that Ireland will need to limit current government spending in the medium term and to run a persistent Budget surplus when adjusted for the economic cycle. It remains to be seen what role these constraints will play in shaping the next general election.
The new fiscal pact also resulted in the setting up of the Irish Fiscal Advisory Council, which is there to assess the budgetary stance and monitor compliance with the fiscal rules. Yet it does not appear to resonate with the public and the government has ignored its recent advice, to no great media clamor or cost in terms of public opinion.
The markets, too, play a role, and can punish profligate governments. Yet bond yields across the euro zone are generally at record lows, despite the fact that debt burdens are still rising, so QE has apparently trumped that potential constraint, at least for a while.
The issue of the electorate’s role in shaping policies is currently on show in Greece, where the new Government is seen to have a mandate to end austerity, kick out the troika and yet secure additional funding from Greece’s creditors. It is unclear how they can pull this off but the electorate has spoken. Yet the same electorate has tolerated the fact that no Greek government has run a Budget surplus in 34 years ( and no doubt longer but that is the limit of the IMF data base) with the average deficit amounting to 7.7% of GDP over that period. Clearly the Greek electorate are willing for future generations to pick up the tab. Some might say this is irresponsible while others seek to blame the creditors for funding what must qualify as reckless behaviour.