Every Irish Budget since 2008 has been Contractionary

The Irish Budget gets much media attention and the process itself is now more transparent than in the past, although the net impact on demand in the economy is generally small and certainly far less important than developments in employment and wages. Indeed, given the scale of mortgage debt in the economy and the prevalence of variable mortgage rates ( declining as a share of the market now but still dominant in terms of outstanding debt) monetary policy has had a far bigger impact, particularly in recent years, and it is surprising that the actions of the ECB and our own Central Bank does not receive more scrutiny from the Oireachtas.

The stance of fiscal policy ( i.e. is the Budget adding to demand in the economy or reducing it) does get attention from the economic community and a standard criticism of fiscal policy in Ireland is that it is pro-cyclical , meaning that the Government tends to boost demand in an already strong economy by  cutting taxes and/or raising expenditute. What is therefore surprising is that an examination of the evidence shows that every Irish budget since 2008 can be said to have been contractionary, at least as delivered by the Minister ( the outcomes are often quite different)

The change in the actual budget is not a good measure of the fiscal stance as the General Government balance is itself  impacted by the economy; tax receipts will  rise in a boom, for example, and fall in a recession, with the reverse operating in terms of government transfers such as unemployment benefit.

These forces act as ‘automatic stabilisers’  in that a downturn will increase a government deficit, thus offsetting, at least in part. the decline in private sector spending , a process which the current Minister of Finance has suggested Ireland would allow in the wake of a significant weakening in activity following Brexit (should it happen). A better measure of the fiscal stance, therefore, is to adjust for the economic cycle, an inexact science to say the least but one that is published in the Budget every year by the Department of Finance. A final tweak is to adjust for interest payments on the debt, which are not at the discretion of the  Government ( and are falling rapidly in Ireland’s case ) to arrive at the structural primary balance, which is the preferred measure of the fiscal stance by many economists, including those at the IMF. For example, the 2019  Irish Budget projected a primary surplus of 1.4% of GDP  or 0.8% when adjusted for the economic cycle.

Using that metric, we can see that the 2008 Budget was the last that could be called expansionary , with a planned structural primary surplus of 0.7% of GDP against an expected 2007 surplus of 1.6%. The following budgets saw massive spending and tax cuts, of course but it is surprising and contrary to the perceived narrative that this contractionary process is still at work. For exampe the 2016 Budget saw a projected shift in the adjusted primary balance from zero to a surplus of 0.5% of GDP. In 2017, the projected surplus rose again, from 0.5% to 1.1%, followed in 2018 by a projected 1.3% from an estimated outturn of 0.9%. In 2019 the change in stance was marginal, it has to be said, but nonetheless the projected adjusted primary surplus still rose, to 0.8% from 0.7%, with much larget surpluses projected over the coming years.

These may never materialise , of course, and as noted the implied stance at the delivery of any budget can look very different at the end of the year in question. Moreover, the  above takes no account of what the budgetary position might have been had the suthorities not made the discretionary choices they did, and again it is a common charge in Ireland that  governments have tended to spend  most of  any tax windfalls. One can  therefore debate whether  fiscal policy could and should have been tighter but it is the case that in terms of the actual policy stance as  delivered by the Minister it is over a decade since we have seen an expansionary budget.