Updated 4.10pm
THE SO-CALLED fiscal space has dominated the opening days of the general election campaign.
The term is not nearly as complex as it sounds. Put simply, it’s the amount of money that will be be available to the next government over and above what it is already spending on public services like health, welfare, education and so on.
The money does not yet exist and is dependent on strong economic growth of around 3% over the next five years. But it has now emerged that Fine Gael, Fianna Fáil and Labour had all been miscalculating the fiscal space in recent weeks with the embarrassing result – for them – that only Sinn Féin has its numbers right.
For Fine Gael and Labour this is particularly serious given they claim to have the only credible economic plans for the country over the next five years. But, in fact, the figures they have bandied about in recent weeks have been wrong by a massive €2 billion.
How did this happen?
Less than two weeks ago Finance Minister Michael Noonan told the Fine Gael Ard Fheis that the money available would be €12 billion:
Our Expenditure Rule ensures that our commitments are sustainable by capping the growth of budgetary commitments at below the long-term growth of the economy.
This rule will limit new budgetary commitments to €12 billion over the five years from 2017 to 2021. This is half of the budgetary expansion in the last five budgets in the years which preceded the crash introduced by the Fianna Fail led Government.
As for the Labour party, Public Expenditure and Reform Minister Brendan Howlin said pretty much the same thing at the party’s conference last weekend:
The figures, confirmed by the Department of Finance, given to all the parties in replies by the Department of Finance, is €12 billion and that, I believe, is the figure we should work on.
How did they reach that number?
The two parties based their figures on what they said the Department of Finance was telling them. The department released an information note last week which explained how it calculated the fiscal space.
It said the gross fiscal space was €10.9 billion if economic growth over the next five years is on average 3%. It then included €1.4 billion as a result of the expected relaxation of EU fiscal rules on deficits because Ireland’s economy is performing so strongly.
Included in the note, the Department said that if the next government did not apply indexation then €2 billion would become available.
What’s indexation?
This involves adjusting tax rates and bands to keep up with inflation, which is the rising cost of goods and services. Indexation would also involve increasing social welfare payments to keep up with inflation. Effectively it means that as the cost of living rises, the government adjusts taxes and welfare payments accordingly.
But this is a decision for a government to make, not the civil service. This is why the Department of Finance assumed that the indexation would not apply.
So what did the parties get wrong?
Labour interpreted the Department of Finance figures to mean that the structural balance in 2021 would be €8.6 billion. It then claimed that €2 billion from non-indexation of taxes as well as the €1.4 billion from the relaxation of fiscal rules would create a total space of €12 billion. Fine Gael appeared to do the same.
To further confuse matters, Fianna Fáil leader Micheál Martin claimed on RTÉ News on Wednesday that the fiscal space would be €8.6 billion before claiming the non-indexation of taxes would generate a further €2bn.
However, Labour is now privately admitting that the tax indexation figure of €2 billion was double-counted and should have been included in the €8.6 billion figure.
Who got it right?
It was left to Sinn Féin to clarify matters when it put the following statement in an email to the chief economist in the Department of Finance John McCarthy:
The potential additional revenue that would be generated from a political decision not to proceed with indexation is approximately €2 billion. This additional revenue from not indexing is included in the net fiscal space figure of €8.6 billion. Conversely, the net fiscal space of €8.6 billion cannot be increased from non indexation.
McCarthy responded that this was indeed correct. Therefore the available fiscal space, when non-indexation is included, is €8.6 billion.
This is how much Sinn Féin says is available to spend over the next five years. Fianna Fáil now agrees with that number. A spokesperson confirmed this morning that the party is working off €8.6 billion being available.
What are Fine Gael and Labour working off?
Fine Gael says the fiscal space is €10.1 billion, because it’s including the €1.5 billion it says has been freed-up by the loosening EU fiscal rules, which allow Ireland to run a small deficit in 2018. The party launched its so-called long term economic plan yesterday.
Labour is now also saying the figure is €10.1 billion but adds that it will create additional resources by raising extra revenue. It’s publishing its fiscal plan next week. Speaking today, Howlin suggested that the government, if re-elected, could exceed the €10.1 billion figure:
I believe we will exceed them as we have done in everything we’ve done for the last five years and the fiscal space will be greater than that. But we will act on the basis of prudence.
Why does this matter?
Fine Gael and Labour have consistently criticised the so-called “fantasy economics” of Sinn Féin and have mocked Gerry Adams for his admission that he is not good at maths.
But in this case it appears that Sinn Féin is the only major party to get the figures right. Howlin wasn’t prepared to acknowledge that today, saying only:
I’ve no quibble with Sinn Féin. I do have a quibble with Sinn Féin economics normally.
But when economic competence is all-important when it comes to the next government, it appears the current one screwed up the numbers – and that’s not good for its re-election hopes.
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