‘Hindsight’ provides further justification for reform of budgetary process

The case for an independent Fiscal Council to oversee the budgetary process, as proposed by TCD economics Professor, Philip Lane, some months ago is underlined by two articles in today’s (May 20) Irish Independent.

Examing the government and opposition approach to stamp duty in the run up to the last election, the Independent’s political correspondent, Fiach Kelly notes:
“An analysis of opposition policies at the height of the boom shows Labour and Fine Gael were in favour of reforming stamp duty which would have decreased the amount of tax levied on house buyers…Labour reforms could have increased property prices because people would have had more money to spend on the actual house rather than giving it to the taxman.”
Far from seeking to deflate the emerging property bubble Fine Gael and Labour policies during the election campaign would have further inflated it, he points out.
“During the 2007 election, Labour and Fine Gael published a plan to abolish stamp duty for first-time buyers up to a limit of €450,000. They also proposed restructuring the system for other buyers and no stamp duty up to €100,000,” Kelly writes
“In contrast, Mr Cowen is widely believed to have only reluctantly agreed to abolish stamp duty for first-time buyers in the run-up to the election. His changes were estimated to cost €76m, compared with the estimated €460m for Fine Gael and Labour’s more extensive proposals.

“Then Labour leader Pat Rabbitte criticised former PD leader Michael McDowell for taking five years to realise stamp duty was an unfair tax. This came after Mr McDowell called for it to be immediately abolished entirely for first time buyers. And Labour finance spokeswoman Joan Burton said stamp duty was “savagely” hitting first time buyers when figures showed it yielded €10.5bn for government coffers.”
In a complementary analysis piece, the Independent’s Finance Editor, Brendan Keenan, points to the budgetary surplus of €5bn that fell into the hands of the then Minister for Finance, Brian Cowen.

“What Mr Cowen did in 2007 was park €3bn of the excess by paying off national debt,” he writes “and give away the other €2bn in that year’s Budget. The opposition parties said that was terribly mean. Since the €5bn had been surplus to requirements, why could we not have it back in more tax cuts, or even more spending?”

What Cowen might have done was to use the €5bn windfall, and others that fell into the government coffers in those years, to effectively eliminate the national debt.
“We would have been able to sail through the crash. And Mr Cowen would have been excoriated from all sides,” Keenan argues. “He’d be a hero now, of course, but Mr Kenny would be taoiseach. That’s politics, and it does not sit well with economics.”

The point is that it’s just as, and probably even more, politically difficult for governments to curb spending and put the brakes on emerging property bubbles during ‘good’ times as it is for them to take corrective action through harsh austerity measures when the inevitable crash ensues.
As this interesting piece of analysis by the Independent also shows, at the best of times ‘blame games’ are no more than naked political opportunism as well as a blatantly dishonest waste of time and energy.

What is needed is reform of the way we do our business to prevent politicians on all sides from indulging their profligate instincts to the detriment of our economy.
“One popular idea is that some external, independent body — whether national or EU — should decide what needs to be done. Something of the kind would have been just as useful when the good times were rolling,” Keenan concludes.
That a complete overhaul of the budgetary system is all that popular amongst the main political parties is not apparent; but the need for it is becoming increasingly obvious.