Keeping My Fiscal Hawk in its Cage for COVID-19

Political and economic terms have different meanings depending on their context. A “republican” in the US is quite different to one in Ireland. Similarly, where US Democrats are perceived as left-wing in the US, their policies often sit to the right of Ireland’s main political parties.

In economics, a “fiscal hawk” describes someone who places a great emphasis on balanced budgets. Germany is the ultimate hawk in Europe, driven by a “black zero” (schwarze null) policy which has generated cumulative surpluses of €229bn since 2012. This is equivalent to almost 3 years of Irish government spending. Arguing against those surpluses is outside the mainstream. An Irish person would ask why the money has not been spent on infrastructure or housing, while keeping either a balanced budget or smaller surplus. I would ask the same, but in doing so lose any reputation for being a hawk. A hawk in Germany supports the surpluses.

The debate in Ireland has different goal posts. No one argues for German level surpluses in Ireland. A hawk supports the balanced budget achieved in 2018, with a small surplus. Those against say we should have kept the deficit wider for longer coming out of the 2008 financial crisis.

Those crisis years saw Ireland’s deficit-to-GDP fall below 30%. Even excluding the establishment of NAMA, we ran double-digit deficits for 2009, 2010 and 2011. These were outliers in the eurozone. The need to balance the books in that environment was immense. The ECB had not deployed the same supports in the bond market as it has today. Ireland was nearly priced out of international markets.

The current forecasts for 2020 and 2021 are 7.4% and 4.1% respectively. These compare more favourably to the 2008 crisis years, although the risks are to the downside, especially if we have further waves of the virus. Nonetheless, this time the ECB has deployed a €750bn quantitative easing programme to buy government debt. Ireland’s forecast deficit isn’t an outlier. Every eurozone country is facing the same challenge.

“Austerity” is nowhere to be seen in Ireland’s government accounts so far. Expenditure is forecast to rise from €86bn to €95bn, driven by social welfare payments and subsidies. In 2021, these fall away on the assumption of the economy reopening. Tax revenues initially fall from €87bn to €73bn, then recover partially to €79bn.

Ireland borrowing costs, measured by the yield on 10 year debt, peaked at 12% in 2011. On Friday, it was just 0.14%. The goal posts have shifted. It is favourable for Ireland to run a wider deficit for longer, and the opportunity is being rightly taken. There seems to be broad consensus on this.

Where consensus falls away is just how wide and for how long we run this deficit. My view is for a shorter duration. This does not need to mean broad cuts. It can instead mean a pause on increases, avoiding new costly policies, and allowing room for limited tax increases to maintain social cohesion:

• The public sector pay increases scheduled this year should be deferred, especially as many in the private sector are facing wage cuts
• The pension age increase to 67 should go ahead. Avoiding the increase is being considered under government formation talks.
• The pledge by Fine Gael and Fianna Fáil not to raise income taxes and USC should be dropped. We don’t know how bad this could get. The option to increase the highest rates of tax should be left on the table.
• Increases in property and inheritance taxes could be applied. Other wealth taxes should be considered.

The first point alone is open to the accusation of “austerity”, but that’s what happens when the goal posts shift. A true fiscal hawk would propose significant wage cuts, but the situation as it stands doesn’t warrant this. My hawk can stay in its cage for now.

This is all dependent on the situation not deteriorating significantly. It could, but that’s a discussion for another day.

Along with writing here, look out for my blog contributions on the Carraighill website.