Why the Fiscal Space is gone
So farewell then fiscal space. We had only just got to know you. But now you have been banished from the back of the budget book, your home these past few, brief years. All because Paschal Donohoe doesn’t want people looking at you.
He is worried they will become fixated on you. That you will distract them with your allure, your Siren call of "more cash to splash" luring them on to the rocks of financial ruin. Or something like that.
Instead, the order from the top is that we must now look at the budgetary stance – the total spending package and the total revenue measures to support it, not just the budget day changes.
In other words, pay attention to the whole iceberg, not just the tip that is visible above the waterline.
Asked about the mysterious absence of a fiscal space number from Table A8 on budget day, the Minister for Finance replied with the following:
"Whenever I hear the word fiscal space I have to think very carefully and focus on the question: - no, fiscal space has not been clearly articulated in the budget documents, because the Irish Fiscal Advisory Council wanted us to allocate where those resources are going to be available in the future, and the budget documents reflect that.
"But since I took over this job I have been very clear that I am talking about budgetary stance, no fiscal space. Fiscal space is a very important mechanism that we use here, internally, to understand what kind resources will be available to us if we don’t make policy changes, and the growth of the economy is in line with how we expect the economy to perform – it is an organic concept.
"But if you are in a place that is focused on fiscal space all the time, the spending departments will put all their focus on how much additional money they can get, and no focus on how they can make the best use of the billions of euro we are already spending each year. And that was my key learning from being Minister for Public Expenditure and Reform, and which I have carried over to do both jobs."
He continued: "So we talk about budgetary stance. And the other reason we talk of budgetary stance is we can have situation where fiscal space is available, but there are other policy reasons you may not wish to spend all of it.
"For example, if we are in a position where we have full employment from say the middle of next year on, for a number of years then, the government of the day may decide that it is not wise to spend all of the money available to us if wages are going up in the economy, and prices are going up in the economy, and we are experiencing labour shortages.
"I have to look at the budgetary stance for our economy, and that is why I made a decision on stamp duty and commercial property on the basis of what is the right budgetary stance for the economy, not just on the basis of what resources that might be available to us next year."
Indeed, Annex C of the Tax Policy Changes document set out an economic rationale for increasing stamp duty on commercial real estate which argues that the measure is needed to avoid overheating in the construction sector, and divert resources into house building and away from commercial real estate.
It claims that construction, minus house building, is now approaching its pre-crisis share of the economy as measured by GNI* (GNI Star).
The Department of Finance forecasts this category of building investment’s share of GNI* will amount to some 8.1% in 2017, which is higher than the long-run average (1995-2016) of 7.1%. And this share is forecast to rise to 10% of GNI* by 2021.
It says commercial property capital values have risen by some 75% from their mid-2013 trough.
The sector attracted investment of €4.5 billion in 2016 – the same amount the government spent on capital investment that year.
Rent levels have almost doubled over the past six years.
CBRE says Dublin office rents were €673 per square metre in Q1 – just below the peak level of 2007/2008.
As a result, office completions have recovered strongly - no new space was delivered between 2011 and 2015 in Dublin, but this year completions are expected to amount to 200,000 metres, with a further 400,000 metres under construction.
When it is finished it will add 10% to the capitals office stock.
And it referred to a July 2016 IMF report on Ireland that said property taxes (on wither capital or market values) could help dampen the boom phase of real estate cycle, as well as discouraging speculative activity. Ah yes – the IMF. Just because the bailout is over doesn’t mean they don’t have their uses.
Anyway, this new focus on budget stance might well be a good idea: in the context of a budget in which voted spending on current and capital projects amounts to €60,923,000,000, obsessing over the carve up a few hundred million is rather missing the wood for the trees.
There are some serious inefficiencies in public spending – notably in the Health budget – that need sustained focus over several budgets to put right.
But it presumes the fiscal space has done its job of persuading the politicians to focus on the actual amount of money available to fund new projects, not to engage in Fantasy Fiscal League-type dreams of less tax and more spending, whatever the (not worked out) cost.
Fiscal space worked well in the last election, with most of the parties basing the manifesto promises on the Department of Finance’s calculation of what was likely to be available for new spending, whilst staying within the fiscal rules.
The same was true of Budget 2017, and this year’s budget.
But from now on, the stabilisers are off (or the blinkers, as the Minister seems to regard them), and the big wide open of the budget stance awaits us.
But we have all seen the calculations that show €3bn a year in fiscal space available in each of the next three budgets.
And we can’t un-see those numbers.