Today the European Commission published its analysis of the draft budgets of the 19 states that use the euro as their national currency. And the British government published its budget as well.
Overall the Commission has marked growth for the euro area up sharply from its March analysis.
The aggregate deficit is set to fall to 0.9% of GDP next year, while the aggregate debt ratio is due to fall by two points to 86% of GDP in 2018.
Capital spending is set for a modest increase after consecutive cuts between 2010 and 2016. The fiscal stance is neutral.
The European Commission’s analysis of Ireland’s budget for 2018 contains the usual criticisms around the expenditure benchmark, and some novel criticisms about tax policy. The latter is more readily understandable.
As part of the European Semester process, the Commission makes Country Specific Recommendations to member states each year to try to nudge them towards meeting the jobs and growth targets they themselves have set in common at EU level. A lot of this involves structural reforms.
For Ireland the advice has been to reduce the number of tax expenditures (tax breaks, as we have become used to calling them), and to broaden the tax base - applying tax to more things.
The idea of base broadening is to allow counties to reduce the "Tax Wedge" - the total amount of taxes and charges applied to labour - as a means of encouraging employment.
In Budget 2018, the Commission notes two new "potentially" base broadening measures:
- the new tax on sugar sweetened drinks
- the cap of 80% on the amount of capital allowances for intangible assets
Against this, it lists the following Budget measures which "do not contribute to expanding the tax base":
- increases to tax credits for self employed and home carers
- the creation of a stamp duty refund scheme for residential land
- the reduction from seven to four years for the holding period to qualify for capital gains tax exemption on certain property assets
- the tapered extension of mortgage interest relief for remaining recipients
- the fiscal incentives for certain share based remunerations
- the decision to extend USC relief for medical card holders for a further two years
Fortunately, it says Ireland has among the very lowest tax wedges in the EU, the euro area and the OECD.
They suggest there is less pressure on Ireland to broaden the tax base because high personal income tax is not an issue for people on average and low wages. Those on above average and high wage may see things differently.
It also criticises Budget 2018 for falling short on the policy goal of reducing revenue volatility. In particular, it says, the increased rate of stamp duty on commercial property purchase "amplifies the reliance on transaction based taxes, which in the recent past, proved to be an unstable and highly pro-cyclical source of government revenue".
It makes a similar criticism of the reduction in capital allowances for intangible assets. "Although it might help smoothing the corporate tax revenue over time, (it) can hardly be seen as a stable funding source".
This is the opening the Commission uses to warn once again that using volatile revenues from corporation tax to finance permanent current spending increases the risk to fiscal sustainability.
It says Budget 2018 benefits from a new spending review process, which in its first three-year cycle has focused on specific critical spending areas, representing around 30% of current government expenditure, such as drug costs in the health sector, disability and employment programmes in social protection, and public transport.
It sums up the budget changes neatly: income tax cuts of 0.1% of GDP and spending increases of 0.4% of GDP. The giveaways are partly financed by revenue raising measures that reduce the overall net impact of the budget to 0.2% of GDP.
On the current spending side, social protection gets 0.1%of GDP, health almost 0.1% of GDP, housing 0.05% of GDP and education 0.05% of GDP.
The capital allocation amounts to €5.3 billion, and an increase of 17% over the previous year. Half of the increase had already been allocated to address social housing shortages.
The Commission report starts to get tricky when it discusses compliance with the fiscal rules. In short, it says efforts to reduce the structural budget deficit are on track, but there is a significant breach of the Expenditure Benchmark in 2017, and a less serious breach in 2018.
The Expenditure Benchmark is supposed to limit the size of the increase in spending in each budget, so spending does not start to gallop away from the ability of the economy to pay for it.
The Irish Fiscal Advisory Council made similar criticisms of Budget 2017, as did the Commission in its assessment last year.
However, as far as the commission was concerned, the breaches were not sufficiently high to trigger action.
This year it's a similar story, with the Commission accepting special pleading from the Irish that the Commission method does not take a couple of Irish-specific things into account: firstly it ignores the revenue raising effect of not indexing tax bands and credits in the budgets (the stealth tax).
Second, it does not count the savings on interest payments (of around €150m a year) from repaying the IMF Sweden and Denmark early on their bailout loans.
The process of granting permission for this action (which all the other states have to do: it almost came a cropper in Germany on Tuesday, with the SPD forcing a full parliamentary vote on the matter, after arguing that this concession to Ireland should be tied to changes to the corporation tax regime).
But when these two elements are included in the calculation, the deviation from the expenditure benchmark just squeaks under the bar of acceptability.
Ireland is one of five countries (along with Estonia, Malta, Cyprus and Slovakia) in this category. Six others get full marks for compliance (Germany, Lithuania, Latvia, Luxembourg, Finland and the Netherlands), while five bad boys are at risk of non-compliance with the rules in 2018 (Belgium, Italy, Austria, Portugal, and Slovenia).
So once again it looks like the Irish have got away with pushing the fiscal rules right to the limit.
As long as the growth projections hold up, the budget numbers should work out. The Commission's forecasts seem to be a little more optimistic than the Irish Government's.
Possibly because the Government here is knocking 0.5% off as insurance against a negative impact from Brexit.
Speaking of which, Britain’s fiscal watchdog, the OBR, released its budget day assessment today as well. It downgrades the growth outlook pretty severely, but not because of Brexit.
Instead it's a revision to its assessment of productivity since the financial crisis that is to blame. In short it says it has been surprised by the strength of employment growth in post crisis Britain, that came with a corresponding weakness in productivity growth.
This has been crudely summarised by others as a result of investing in cheap labour rather than expensive capital.
But for the OBR "the persistence of weak productivity growth does not bode well for the UK’s growth potential in the years ahead".
It expects annual growth to average 1.4% over the next five years. It is expected to slow a little more in the next two years as public spending cuts and Brexit-related uncertainty weigh on the economy, before picking up moderately as productivity growth ticks upward.
It says "faced with a weaker outlook for the economy and the public finances, and growing pressure on public services following years of cuts, the Government has chosen (in its budget) to deliver a significant near term giveaway.
This adds £2.7bn to borrowing next year and £9.2bn the following year. Much of this money is going on an easing of planned spending cuts, and paying for a freeze (for yet another year) on planned fuel tax hikes and a cut in stamp duty for first time buyers.
Capital spending is also due to get a boost. The combined effect, according to the OBR, is to boost GDP in the years it expects it to be weakest.
The fiscal boost will be reeled in during later years, with a small fiscal tightening pencilled in for 2022/23 by way of further cuts in public spending.
Net debt is planned to fall, by selling of another tranch of RBS shares, and by a statistical trick of reclassifying housing associations so that they go off balance sheet.
But the OBR notes that this wheeze "has no material effect on the underlying heath and riskiness of the public finances", saying that if the sector runs into trouble the government would almost certainly stand behind it, whatever the statistical classification.
Here in Ireland there is a similar statistical conundrum for the Government, when it comes to putting serious money into building social housing: but it has to convince Eurostat in Luxembourg, not a local statistics agency, that it can "hide" spending on social housing by treating it in such a way that it goes off balance sheet.
Keeping it on balance sheet runs it into more trouble with the Expenditure Benchmark.
And Eurostat may hold a firm line on this, for the same reasons the OBR cites in its criticism of the British government’s move.