That €6.75 billion spending increase – a back-of-the envelope first take
The leaked draft programme for government says the new government will spend €6.75 billion more on services by 2021 than it plans to spend this year.
What does this mean? Are they talking about the dreaded fiscal space?
Michael Noonan told the Dáil last week that the fiscal space has gone up from €8.6 billion before the election, to somewhere north of €10 billion now.
Taking the draft programmes 2:1 spending to tax cuts ratio suggests €3.4 billion in tax cuts and €6.75 billion in spending increases, using up around €10.2 billion in fiscal space over the five year period. Most of the extra spending will come in the last two or three years, when the “Confidence and Supply” deal with Fianna Fáil may have expired.
Or is this €6.75 billion the increase in 2021 spending compared with this year’s Budget?
At first glance – going on little more than what has been on social media – it seems not much of a change.
Yes, €6.75 billion is a large number in cash terms. It suggest spending in 2021 will be around 10% higher in cash terms than it is supposed to be this year.
Under the existing plan published last October, the nominal spending increase was 7% anyway. But in those plans, the real-terms spending increase (taking inflation into account) was negative – that is, a real terms cut.
Total expenditure was forecast to fall in the budget from 33.2% of GDP this year, to 28.4% of GDP in 2021.
This fall in spending as a percentage of the economy was slammed by the Fiscal Advisory Council as “implausibly large” given demographic pressures and pent up spending demand (see November report )
If this is what we are talking about then, my uneducated guess is that the deal with the independents (supported by Fianna Fáil from the outside) looks like an extra €1.75 billion in spending in 2021 over and above what was already planned.
This is about 0.6% of 2021 forecast GDP, which would seem to nudge expenditure for that year up to 29% of GDP – about four percentage points lower than this year as a share of GDP.
As I said, this is all top of the head stuff, based on leaks on websites, not properly worked out spreadsheets. The numbers are probably wrong, but the broad direction of travel is probably right.
As usual with government accounts, it depends on which set of numbers you want to use.
According to the projections in Budget 2016, the “permitted expenditure ceiling” is €68.2 billion this year, rising to €73.2 billion in 2021 – a cumulative €354 billion.
This includes a calculation of available fiscal space of €8.6 billion.
If this is the spending figure the draft programme for government is talking about, then going from €68.2 billion to €73.2 billion means an increase of €5 billion.
The document’s suggestion that spending in 2021 will be €6.75 billion higher than this year implies an extra €1.75 billion in spending that year, bringing it to €74.95 billion. Other figures give a nominal increase over the 2016 budget projections of €2.5 billion or €3.75 billion.
What does this tell us about the fiscal space? That it is going up from the €8.6 billion estimated at budget time. (To keep things in perspective, that fiscal space was about 2.5% of the total projected spend over the period). The Minster for Finance told us it was going up last week – to €10- €11 billion over the five year period.
We have known since last October that there was likely to be a change to the medium term objective (MTO) – the formal definition of what constituted a balanced budget in structural terms.
Due mainly to the falling debt ratio, the MTO has been set at a deficit in structural terms of 0.5% of GDP.
This is expected to be hit in 2018, making more fiscal space available from 2019 on – which looks like €1.5 to €2 billion – the number Michael Noonan told the Dáil about in last week’s debate on the Stability Programme Update (but hasn’t published the table, so we have to guess on the impact).
At this stage it looks like the increase in spending is consistent with national and EU budget rules (as the agreement with Fianna Fáil said it would be).
Whether it will be consistent with the political realities of real life service provision is another question.