Pearse Kenney – Senior Tax Manager with HC Financial Advisers Ltd Economists, academics and think tanks will continue to offer well considered advice only to see it roundly ignored by those tasked to implement the policies, writes Pearse Kenney In the lead-up to Richard Nixon’s visit to China in 1972, a White House official mentioned in a briefing to the US President that the then Chinese Prime Minister Chou En-Lai was a keen student of French history. During the visit, Nixon and Chou walked the gardens of the Prime Minister’s residence. As they strolled, and with Nixon desperately trying to fill the silence, he remembered his official’s comment and asked Chou what he thought the impact of the French revolution on western civilization had been. Chou En-Lai considered the question for a moment before he finally turned to Nixon and said: “The impact of the French Revolution on western civilization? – It is too early to tell.”
This story has often been cited as an example of the ability of the Chinese to take the long term view as opposed to the short termism of the impatient West.
Thinking in the short term is something that our present Government might be accused of in the formulation of our recent budget. And, while this is not something that the Irish Fiscal Advisory Council (IFAC) said directly, it is perhaps a sentiment that forms the basis of their analysis of Budget 2015 in their most recent ‘Fiscal Assessment Report’, which was published last week.
The introduction of an expansionary budget amounting to just over €1 billion through a combination of tax measures and expenditure increases was a €3 billion reversal from the IFAC’s recommendation to take €2 billion out of the economy in 2015. And, while the Government is still on target to meet the deficit target for 2015, the IFAC, in its report, stated that: “Budget 2015 represented a missed opportunity to decisively move the public finances into a zone of safety and to create a large buffer to guard against adverse shocks”. In addition, the report states that “Budget 2015 was marked by an absence of a well specified plan for the public finances beyond 2015”.
In essence, what the report is telling the Government is that, while short-term targets may be met, we have not given ourselves adequate room to meet more long-term targets if projections around the growth of our economy, tax revenues, spending requirements, etc do not come to pass.
The OECD, in its Economic Outlook Report last week, echoed these sentiments by describing the move of Irish fiscal policy from consolidation to stimulus as premature.
But what was the Government to do? The public demand for an end to austerity budgets was too great to resist, even if ultimately they did not show any great appetite to do so. Furthermore, the ongoing protests against the introduction of water charges has shown that any attempt to hit the pockets of the public through another austerity budget would have been met with great disquiet – especially as the strong economic figures in the lead-up to the budget had created a strong expectation amongst the public. An expectation that the Government did not move to quell at the time.
The reality is that prudent economic management and political pragmatism often do not align. And what in hindsight might prove to be the correct course of action is not necessarily recognised as such in the voting booth. In fact, the reverse often proves to be the case. As a result, economists, academics and think tanks will continue to offer well thought out and considered advice only to see it roundly ignored by those tasked to implement the policies. In the end, the policy of realpolitik usually trumps all.
So what will be the impact of Budget 2015? While it may be too early to tell, for better or worse, we may not have to wait that long to find out. HC Financial Advisers…we advise.