In the first of a series of posts on the new Programme for Government (PG) I examine the broad fiscal proposals. The first thing that comes out is an alarming lack of content. Given that so much of the campaign was fought over target dates and breakdowns of taxation and expenditure (but not, unfortunately,investment which is a major, if not the primary, element of fiscal consolidation), this lack of content suggests a lack of agreement between the parties. This is not the best of starts.

So what do we know? First, the Maastricht target date has been set at 2015 - unsurprising, since the EU Commission, as part of the bail-out deal, set that year as the date.

Second, the new Government is committed to Fianna Fail’s budgetary parameters for this year and next year. For 2012, this means reduction in public expenditure of €1.7 billion and taxation measures equivalent to €1.1 billion.

After that, however, we are in the dark. How much more public expenditure cuts? How much more tax revenue increases? How much investment which can be measured? None of this is referred to in a fiscal context. And there is a pressing short-term issue. The PG commits itself to introducing a ‘Jobs Fund‘ in the first 100 days (a ‘Jobs budget‘ is how the new Taoiseach has described it).

The following three proposals to be introduced will have an impact on public finances in 2011 and beyond:

– Cut the 13.5 percent VAT rate to 12 percent up end of 2013

– Halve the lower 8.5 percent Employers’ PRSI up to end 2013

– Abolish the Travel Tax as part of a deal with airlines to restore lost routes

We will leave the economic or ‘stimulus’ impact of these measures for a following post. The issue here is the headline fiscal impact. According to Fine Gael’s own estimates, cutting the VAT rate will cost €327 million in a full year, halving the Employer’s PRSI rate will cost €369 million, while abolishing the travel tax will cost €83 million. That’s a gross cost of €779 million (though the cost in 2011 will be less since it won’t be full year). Given that the VAT and PRSI measures will stay in place until the end of 2013, the gross cost of these two measures will be approximately €1.8 billion over that period.

This extra cost is taking place against a backdrop of sluggish Exchequer revenue returns - €900 million in the year if current trends hold (though it is early days). Therefore, it is essential the new Government justify these measures through a comprehensive economic impact assessment. Will these measures actually boost GDP, employment and, so tax revenue? By how much? Will it equal the amount lost in tax revenue. Given that Labour insisted on such assessments when it came to property tax relief, we should expect this to continue through all Government measures. Otherwise, the Government will be spending money on a wing and a prayer.

So making estimates at this stage - with so little knowledge of what the new Government intends - is difficult. In addition, the party negotiators would have been briefed by the Department of Finance as to the latest growth projections. These would be critical to assess whether the current fiscal strategy - which the new Government will adopt for this year and next - is capable of significant deficit reduction.

The signs are not hopeful. Following the publication of the National Recovery Plan, both the IMF and the EU Commission accepted that the Government would be unable to achieve fiscal stability by 2014. In fact, they claimed it couldn’t even be done by 2015. They projected that if the Maastricht target were to be achieved by 2015, even more spending cuts and/or tax increases will be needed (an additional €3 billion ‘fiscal adjustment’ in 2015 according to the EU Commission).

In other words, we may, according to our ‘paymasters’ need a €12 billion adjustment to reach fiscal stability - not the €9 billion that the Fianna Fail government estimated; deepening and extending austerity policies out another year.

What’s even more worrying is that these estimates were in the public realm before the election - yet both Fine Gael and Labour chose to ignore them.

And even with all that fiscal consolidation, the IMF has pointed to the downsides (‘the risks to the programme remain high‘): weaker than projected growth and sharp reductions in tax revenue - downsides which many commentators and latest statistics are confirming.

The EU Commission put it another way:

‘We recognise that the risks in the short term are tilted to the downside, and, in particular, the headwinds from fiscal consolidation on domestic demand could be larger than anticipated.’

Maybe an election campaign is not the time to roll out detailed macro-economic forecasts and variables. Certainly, the new Government parties side-stepped uncomfortable projections in their manifestos. However, it is imperative that the new Government - if it is to restore official credibility - must face up to these difficulties in open and transparent way. Critically the new Government must:

– Present their own growth projections, based on the latest available data - both pre and post-consolidation (in other words, the underlying growth rate before austerity measures and the growth rate afterwards)

– Outline their consolidation strategy up to 2015 - even if it is only aggregate numbers (that is, even if the Government parties cannot agree on the breakdown between taxation and expenditure - though the balance will determine the deflationary impact, as spending cuts are worse for the economy than tax increases)

Further, they will have to present a more sophisticated economic impact assessment of spending cuts, tax increases and ‘stimulus measures’ than we have had to date. In this regard, the independent Fiscal Advisory Council - with its remit to publicly assess spending and taxation measures - would be a useful step; but in the meantime the Department of Finance should take up this function in the same transparent manner.

But most importantly, the Government will have to show why they are continuing (if they do intend to continue) the Fianna Fail Government’s austerity strategy. This is the crunch issue. If the approach isn’t working - if the macro-economic assessments show that continued degradation of growth, employment, and domestic demand will undermine the prospects of economic recovery and fiscal stability - the Government will need to face up to this reality, and outline an alternative approach.

We can no longer afford to rely on the inertia of blinkered ‘there is no alternative‘ thinking. If the Government rejects this for a transparent, evidence-based approach - they will have the support of the public. And reap huge political gains.

Otherwise, it will be ‘steady as she goes‘. Downwards.

Michael Taft of Notes on the Front [1]