Fiscal Policy for a Slowing Economy

In his paper presented at the ESRI/FFS "Budget Perspectives 2008" Conference, Philip Lane (IIIS/TCD) asks "What are the implications for fiscal policy of the current deceleration in output growth?" Over 2003-2006, total government spending and total tax revenues have grown markedly faster than GDP, with revenues from capital gains taxes and stamp duties growing especially fast. The transition to a period of more modest output growth rate poses an adjustment problem, with the fiscal diagnosis sharply different for the capital and current budgets. Philip Lane points out that: The prolonged period of under-investment during the 1980s and early 1990s means that the level of public capital in Ireland remains below its optimal level and a high growth rate of public investment should be maintained. However, growth in current spending has to be considerably restricted. Moreover, in tackling the competitiveness problem that is a contributor to the current slowdown, a reduction in the growth of the public sector payroll can relieve labour cost pressures in the private sector and facilitate a re-balancing of the economy towards the export sector. Managing the transition to a slower pace of output growth and public sector expansion can be best achieved, Philip Lane says, in the context of a supportive socio-political environment. While social partnership proved to be effective in facilitating recovery from a crisis situation in the mid-1980s, the challenge for the social partners is to ensure that fiscal expectations are well managed during a phase of a moderate slowdown in economic growth.