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This column has repeatedly argued that the annual fiscal year is a circus and is no longer suited to its purpose. Among the main players on the Irish budget scene, there are American technology companies.
The CFOs of these companies would agree that modern budgeting is an ongoing process, not a process adapted to one-off events. The complexity of these companies and the hazards of their operating environment – the global economy – imply a constantly evolving strategy and tactics that sometimes have to change, often without notice.
We are not the only ones to persist in the annual budget mimes managed by stages. Philip Hammond, the British Chancellor of the Exchequer, announced his version last week.
It's not just the event itself that has echoed our own process. Hammond repeated the old ploy of spending every penny of tax revenue and promising to spend unexpected profits: this old friend, the optimistic economic forecast, still has a central role in most budget performance.
Optimism about future economic growth gives rise to predictions of sustained tax revenues, which lead to extravagant and unsustainable increases in public spending.
But nobody of importance is going to listen to calls to put an end to all this. It is a pure policy with all interest groups determined to leave things exactly as they are.
One of the few virtues of our version of the great financial crisis is that we have drawn important practical lessons from economic policy.
First, we can be as tactical as any financial director of a technology company and change course if necessary: emergency budgets are allocated when needed, policy can be tactically adjusted permanently.
Secondly, this first point will only happen under the effects of the crisis: we are committed to old ways of doing things and we will come back to it as soon as any crisis is over.
Health expenditure
Thirdly, it is almost impossible not to spend tax revenues, whether or not we think these revenues are likely to persist. It is acceptable if the spending commitments are as temporary as these tax revenues. Which brings us nicely to the last constant of fiscal policy: whatever the budget allocated to health expenditure, the overrun will be about 600 million euros.
Many of these features were present in the recent British budget: these bad habits are global in nature. Health spending is also a big problem in the UK, with the well-known problem that no amount is ever enough.
In 2000, UK health expenditure absorbed 23% of total public expenditure. According to the plans that have just been announced, this number will reach 38% in the next five years. This is a staggering increase with many political and not just economic implications.
The British plan to increase health spending in relative and absolute terms, partly by limiting government spending as much as possible. As the renowned Institute for Fiscal Studies (IFS) has stated this week, this is not sustainable at all.
If health absorbs this type of resource – a reasonable expectation – taxes will have to increase, probably by a lot. This is where arithmetic applies to pure politics.
The IFS has summarized Hammond's budget in a beautiful line: "The loan forecasts have improved by about 18 billion pounds. [€20.5 billion] and the Chancellor spent everything on the national health service. "
I would say it a little differently. When optimistic economic forecasts dissipate, there will be problems. The public sector in the UK is becoming a health service with a few things happening elsewhere
Arithmetic and demographics
Health spending will be at the center of future budgets on both sides of the Irish Sea. It's both arithmetic and demographics. I've lost count of the number of NHS strategic journals published in recent years. Each new health secretary seems to know that his mandate will be measured in months and that he therefore has little time to introduce another set of sloppy structural reforms of the NHS.
There must be a better way to conduct tax policy in general and the management of health spending in particular.
Annual budgeting exercises can skew behavior: The Irish Tax Council (Ifac) highlighted this week government research, which shows that budget overruns in health care staff tend to increase sharply in the last quarter of the year or after. If we can not deviate from the annual budget, a more modest proposal could perhaps gain ground: postpone it to November.
Forecasts are one thing, but the main economic anchor of the budget is the fiscal arithmetic of the current year. We can expect good, robust economic growth over the next two years, but that means the starting point is very important.
The problem is that October, at least as far as tax revenues are concerned, is the most important month of the year and that it would be useful for the budget to be established with knowledge of the figures.
Already four weeks after the 2019 budget, we learn that the corporate tax is well ahead of recent forecasts and that PRSI revenues are also outperforming. Health expenditure now exceeds the target of 400 million euros and Ifac hopes to reach 600 million euros.
Would it certainly help the annual budget if we had a better idea of where we started?
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