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Friday, 14th August 2020
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Increasing competitiveness should be cornerstone of Budget Back  
Aziz McMahon believes that controlling growth in public spending is the biggest objective of the next Budget.
Because we no longer have control of interest rates, a greater emphasis has been placed by some commentators on the need for fiscal policy to assume responsibility for demand management in the economy. In reality this is a noble but unrealistic aspiration. The time lags involved in the legislative process mean that as often as not the adjustment to policy arrives so late that it exaggerates rather than subdues the cycle. To use demand management as a justification for either raising or lower taxes is at best naïve and at worst disingenuous. For example, in the US, the Bush administration, which is cutting taxes for political reasons, is disingenuously justifying those tax cuts by saying that they are needed to support economic growth, even though those tax cuts were planned long before the economy began to slow.

Similar but opposite arguments may have been employed by those opposing tax cuts in Ireland. Minister McCreevy’s stated motivation in cutting taxes has been to fulfill manifesto commitments and as part of a long term economic strategy rather than seeking to fine tune the short term economic cycle. He deserves credit for this transparency.

The biggest challenge facing Mr McCreevy is to control growth in public spending, in particular the public sector wage bill. Increasingly it appears that public sector wage gains are being driven less by improvements in productivity and more by the overly strong bargaining strength of the public sector unions. Current buoyant public finances have masked an increase in public sector spending that could present financing difficulties were the economy to slow by more than is expected.

From a fiscal perspective, controlling public spending growth as the economy slows is key to avoiding a repeat of the late 1970s early 1980s public finance crisis.

Another equally important policy issue facing the Government is to press ahead with measures to improve competition. The emphasis of policy needs to be on increasing competition, rather than privatisation per se, to combat price increases in certain key sectors that contribute to inflation and erode economic competitiveness.

While recent well publicised price rises may be a legitimate response to rising costs, this can only be known for certain if markets are operating competitively. Strengthening the powers and increasing the resources of state bodies responsible for enforcing competition would be a good first step.

One of the main concerns raised by the IMF and the OECD in their recent assessments of the Irish economy was a lack of progress in increasing competition. This is one of the most pressing economic policy issues facing the economy, but it remains to be seen whether the political will exists to take on powerful interest groups.

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