Wednesday, 10 November 2010

Ireland will not run out of money if the December Budget fails

Nat O'Connor: The front page of The Irish Times runs with the Taoiseach claiming that if the Budget is not passed, the country will run out of money. That is technically untrue.

The Taoiseach is absolutely correct that major fiscal adjustments have to be made this year and in subsequent years, but the evidence does not necessarily weigh behind the current plan of frontloading €6 billion.

The Taoiseach is also correct that if Ireland reached the middle of next year, with no coherent economic strategy and a weak Budget that fudged the issues, we could find ourselves running out of money. He is correct that you can't spend €50 billion a year, if you only bring in €31 billion in tax.

But none of the areas where the Taoiseach is factually correct supports his contention that if the Government's Budget is not passed on December 7, that Ireland will then run out of money.

Under the Constitution, only the Dáil deals with 'money' bills, like the Budget, the Finance Act, etc. The Seanad can only make commentary. So, passing the Budget is down to the Dáil vote.

The Budget could at this point easily fail to be passed, if the Green Party defects, if a very small number of backbench Fianna Fáil TDs vote against it, or if a slightly larger number of pro-Government TDs abstain or don't turn up. This assumes that all the Opposition TDs do turn up, and vote against it.

If the Budget is defeated in the Dáil, what will happen next is very predictable based on Ireland's prior parliamentary history. The Opposition will put down a Motion of No Confidence in the Government, which the Government will counter with a Motion of Confidence in themselves. Under the parliamentary rules, the Government's motion gets to be debated first, so there will be some heated speeches in the Dáil. Then the TDs will vote on the motion. It seems to me highly unlikely that the Government would win such a vote. If they lose the Budget vote, they'll almost certainly lose the confidence vote, and a General Election will be called.

Once the election is called, arrangements will be made for what the now 'caretaker' Government will do in its final weeks. The Opposition may be asked to agree a compromise and pass parts of the Budget. That could go in various ways. Fianna Fáil and Fine Gael might agree an alternative €6 billion adjustment at that point. Alternatively, a wider range of TDs might agree a skeleton Budget that simply ensures money is there so that hospitals, schools, etc will all remain open in January.

Once the election is over, the new Government will then propose, and pass, their own Budget (probably in January). Any new Government must have a working majority in the Dáil, so this New Year Budget would almost certainly pass. Depending on its content - and the economic logic of its approach - the bond markets will react accordingly. If the markets react favourably, the new Government could borrow a relatively small amount in the first quarter to 'test the water' and then go back to the markets again in late summer. As ever, what will matter to the markets is a coherent, sustainable growth strategy to demonstrate that Ireland is serious about generating the funds to pay them back.

The Taoiseach is right that Ireland does need to pass a strong Budget and four-year plan before very early next year. But it does not have to be his Budget.

I would go further and suggest that Ireland could be more likely to 'run out of money' if the Government's planned €6 billion budget is passed. If the austerity measures kill growth and stagnate the economy, and if there is no robust plan on jobs, then the bond markets will demand far too high interest rates, making it effectively impossible for Ireland to borrow. And then we really will run out of money.


Peter said...

Just a note that the only time a budget was defeated (27 Jan 1982) no seperate vote of confidence was take. The vote on the finaicial resolution was seen by the government as a vote of no confidence and it sought an immediate dissolution.

Rory O'Farrell said...

@ Nat and Peter

I'm not a legal expert, but as far as I know a failure to pass a money bill is constitutionally a vote of no confidence.