David McWilliams: We have just seen a perfect example of Ireland’s fiscal incontinence

Nothing focuses the mind like a hanging,” noted Samuel Johnson, according to his biographer James Boswell. The condemned man, realising that he has only a few weeks to live, focuses on what is truly important. The economic equivalent of this expression is: “Nothing focuses the mind like a hard budget.” Hard budgets make countries and organisations efficient, innovative, thoughtful and, by injecting financial discipline, ensure that decision-makers work through their options to get value for money. The hard budget in itself leads to better management, getting more from less, which requires more effort.In contrast, a sloppy, bloated budget where money is not a problem will lead to waste, cynicism, cutting corners and the abandonment of accounting discipline. When money is wasted, the essential connection between the cost of something and the delivery of quality breaks down. Without a hard budget, management becomes almost impossible and the corporation, organisation or country drifts, becoming gradually unable to deal with any shocks to the system that might lie ahead. Like someone who allows themselves to get out of shape, their muscles to weaken, and their weight to soar, the person becomes more susceptible to physical and potential emotional or psychological fragility.Countries and corporations operate in a similar fashion. If they become addicted to easy money, particularly if that money is someone else’s, a gap opens up between reality and fantasy. The managers begin to feel that the money is theirs and they are entitled to it, creating a dependency. Successful management no longer revolves around the best use of the resources to achieve a specific outcome, but rather it becomes a smash-and-grab exercise centred on how much of the “easy” money the managers can get their hands on. READ MOREWithout a budget constraint, the objective of management becomes size, not efficiency. The organisation becomes an extractive machine, extracting money from the central budget and, as that part of the organisation gets bigger, the fact of its expanding size means that it gobbles up more and more money, needing more every year just to stay still.This is what has happened to the Irish State. It is a monstrously bloated organisation that has lost all sense of value for money and exists to gorge on cheap, endless cash that is cascading into the coffers from the US multinationals. In development economics this process, whereby the State becomes hollowed out by too much rather than too little money, is termed the ”resource curse”. When an underdeveloped country without proper institutions finds a resource like oil, money flows in and it is often wasted, ending up in the pockets of the rulers, driving up costs for everyone else. The country ends up unbalanced – rich in parts but without the public infrastructure that the financial windfall could have paid for. Think Nigeria, Angola or Venezuela, where huge oil finds have not elevated the position of the citizens who own the natural resources of the country. If these countries are synonymous with bad management, the exemplar of good behaviour is Norway, where the oil windfall has been invested judiciously and democratically for future generations, rather than blown on goodies for today.Now look at Ireland’s equivalent of an oil find – the gusher that is the US multinational money, a spigot of cashflow, the product of clever tax arbitrage, which is flowing into the system to be pilfered by public sector management in a country that can’t even build a proper national rail system. This week’s budget is a perfect example of the fiscal incontinence that a soft budget generates. First the Government flatters to deceive by announcing an overall surplus of about €9 billion next year. This looks great, but when you consider that the Department of Finance regards about €23 billion of the €34 billion in projected corporation taxes received this year as being transient, then we are in a different world. If we were to strip that out, our underlying surplus becomes a significant deficit of €13 billion to €14 billion for 2027; and, given commitments outlined in this budget, that deficit will widen to about €20 billion by 2029. Even from a cyclical perspective, a country at full employment does not need any more money thrown at it – the economy is already bursting at the seams – and yet this week’s Budget 2027 is throwing a net €7.4 billion extra into an already bloated system. [ New public spending efficiency taskforce to be established within three monthsOpens in new window ]The Government presents it as cost-of-living relief. But the cost of living has risen because prices have risen. Throwing extra money at this problem will not cause prices to fall, but will cause them to rise, while the extra handout to soften the blow will simply increase dependency on handouts rather than cut prices and permanently. So you get the worst of all worlds: handouts which drive prices higher that are mistakenly put forward as a solution to high prices. The Irish Fiscal Advisory Council’s analysis says spending is growing at double the pace of the Government’s own 5 per cent sustainable limit. Basically, our windfall is being spent rather than saved. The lack of a hard budget also means that tough decisions are not taken, not just in the area of financial management but in organisational management too. Take, for example, this rotating taoiseach codology. With two bosses – one on the way out, the other on the way in – the lad on the way in is more important for tomorrow, undermining the lad in situ today. Such management structure means that the incentive for all senior public servants and politicians is to curry favour with the next guy, not the guy in charge, thus undermining the guy in charge. And by splitting the Department of Finance in two, with the Department of Finance and the Department of Public Expenditure, what’s the aim? Rather than have one department looking after the money, we now have two departments – and, critically, the Department of the Taoiseach, which used to be the nerve centre of final decision making, is now neutered because no one knows which taoiseach is more important: the incumbent or the next guy. All the while global financial markets, the font of the windfall money that finances the large US tech companies, are becoming more and more nervous about the future.