Falling off fiscal cliffs in Belfast and Washington?
On paper, the American fiscal situation is truly dire.
Legally and constitutionally, the US Federal Government can only borrow up to a maximum sum which is agreed by the Congress. That limit is currently about $19.8Trillion; admittedly, an unimaginably large number (though roughly equivalent to the annual output of the US economy). In reality, US government borrowing has already breached that ceiling but various accounting devices have bought a few weeks of extra time.
Congress now needs to agree an increase in the debt limit before the end of this month. If it cannot then pay cheques will stop being paid, welfare benefits will end and the interest on existing debt would no longer be paid. In fact, the unbelievably frightening potential for a US government default (which could make the 2008 banking crisis, Lehmans etc., look mild by comparison).
In practice, even allowing for the chaotic potential of the current Presidential administration, it is déjà vu. We’ve been here several times already since 2010. A deal, even if it is a stop-gap, is likely, especially if it includes the release of Federal money to repair some of the damage done by Hurricane Harvey.
What the fiscal difficulties illustrate is the extent to which for some time now economic policy making in the US has been constrained by political deadlock. Back in 2016, the Harvard Business School concluded that shortcomings in the political institutions were the single greatest reason why the US economy was unable to raise its rate of productivity growth and hence competitiveness.
All this should sound familiar to us, political uncertainty and deadlock are a major reason why the Northern Ireland economy is also failing to fulfil its potential [See Note 1, below].
We do not have a fiscal cliff in terms of banging into a debt ceiling but we do have the harmful effects of having no agreed Budget (for 2017-18) in place and no ministerial decision making. Those harmful effects would include:
- A 5% cut in total public sector funding in this financial year (in the absence of Budget being agreed by a restored Executive or a Budget being applied by Direct Rule ministers).
- The achievement of the target date for Corporation Tax devolution becomes very unlikely given the preconditions previously stated by the UK government.
- The unlocking of the additional funding (up to £950m) agreed through the Conservative-DUP deal becomes harder if there is no decision about major infrastructure projects.
It is to be hoped that both in Washington DC and in Stormont political wisdom will reassert itself before we tumble over the fiscal cliff.
- Of course, there is a massive difference of scale between the American and Northern Ireland fiscal problems- the sum of money involved in the US is over one thousand times greater; the US debt ceiling is equivalent to about £15,000bn whereas total Stormont departmental spending is “only” £12bn annually. This does mean the US fiscal crisis could in theory tip the entire world economy into recession.