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FactCheck: Could the government actually bend EU spending rules to build more homes?

The Housing Minister suggested it could be a runner – but is Ireland actually allowed to do this?

For Covid factchecks (4)

HOUSING MINISTER DARRAGH O’Brien has suggested that it could be possible for Ireland to bend EU rules on government spending in order to put more money into building homes. 

In an interview with The Journal last month, O’Brien was asked about whether there could be some sort of emergency opt-out from the EU rules in the future. 

He responded: ”Yeah, there’s certainly an argument for that and we’re dealing with European colleagues on a regular basis on that specific point…”. 

The European Union has rules on government spending that Ireland, as a member, has to follow. Those rules have been temporarily suspended because of the pandemic and accompanying economic crisis.

The argument goes that if it’s possible to set the fiscal rules aside for one crisis, why not another? Specifically, why can’t we just say to Brussels, look, there’s a housing crisis and we urgently need to spend more than we’re normally allowed in order to solve it?

thumbhouse1artboard-3 A screenshot from last month's interview

But experts say that it’s not at all likely that the rules would allow for any such thing, and the government didn’t provide us with any evidence to support the minister’s statement that (a) there is such an argument to be made or (b) that officials are making such an argument to European colleagues.

That said, EU spending rules are barely a factor in the housing crisis in the first place. Apart from anything else, a government that wanted to splash way more cash on building public housing could do that in full compliance with the rules by raising taxes to pay for it, or by taking it from elsewhere in the budget. The decision not to do that is a political choice.

The evidence: starting with the EU fiscal rules

Fiscal rules are laws or policies that put an upper limit on a country’s national debt, budget deficit and/or public spending. They’re a way of trying to keep the public finances in order and are pretty common around the world. “Between 1990 and 2015, the number of countries with national and/or supranational fiscal rules surged from five to 96”, according to the Bruegel think tank.

The European Union has had fiscal rules since the introduction of the Stability and Growth Pact in the late 1990s. The framework has been altered over the years more times than Marge Simpson’s Chanel suit, but the key thing to understand is that Ireland (like every EU member state) is supposed to aim for debt below 60% of GDP and a yearly budget deficit below 3% of GDP. These figures are actually written into the EU treaties.

To support these headline objectives, the rules put a cap on overall public spending. Essentially, governments aren’t supposed to increase public spending from one year to the next above the rate at which their economy is expected to grow in the medium term.

EU countries haven’t covered themselves in fiscal glory when it comes to complying with these rules. Since 1998, budgetary policies have met the rules about half the time according to one study (handily visualised with a map showing a lot of red and orange). Enforcement isn’t particularly strict: Brussels has been “hesitant to enforce sanctions” and “frequently invoke[s] the discretion” allowed by the fiendishly complicated rulebook.

For present purposes it’s not particularly necessary to understand the details, not least because the rules have been suspended because of the Covid crisis. A “general escape clause” was triggered in March 2020 and the rules aren’t expected to come back into force until perhaps 2023. When they do, they could well be different.

But we can safely assume that there will be rules of some sort, and that — as we found last time we looked into this — that they will be a factor in the government’s overall spending plans. That being the case, what are the prospects for an opt-out for housing spending should that become necessary, as the minister suggested?

Opting out: no dice

Well, they’re slim. Dr Eddie Casey, chief economist at the Irish Fiscal Advisory Council, told us:

There is unlikely to be any scope to invoke an exception in the fiscal rules based on the argument that there is a crisis in housing in Ireland… deviations from the domestic Budgetary rules are allowed but for an unusual event outside the control of the State that has a major impact on the financial position of the general government or for a period of severe economic downturn.
The use of such clauses has been very limited. Recent examples include the Covid-19 pandemic, and exceptional refugee flows and heightened terrorist threats in specific Member States.

Other experts we consulted agreed. The consensus is that the opt-outs are worded to cover a sudden onset crisis like Covid, not a chronic policy failure like not having enough homes. Put another way: the rules are there precisely to stop politicians from spending more than the country can afford, even if they think it’s very important to splash the cash.

Nor did the government argue otherwise. When we asked for more information to support the Housing Minister’s position, the Department of Housing referred us to the Department for Public Expenditure. The latter department sent us a long statement that, with all due respect, didn’t address whether a housing opt-out would be possible. If anything, it emphasised that fiscal discipline is really quite important for its own sake. You can read the full statement here

EU rules are very much not the issue

A running theme from the experts we consulted was that, in a way, we’re asking the wrong question here. The rules aren’t the problem, for several reasons.

First, they’re suspended this year and likely next. There’s no particular legal reason not to spend money on housing in 2021 and 2022.

Second, as we previously found, there is some scope for potentially keeping house spending off the books, which the government could explore if the fiscal rules were really a big issue. So far as we know, it hasn’t.

Third, the rules are likely to be more lenient when reintroduced in 2023 (or whenever it might be). “We can expect the reinstallation of some fiscal rules – it can’t go on the way it is at the moment – but that’s all we know. We don’t know what level the rules will be at,” says Professor Gavin Barrett of UCD. Reform of the rules is a live debate and many commentators reckon they’ll need to be looser than before.

Fourth, you could arguably borrow enough within the existing rules to make a measurable dent in the crisis. That’s the argument made by Kieran McQuinn in a recent paper for the ESRI think tank, which said that:

… even under prudent assumptions, the Irish Exchequer would be able to raise approximately €4 billion to €7 billion each year in additional resources for the State [and could be spent on housing] while still keeping the public finances on a sustainable and prudent path.

“That’s coming fairly well within the fiscal rules”, McQuinn told The Journal. “What we suggested would certainly be permissible — I don’t see the fiscal rules being an issue”.

Fifth, even if you don’t buy that the assumptions in that paper are prudent, there are other ways of increasing public spending within the rules. The rules only apply to the overall budget balance: they don’t stop you from (a) raising taxes to increase the housing budget or (b) taking money from elsewhere in the budget to go on housing, if that’s your political priority.

This is probably the most important point. In principle, the government can fund as much housebuilding as it likes within the rules if it’s prepared to raise taxes or reallocate spending. In that sense, the fiscal rules are a red herring.

Dr Casey from the Fiscal Council again:

The rules aim to ensure that the public finances are sustainable by limiting public spending increases from one year to the next. However, there is nothing to prevent a government from going beyond that limit should it wish to do so provided that it raises additional resources in the form of taxes that would sustainable over the medium term or that it reprioritises spending.

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Professor Barrett of UCD reckons it’s often tempting for politicians to claim that their hands are tied by the EU, telling The Journal: “Brussels is an incredibly handy whipping boy”.

Better planning during the recovery might have helped. There were warnings: in 2014, for example, the ESRI was saying that “demand will tend to run ahead of supply for the immediate future, resulting in continued price growth”. One economist, who prefers not to be named because of where they work, accuses the State of “waiting until the horse has essentially bolted and then saying ‘we need more fiscal space’ to deal with it”.

The same person also says that government forecasts of the money available to spend on the likes of housing have been consistently too pessimistic. If fiscal expectations had been less unrealistically gloomy during the 2010s, there could have been more investment in housing that might – we’ll never know – have stopped things getting this bad.

Can the crisis be solved by throwing money at it anyway?

There’s an unspoken assumption in what we’ve said so far that housing in Ireland can be made more affordable by increasing supply through higher government spending on public housing. The reality may be less straightforward.

For one thing, there are capacity constraints. Let’s say the government promised to double the number of new build social homes (the 2021 target is 9,500) to around 20,000. To do that you need people who know how to put up buildings.

“Finding enough construction workers will be difficult given the pandemic will discourage migration for a while yet”, one economist told us. “Another aspect that’s often overlooked is that the building industry did completely collapse here 12 years ago or so, and efforts to recover that lost knowledge and expertise appear to have been inadequate”.

In that context, increased government investment in public housing risks “crowding out” private construction. If there are only so many homes that can be built at once, you might end up with more social housing coming at the expense of homes being available for sale. You might prefer that outcome politically, but just in terms of overall supply, crowding out is something to bear in mind.

Other potential issues include the planning system and low interest rates on mortgages stimulating demand.

Overall, then, boosting supply is a necessary condition for making housing more affordable, but perhaps not sufficient in itself, and it’s not a dead certainty that higher government spending on housebuilding can increase supply by as much as we’d like.

Verdict

Returning to the specific question of a housing spend exception: no expert seems to think that would be possible under the fiscal rules as they stood before being suspended for Covid.

There are some uncertainties: the rules are very complicated, lawyers are clever and the government may have a strategy on this that it hasn’t told us in its statement. No harm to Darragh O’Brien, as it’s a fairly throwaway comment in the course of a long interview, but all the same we rate the claim: Mostly FALSE.

This work is co-funded by Journal Media and a grant programme from the European Parliament. Any opinions or conclusions expressed in this work is the author’s own. The European Parliament has no involvement in nor responsibility for the editorial content published by the project. For more information, see here

About the author:

CJ McKinney  / Legal Affairs Journalist

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