Sunday 23 July 2017

Government has opted for a 'blanket defence' Budget instead of trying to create real scores

Finance Minister Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe
Finance Minister Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe
Richard Curran

Richard Curran

Fine Gael, Fianna Fáil and the Independent Alliance were climbing over each other to claim credit for the extra public spending in this week's Budget. As they were stepping up for popularity plaudits, the chairman of the Irish Fiscal Advisory Council was warning that those very same commitments may well end up breaching key EU spending rules.

It raises the question of whether the Irish political system has learned anything at all from the catastrophe of our financial and economic crash.

Social Protection minister Leo Varadkar fielded questions from Newstalk's Pat Kenny yesterday that the higher spending was reminiscent of high octane Charlie McCreevy budgets of the past.

Varadkar retorted that the McCreevy budgets involved 10pc hikes in spending whereas this one involves about 3pc. The comparison doesn't fully hold water.

Of course the McCreevy years were excessive but the 3pc increases are only prudent if they are affordable in the current environment.

Right now there is enormous uncertainty and now is not the time to sign up to sizeable permanent commitments to increases in public expenditure.

This was a highly political Budget in which every party is watching its back. Fine Gael is watching Fianna Fáil. Fianna Fáil is watching Sinn Fein. The Independent Alliance TDs are watching their own backyards where they are afraid of being dumped out of office in fresh election that could come as quickly as next year.

So for political expediency this Budget was about looking over your shoulder rather than looking ahead at the future. This budget was the political equivalent of the GAA football "blanket defence" - neutralise the opposition but don't worry about actually scoring anything.

Where is this evident? Take Brexit for example. We were told the Budget would be Brexit-proofed. There were 11 measures that referred to Brexit-proofing in some way or other but in reality many of them were smaller farming or fishing measures that had very little to do with Brexit at all.

The best way to Brexit-proof this Budget would have been to introduce some kind of scheme to protect Irish jobs in exporting firms who are facing into a currency trading abyss. There was nothing meaningful there to protect these businesses.

The second way to Brexit-proof the Budget would have been to take a very prudent approach to spending. With serious economic risks on the horizon, spending increases should have been focused on improving our competitiveness or social improvements for communities that do not involve permanent spending increases.

The scale of the challenge from the likes of Brexit is actually contained in a report published on budget day by the Department of Finance.

Around 46pc of our indigenous company exports go to the UK. Around 15pc of our goods exports go to the UK and 20pc of services. The top five exposed manufacturing sectors rely on the UK for between nine and 13 per cent of total sectoral turnover.

In the traditional materials and electrical equipment manufacturing sectors, over a quarter of exports go to the UK.

What is most extraordinary about the research is how the most vulnerable sectors are those who employ very large numbers of people outside Dublin.

In food and beverage, 78pc of those employed work outside Dublin. In traditional manufacturing it is 69pc and in materials manufacturing it is 86pc.

For the border region, the situation is even more precarious because it has the highest regional share of total employment in four out of the five most exposed sectors across all regions.

At a recent conference in Dublin Martin McVicar, founder of Monaghan-based forklift maker Combilift, explained one way in which the sterling fall is affecting business.

He said his company sources some materials from Irish companies, but because of the dramatic falling in sterling, they will have to look at sourcing those materials from now cheaper UK suppliers. This could cost Irish jobs very quickly.

Longer term the question of tariffs looms large on the trade agenda for Ireland and the UK. The Department of Finance research shows that three sectors, food & beverage, traditional manufacturing and materials manufacturing each source over 45pc of their imported production materials from the UK. Would a tariff regime mean they will in future source these from Ireland, resulting in a boom for Irish jobs?

No. It is more likely that they will not be able to source these materials from Ireland and will just have to pay more to import them, thereby making Irish businesses in these sectors less competitive.

Yet, there was no sense of any looming danger in this week's Budget. Brexit was mentioned in relation to measures that weren't necessarily related to it.

Brexit was also mentioned in relation to a new rainy day fund, which will see €1bn a year put away to cover for economic shocks. That won't begin until 2019.

In a year when the Government is expecting a slowdown in economic growth from 4.5pc this year to 3.4pc next year, it is committed to a range of expenditure measures that won't do anything for the economy, for attracting talent into Ireland from abroad or making business more competitive.

Measures to bring the self-employed towards tax equality with PAYE workers have been welcomed but there is still a long way to go before equality of tax treatment exists. The inequalities are still there: on PRSI; the PAYE tax credit is still nearly double the new self-employed equivalent; the additional USC on self-employed income over €100,000 that doesn't apply to PAYE.

There is a real danger that with high national debt, commitments on public spending, real economic dangers and a commitment to put €1bn a year away for a rainy day, that investment in the economy will suffer.

Where will the money come from to keep investing in important infrastructure? We are under-investing in this vital area. Our roads budget will just about cover maintenance for what we have.

Michael Noonan is budgeting for an additional 45,000 jobs to be created next year. Where will they come from?

Foreign direct investment (FDI) continues to work well and there may be FDI opportunities arising from Brexit. But we are already approaching capacity issues there when it comes to offices, housing and the ability to remain attractive for incoming professionals.

I interviewed the head of Microsoft Ireland last week. The company employs 1,300 staff here and has plans to expand on that significantly.

But she told me the company was already seeing issues arising with attracting people to come to Dublin. They are looking at tax rates, USC, cost of living, rents and house prices and in some cases, saying "thanks but no thanks".

IDA Ireland might continue churning out job announcements but as multinationals find it increasing difficult to fill those posts, the message will get out.

Yet with all of these uncertainties we are committing to spending another €300m per year on an extra fiver a week for old-age pensioners.

Do they deserve it? I believe they do, but so do lots of other people too. Do they need it? I expect that many of them do while others probably do not.

But with Fianna Fáil pushing for it, and Fine Gael under pressure not to be outflanked by their new "opposition colleagues" in the Dail, I suspect Fine Gael needed it as much as the pensioners.

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