independent

Wednesday 16 April 2014

Marc Coleman: Budget fixes one engine but two others still in dire need of repair

Banking and property, and consumer spending require attention from the Government

THE Budget was a good one for exporters and investment. But unless there is a quantum change in budgetary policy in the next two years, economic recovery is far from guaranteed. For the third year in a row, the year of recovery has been knocked back to "next year". So it was a bad Budget?

Well, although in some areas it is quite unfair, overall, Budget 2014 is a success in achieving what it could. What the measures are not enough to do, nor anywhere near it, is to get a fully fledged recovery off the ground.

Think of the economy as a propeller aircraft. Now imagine it has four engines, all of them damaged in a crash. A bit of good mechanics like last week's well-designed €500m stimulus package means that the most important of those engines (exports and investment) is now whirring nicely and ready for action.

As this column recommended a week ago, good use was made in the Budget of savings from a lower than expected adjustment (€2.5bn instead of €3.1bn). The lower 9 per cent VAT rate on hotels was continued (also as recommended here), the research and development credit regime made easier and a home renovation scheme introduced. These and many more initiatives are channelling those savings to help investment and exports kickstart the recovery.

But a bird cannot fly on one wing. Nor can a four-engine aircraft fly on one engine. Two more engines need to be working at full throttle to get this craft off the ground. One of them is banking and property. The other is consumer spending (the fourth, government spending, isn't needed for now). And the trouble is, they aren't getting the same mechanical TLC from government as exporters. Far from it.

It would, of course, be unrealistic to expect one budget to fix all our problems. And previous budgets have done a lot. By cutting the deficit to 4.8 per cent of GDP and achieving a primary surplus (excluding

interest on debt, Government is now paying its way), the proverbial aircraft will, in eight weeks' time, be able to leave the bailout hangar and taxi onto the runway.

But as we may find out, airport runways are cold and windy places where you can get stuck for a long time before take-off.

Holding up our recovery is the fact that half a million households are in negative equity and one in seven is in mortgage arrears. On top of that, the crushing stamp duty burden – for which many are still repaying what they borrowed to fund it – is now compounded by a second property tax.

Because the housing market caused the crash, some believe that homeowners and the housing market in general must be punished by permanent consignment to oblivion and inactivity. But this policy fallacy traps a vast demographic in negative wealth and, in the process, is crippling consumer spending growth and jobs.

The property market will never drive our economy again and that's as it should be. But if growth is to return, it must normalise, and that means some tough decisions. Our banks are, says European Minister Pascal Donohue, well capitalised. But due to a mortgage arrears crisis – caused by unemployment and falling incomes, caused in turn by low growth – the banks aren't lending.

The key to turning this vicious circle into a virtuous one is to release Middle Ireland from the traps of excessive taxation on property and negative equity. The depressing impact of the property tax on retail sales and VAT returns shows the tax isn't working. Stalling its full introduction until 2016 would enable environment minister Phil Hogan's reform process to gain the momentum it needs to be really radical.

We also need to find a way to let mortgage-holders transfer negative equity when trading up. A normal equilibrium in property price levels is the most obvious solution. And it will repair household and bank balance sheets allowing the third engine – consumption growth – to sputter back to life.

After last Tuesday, the Government can claim that it has kept fiscal recovery on track. Perhaps it might have done so in a fairer way. But it has done it.

However, if it also wants to meet Minister for Jobs, Enterprise and Innovation Richard Bruton's target of raising the job creation rate from 3,000 to 4,000 a month – which is do-able – then budgetary policy needs to enter a different space, from reducing wasteful spending on deadweight areas, such spending must be entirely eliminated and the savings should be channelled back into households via tax cuts.

The Department of Public Expenditure and Reform has achieved much in terms of efficiency – we are doing the same things for a lot less money, thanks to Brendan Howlin and his officials. Public servants should also get credit for enduring three painful rounds of pay cuts. But doing the "same things" for less money than before doesn't mean those things should be done at all. Nor do the undeniable public pay cuts to date mean that existing differentials – between the average public and private pay here or between the average public pay here and elsewhere in the EU – are sustainable or desirable. Targeting goals based on efficiency is great. But we need now to shift to goals based on effectiveness.

Finally, a word about welfare cuts. As well as being unfair, cuts on the young unemployed and the elderly symptomise a deep policy malaise. We have not yet fully connected employment and social welfare policies. So we are now in a situation a young unemployed person who refuses a job offer cannot – as occurs in Sweden – have their dole withdrawn. So instead of this, we cut back on the cost of the dole by punishing everyone under 25 – the majority of whom are genuinely seeking a job.

Likewise, a universal welfare system gives money to the elderly who don't need it, making the system unaffordable. So we cut back and universality means we have to cut back across the board. Cruel, dysfunctional and wasteful welfare universality is a relic of a 'big government' era that will – as the US debt crisis shows – bankrupt us if we let it. We must now enter an era of small lean government.

Marc Coleman presents @MarcColemanShow on Newstalk 106-108fm each Sunday from 9pm

Sunday Independent

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