Tuesday 27 September 2016

Large majority still not feeling fruits of the economic recovery

Dermot O'Leary

Published 24/09/2015 | 02:30

Dermot O'Leary is chief economist with Goodbody
Dermot O'Leary is chief economist with Goodbody

Is Ireland's meteoric rise from the ashes over recent years nothing more than a statistical mirage? The question might seem like a preposterous one that places doubt on the trustworthiness of the Central Statistics Office (CSO), but it is one that arises from the divergence between the macro-economic statistics on the one hand and people's perceptions of their own economic situation on the other.

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Let's firstly take a look at the macro-economic numbers. Ireland's economy, as measured by real Gross Domestic Product (GDP) grew by 6.9pc in the first half of the year, more than six times faster than the euro area as a whole.

Ireland's large multinational sector, which can often distort these figures, is not the explanation here; Gross National Product (GNP), which strips out profits accruing to foreign entities, grew by a similarly impressive 6.6pc.

In cash terms (including price inflation), the expansion was even more startling, with GDP growing by 12pc. If such a feat were to be repeated in the second half of the year, Irish output will have increased by an astonishing €24bn in 2015 alone, equivalent to an increase of over €5,000 for every man, woman and child in the State.

Given this, one would have thought that the population would be popping the champagne corks, spending with abandon and smiling from ear to ear.

Not so. While people broadly accept that the country is better off than a year ago, a large majority believe that it has not yet benefited them personally.

One recent survey suggested that only 15pc of people feel that they have personally benefited. Trickle-down economics appears to be clogged up.

While this is an important finding from a social and economic viewpoint, it has profound political consequences when a General Election is but a few months away. The fact that the economy and poll ratings have gone in opposing directions since the last election is deeply worrying for the Government. Maybe it's not about the economy, stupid!

So why is it that 85pc of the population believe that they have not yet felt the benefits of the improvement personally?

There are important divergences that explain the conflicting results. These apply, among other things, to geography, age, housing tenure and social class.

Take geography first. There is little doubt that Dublin continues to be on a different growth plane to the rest of the country. This perception is shared by businesses and consumers alike.

On the former, a survey carried out for Dublin City Council by Markit states that businesses in Dublin have been more confident about the economic situation relative to the rest of the country for every quarter since 2009.

On the latter, a recent Behaviour and Attitudes survey showed that the net balance of consumers holding a more positive view on the economic situation was six times higher than respondents from outside Dublin. The capital is All-Ireland champion in more ways than one.

Another grouping that is unlikely to be overly enthused by Ireland's recovery are renters. This group, which has increased significantly in recent years, has every right to feel somewhat peeved. The average renter in Ireland is now paying out an additional €2000 in accommodation costs relative to four years ago.

In Dublin, the increase is in excess of €4000 per annum over the same time period. Obviously, both of these increases have to be paid out of after-tax earnings. At the same time, the Central Bank has just made it more difficult for these people to purchase their own home by introducing strict deposit rules.

For those who own their own homes, the "negative equity generation" is another group that are unlikely to be jumping up and down about the health of the economy. This group, largely in the 25-44 age cohort, who got on the property ladder in the mid-2000s are, in general, living in the commuter belts to the major cities. They took out large mortgages at, or close to, the peak of the market with the notion that they could move up the ladder at some stage in the future.

Now they are sitting in a seriously devalued asset which is worth less than the mortgage and are, in many cases, having to travel large distances for work, with bigger traffic delays. Many now also have the added financial burden of childcare costs. These explanations apply to three very specific cohorts in Ireland and one can see why they may feel that they have not yet benefited.

A more general point relates to the benefits that people may feel they deserve due to the improvement in the public finances. Harsh austerity measures were imposed on the Irish population during the crash, so surely we can expect something back as tax revenues grow? Budget 2015 did contain some income tax reductions, but these effects were small and were drowned out by the introduction of water charges.

While there will be some loosening of the purse strings in the Budget in three weeks' time, new rules dictate that the level of wriggle-room will be small. In April, Finance Minister Michael Noonan announced that he would have between €1.2bn and €1.5bn to play around with in Budget 2016. Latest indications are that the measures that will be announced on Budget Day will be towards the upper end of this range. However, over a third of this will be needed to pay increased public sector salaries under the Lansdowne Road agreement. The other €1bn, or €200 per person, will not butter many parsnips.

Irish governments of old relied on the pre-Election budgets to buy the electorate. In 2007, for instance, political parties attempted to outdo each other in promises to the electorate if they were voted into power. These promises, unrealistic as they were, had political benefits. .

The current government cannot go down this route, so how can it translate the economic gains into political ones? Honesty is the best policy here.

Ireland has built up significant legacy debt as a result of the crisis. If another crisis were to hit in the coming years, for whatever reason, Ireland would be ill-equipped to deal with it. Therefore, it makes sound economic sense to move the budget into surplus over the coming years and thus bring down the national debt.

Sound economic policy is not always consistent with best political practice, but the government may be pleasantly surprised by the results. It was the Irish electorate, after all, that voted in the fiscal rules in 2012. It was the only electorate in the euro area to do so.

Of course, the electorate wants to see the benefits of the economic expansion in their own pockets but they also want the expansion to last.

With such a small amount of wriggle-room, it is vital that the right areas are targeted. In this regard, it is somewhat worrying that universal benefits are returning instead of focusing on those that need it most. Housing is an obvious area that needs to be heavily focused on.

It remains to be seen whether politicians will be honest enough and the electorate sufficiently informed to accept that short-term gains are not always in the country's best interests. Indeed, these types of pro-cyclical policies have contributed to two large fiscal crises in Ireland in the past 30 years. An end to boom/bust will be to the benefit of everyone over time.

Dermot O'Leary is chief economist with Goodbody

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