Last of the hairshirt budgets?
Technically we are out of recession – but, as Noonan said, 'there's no reason to throw our hats in the air'
MINISTER for Finance Michael Noonan was extremely cautious about Ireland's emergence from recession in the second quarter. However, a combination of strong jobs growth and rising retail sales could mean that we are about to endure the last of the hairshirt budgets.
The Irish economy, as measured by GDP, grew by 0.4 per cent between April and June. While this might not seem like a lot, it came after three consecutive quarters during which GDP shrank and means that the Irish economy has technically emerged from recession.
Coming less than four weeks before Budget day, the second-quarter GDP figures were good news for the Government. However, Finance Minister Michael Noonan moved quickly to dampen any outbreak of euphoria, warning that he would still have to deliver a tough Budget on October 15.
"There is no reason to be throwing our hats in the air or anything like that," said Mr Noonan last Thursday.
Mr Noonan is right to be cautious. While GDP, which includes multinational profits, rose by 0.4 per cent in the second quarter, GNP fell by a similar amount over the same period. As GNP excludes multinational profits, most economists regard it as being a more accurate measurement of the performance of the domestic economy.
Last week's GNP figures from the CSO aren't the only indicator that the domestic economy is still bumping along the bottom. The value of non-motor retail sales fell by over 3 per cent from the end of October 2012 to the end of June 2013 while VAT receipts, which depend on consumer spending, have been below expectations in recent months. The VAT take for the first eight months of the year at €6.8bn was 3.5 per cent behind target, while the August VAT receipts were a massive 27 per cent lower than expected.
These warning signs haven't deterred the Labour Party and its allies declaring there is no need for further austerity. Instead they want the €1bn annual "savings" from the deal on the Anglo promissory notes, in reality no more than a reduced borrowing requirement, to be frittered away on all sorts of politically correct pet schemes.
The CSO figures, showing an apparent return to economic growth, would seem to provide further ammunition to those who argue that we can afford to ease off on austerity. Sure, won't the extra tax revenue generated by economic growth painlessly solve all of our problems?
According to this line of thinking, Mr Noonan can afford to take his foot off the fiscal pedal and bring in a budget that falls several hundred million euro short of the €3.1bn tax increases and spending cuts target already agreed with the Troika.
If only life were that simple. While a perfectly respectable case can be made for a reduction or even an end to austerity – the IMF has already admitted that it vastly under-estimated the impact of austerity on the peripheral eurozone economies and that austerity may in fact have done more harm than good – beggars can't be choosers.
While we remain dependent on the goodwill of the EU and the ECB to pay our way then austerity is the only game in town. Although we will hopefully formally exit the bailout at the end of this year, Ireland will still require a standby emergency funding arrangement, perhaps of up to €10bn, just in case the bond markets suddenly have a fit of the heebie-jeebies and change their minds about lending to this country. That emergency funding arrangement can only come courtesy of our masters in Brussels and Frankfurt. He who pays the piper calls the tune.
So are we condemned to many more years of austerity with direct fiscal control by the Troika being replaced by indirect EU/ECB control?
Maybe, maybe not. While there was almost certainly less to the second-quarter economic growth figures than met the eye, there are at least some signs that the recovery in the export sector may finally be feeding through into the domestic economy. By far the most encouraging such indicator is the fact that 33,800 new jobs were created in the 12 months to the end of June, an increase of 1.8 per cent in the number of people at work.
It would seem that the strong growth in employment has continued since mid-year, with the numbers on the live register falling by 3,200 in July and a further 3,400 in August, with unconfirmed reports of large numbers of people signing off this month also.
The fact that the economy is now creating more new jobs than at any time since the Celtic Tiger bubble burst over five years is surely not unconnected to the fact that, after having fallen for eight months, the value of retail sales recovered strongly in July with a 1.3 per cent increase in non-motor sales being recorded.
So while Mr Noonan is unlikely to offer Labour anything more than token concession in his 2014 Budget, it could be a very different story when he gets up to deliver his 2015 Budget speech in 13 months' time. A combination of strong job growth and rising retail sales could mean that we are about to endure the last of the real hairshirt budgets.