Six-cylinder economy motoring – but brakes must be applied for Budget
Published 03/04/2015 | 02:30
Firing on all cylinders. That was the description of the Irish economy in the recent report from the IMF. Yesterday’s Exchequer returns suggest it’s a six-cylinder motor.
In the world of the modern multi-national corporation, these returns of government revenue and spending are about the most reliable guide to what the economy is doing. The other is employment data and both are telling the same story.
On Wednesday, the Central Statistics Office calculated that unemployment fell to 10pc last month. The figures for PRSI payments in yesterday’s returns confirm that. PRSI is the broadest financial measure of what is happening in the labour market and receipts are 5.4pc – €123m – higher than this time last year.
Just to make life simple, the Department of Finance uses two measures in these returns. The first is the actual result and the second is how it compares with the estimates made in October’s Budget. Using these “profiles” helped the Government “under-promise and over-deliver”, as some economists call it. It was a useful strategy in claiming success during the bailout period. But there is little doubt that the department, and its political masters, are genuinely surprised at the degree to which the economy is over-delivering.
Tax revenues are up 13.4pc in the year and the quarterly receipts topped €10bn. While PRSI relates mainly to employment, income tax itself is almost 8pc higher, reflecting more employment, pay rises and higher business earnings.
Perhaps the most striking revenue figure is the 12.8pc increase in VAT receipts compared with the first three months of last year. The put-upon Irish consumer is finally venturing forth, with the Central Bank this week putting a forecast increase of more than 2pc on the volume of personal spending this year.
Economic recoveries are often faster than seems possible in the depths of recession, but there is another boost to this oneone which could not have been foreseen a few years ago. Interest on the national debt was €2bn in the first three months, which is a lot of money, but almost €200m less than Mr Noonan pencilled in as recently as October.
Last month, the Government took out a 30-year loan on the financial markets at an interest rate of just over 2pc. Even in the good times, the NTMA (National Treasury Management Agency) avoided 30-year loans because of the higher cost and the uncertainty over whether they would prove a bargain over such a long period.
No such worries now. The Government is paying less than 1pc on the normal 10-year loans. The injection of new cash from the European Central Bank will force rates even lower. Such low rates are a sign of weakness in the global economy, but are manna for a heavily indebted country such as Ireland.
The fear that the crash would cripple a whole generation is gone so far as government debt is concerned (although not for private debt).
The economic cycle has worked out perfectly for the Coalition’s political cycle, but that means it has critical choices to make. There should be no difficulty beating the planned deficit of 2.7pc of economic output (GDP) this year. That leaves theoretical scope for a very generous Budget – perhaps €2.5bn – in October, while still meeting the now undemanding target of a 2.2pc deficit next year. Almost all the outside advice is that this would not be wise. An economy firing on all cylinders is in danger of overheating from such a stimulus. The ESRI reckons that, even with a no-change Budget, the economy would grow strongly and unemployment fall below 9pc in 2016.
Such a “neutral” Budget would be asking too much of any politician in election year. But the Coalition has the opportunity to end the disastrous policy – which it cheered on from the opposition Dáil benches – of recycling all economic growth, however rapid, back into the system via tax cuts and spending increases.
The best way to do that would be in a multi-year programme – just like the bailout, but managing growth rather than imposing austerity, with a bit of vote-buying in the first year. If it is not at least attempted in these unexpected circumstances, there seems no reason to suppose it ever will.