Monday 26 September 2016

Don't expect any thanks from the voters, Enda

The economy is now racing ahead, but the electorate is right not to feel grateful to the Government for this

Published 02/08/2015 | 02:30

'There seems to be no willingness to credit the improvement in the economy to the government parties'
'There seems to be no willingness to credit the improvement in the economy to the government parties'

This morning's Sunday Independent poll asked a number of interesting questions about the public's personal experience of economic recovery and expectations for the year ahead, as well as preferences for tax cuts, should there be any in October's Budget. The context is important. The Irish economy has been through the sharpest contraction since World War II; the quickest rise in unemployment it has ever gone through; a monster banking bust, amongst the largest ever endured anywhere; and the indignity of the country forced into a financial rescue from official lenders for the first time since independence.

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Real output (GDP) peaked in 2007, crashed to just 92pc of that year's level in the two years to 2009 and finally recovered to barely above the 2007 figure only last year. In seven years, real output in the economy has just about regained the previous peak. This is by far the worst downturn in Ireland's recent economic history.

Last year, real output grew by about 5pc and the most recent forecasts are for a 4pc expansion in both 2015 and 2016. The recovery in our major trading partners, the US and Britain, has helped, along with the weakness of the euro against the dollar and sterling.

But the downturn has left deep scars on the public finances. The budget is still in serious deficit and the national debt still rising. The expenditure cuts and tax increases have reeled in the unsustainable deficits of the immediate post-bust years. But it is imperative that, without control of our own currency due to eurozone membership, the State minimises the risks attendant on another downturn.

The Central Bank warned last week against any premature loosening of budgetary policy, even though it was also predicting a positive outlook for the economy over the next couple of years. It was right to urge caution. Just about every politician in Dail Eireann has learned to decry pro-cyclical budgetary policy (loosening the purse strings when things are going fine) but nobody walks the walk. With the economy apparently having expanded 5pc last year and with two years at 4pc growth in prospect, all the politicians have to do is do nothing. The budget deficit will take care of itself if spending is kept in check and tax cuts are avoided.

Unfortunately, the Government cannot resist the temptation to give an expanding economy an entirely unnecessary boost and October's Budget looks as if it will repeat the routine pre-election pro-cyclical dosage. There will be equally familiar denunciations from the opposition parties that the over-dosage is mean and insufficient.

Offered an unpriced menu of budget goodies, today's poll shows that public preferences for alternative giveaways are rather scattered. Substantial numbers would like to see reductions in income tax and in other direct deductions, including the universal social charge and PRSI contributions.

Surprisingly, far more people want a cut in water charges than want a reduction in property tax. For almost all householders the property tax is going to cost - and for the foreseeable future - far more than water charges. In purely cash terms, it does not make sense to be more upset about water charges. Roughly one-third of voters believe that water charges are likely to be scrapped altogether. It is really quite puzzling that the property tax has, it would appear, achieved a high degree of public acceptance, while the water charge, a far lower financial burden for most, has provoked such widespread hostility.

The opinion polls have been tracking political party support alongside the public's feelings about their personal economic circumstances and the results are really quite odd. Unemployment is down from over 15pc to under 10pc, consumer spending is on the rise and the economy has been enjoying a fairly broad-based recovery for two full years. Not surprisingly, the percentage of people feeling worse off has declined substantially. If the economic forecasts are correct, this percentage will fall further in the months ahead.

Nevertheless, support for Fine Gael and Labour has remained weak - there seems to be no willingness to credit the improvement in the economy to the government parties. The absolute numbers are also hard to understand. The number claiming to be worse off compared to last year is more than double the number who admit to being better off. The economy has had a really good run over the last year on all available measures. If such a large percentage of the public feel worse off they are not telling the whole truth to the pollsters: they are in a sour mood and are using the poll as an opportunity for a grumble. This looks ominous for the government parties, which are being held responsible for the eight-year-old downturn by an electorate unresponsive to the very real improvement over the last couple of years.

If the voters do not thank the Government for the recent turnaround, they may have a point. The Irish economy is now performing better than almost any other in the 19-member eurozone. But this is largely down to good luck, rather than good management. Ireland's main trading partners are not in the sluggish common currency area and the recent weakness of the euro has been a real blessing. The exchange rate against the dollar is now around 1.10, versus 1.35 or so early last year. The sterling rate is about 0.70 versus 0.83 in early 2014.

Against these key trading partners, Ireland has enjoyed a really large exchange rate devaluation which has restored the competitiveness of the economy in dramatic fashion. This has been a huge boon for exporters, including the tourism industry, which is seeing visitor numbers back close to peak levels. If the public think that the Government deserves no credit for this, they are of course perfectly correct: Ireland has had no control over exchange rate movements since the abolition of the currency back in 1999.

However, the government parties are entitled to feel a little peeved. They have managed to stick with the budget-adjustment programme and have been able to restore credibility in the sovereign debt market. The public finances are a work in progress but it would be churlish to deny that Fine Gael and Labour have kept things on track since they came to office in February 2011. You have to be in the right spot to get lucky and they can claim to have put the economy in the right spot.

Incumbent parties all around the eurozone have struggled to retain popularity in recent years and this has affected governing parties of both left and right. The news has been dominated this year by the travails of the radical left government elected last January in Greece but the polls are showing strong shifts to anti-system parties from both ends of the political spectrum in many countries.

In France the far-right Front National is the beneficiary of disenchantment with economic performance, in Spain the left-wing Podemos party. In Italy, the centre-left government is under pressure from assorted anti-euro parties. Government unpopularity in Ireland should be seen against this background. The common currency has not been kind to the established political order.

Sunday Independent

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