Wednesday 26 October 2016

Parties play dangerous game with 'Contest of Promises'

As election time approaches, Colm McCarthy examines the party manifestos likely to leave Ireland vulnerable to another economic crash

Published 03/01/2016 | 02:30

Enda Kenny, Joan Burton, Micheal Martin and Gerry Adams
Enda Kenny, Joan Burton, Micheal Martin and Gerry Adams

After just two years of recovery from the worst downturn since the Second World War, and the near-insolvency of the State, the general election is descending into a Contest of Promises.

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It is difficult to overstate the sheer speed of the collective memory loss in the political system. Ireland is a small and exposed economy, heavily indebted, with a still-fragile banking system, lacking an independent currency and with a history of bad mistakes in economic management. The costs of any future mistakes will be high given the limits to corrective domestic policy. The most likely future mistake will not even be a new one.

Within a month or six weeks, the parties will publish their full election manifestos. But the party managers are already busy releasing the juicier items on offer and it is a depressing spectacle. Fine Gael plan to scrap altogether the Universal Social Charge, likely to yield €4b in 2016, while the other parties propose to scrap USC for most voters. Labour want the minimum wage (2015: €8.65) to go to €11.30 an hour and the old-age pension to €258 per week, Fianna Fail promise to cut Capital Gains Tax and scrap water charges, Sinn Fein also offer to scrap water charges and to reduce employee payroll taxes. All of this note against the background of over €200b in the opening level of national debt, a ninth successive year of deficit in 2016 and the promising has only begun.

It should be possible, once the manifestos appear, to assess whether the budget sums of the various parties actually add up. Unless future economic growth is being spent in advance, tax giveaways or extra spending can honestly be financed in just two ways, through tax increases elsewhere or through identified cuts in spending.

There are two pretend sources of the extra readies, enhanced tax revenues through better collection (or soaking the rich) and painless 'efficiency' improvements in expenditure control. These dishonest sources of manifesto finance always disappoint. The manifestos will claim to be self-financing and within the EU budget guidelines. The likelihood is that continued economic growth at decent rates is needed to make the sums work. The parties, if that assumption is correct, are planning to distribute the proceeds of future economic growth in advance.

This is never prudent. In national financial management, as in running a business, it is always best to be surprised on the upside. The danger in the Contest of Promises is that, at some stage over the next five years, the economy will face another serious dip. An incoming government burdened with tax-reducing and expenditure-increasing commitments will struggle to deal with it, and could end up reversing engines in adverse circumstances. It is not as if this had never happened before.

One possibility is everything works out just fine and the sharp recovery of the last couple of years continues indefinitely, or at least through the lifetime of the next government. There is however a list of reasons why it would be rash to build manifesto commitments around this happy scenario.

The first concern in that timescale should be energy costs. Oil was over €80 a barrel in the first half of 2014 but has recently been around €34. It cannot drop this much again without going negative. Coal and gas have also fallen sharply and a price reversal, whenever it comes, would hit the Irish economy hard. A short-term reversal looks unlikely but five years is a long time and few observers expect oil to be at today's low level in 2021.

Reductions in the cost of financing government debt have helped the budget figures greatly these last few years. The perception that the Eurozone crisis is over and no resumption is possible is not widely shared outside of Ireland. The Greek debacle has not been resolved and inconclusive recent elections in Portugal and Spain have left both these peripheral and vulnerable members without the prospect of stable governments. Spain is a too-big-to-fail country and a continuing political impasse there could trigger another round of the wobbles in sovereign debt markets.

The German government has recently adopted a stance of flat opposition to a centralised Eurozone system of deposit insurance for banks. Without this key component of banking union, further destabilising capital outflows could strike any of the at-risk countries. The Eurozone crisis will not be over until a proper monetary union is completed and it could take another earthquake to shift German opinion.

At some stage later this year or in 2017 the UK electorate will pronounce on that country's continued membership in the European Union. The odds Britain could leave have shortened, due to concerns about the incoherent EU response to the refugee influx and the mishandling of the common currency project. The British have, from an Irish perspective, an enviable relationship with Europe: in the EU but spared membership in the Eurozone. But if they choose EU exit, and they might, the economic consequences for Ireland are all negative.

There are other bricks in the wall of worry but you get the point: the economy could hit a rough patch and will be ill-prepared if too much is promised by whatever parties make up the new government. The next rough patch will be harder to manage because of the inherited debt and consequent constraints on access to debt markets. Add in the inability to create liquidity because of Eurozone membership and the case is made for a profound bias towards caution in budgetary policy.

With any luck at all, there should be no need to raise taxes further, nor to cut expenditure totals. In that sense the period of austerity is over. But a premature return to loose budget policy, already under way, means the next downturn will trigger immediate austerity, since no room for manoeuvre is being created.

If the Contest of Promises is inadvisable, what form, you might ask, should electoral competition between the parties take? How about contesting the best way to promote the long-term improvement of living standards in Ireland, including more effective re-distribution policies? Access to earned income amongst Irish households is markedly uneven: the proportion of jobless households is amongst the highest in the advanced countries. Or what about the patently dysfunctional housing market? Why precisely are young adults in employment unable to afford accommodation in the (relatively small by European standards) city of Dublin? Does Ireland suffer an absolute shortage of buildable land, or of building materials, or of construction workers? Why do consumers of professional services, medicines, energy and a wide range of consumer goods face higher prices in the Republic than are charged up the M1 in Northern Ireland?

These are difficult and long-term problems that have been around for decades. They are not amenable to populist 'solutions' and there are powerful vested interests wedded to the status quo. Much easier to promise a reduction in USC or a boost to the old-age pension, one-liner politics. The election campaign has commenced as if Ireland enjoyed complete freedom of action in budgetary policy but could do little about these longer-term issues. This is the precise reverse of the true position.

Sunday Independent

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