Sunday 23 October 2016

Pray that our politicians can get it right this time round

Published 02/05/2015 | 02:30

Minister for finance Michael Noonan and minister for public expenditure Brendan Howlin deliver the Spring Economic Statement. Photo: Steve Humphreys
Minister for finance Michael Noonan and minister for public expenditure Brendan Howlin deliver the Spring Economic Statement. Photo: Steve Humphreys

For every man, woman and child in the country the Government will spend €1,000 more than it takes in this year. Next year the gap in spending over revenue per person will narrow a tad, to €780. Only in distant 2019 are the State's books to be balanced.

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These are some of the facts that emerged this week from the Coalition's Spring Statement, and the much meatier document it is obliged to submit to Brussels on the state of the public finances over the medium term. These facts might not exist for all the coverage they got.

Much more commonly heard were comments to the effect that the Government has "money to play with", as if it were in clover. It is not.

Every additional cent it "gives away" or "gives back" is borrowed. That should never be forgotten in all the discussion of where we are and what options the Government has before the election and for the remainder of the decade.

This column does not like raining on anyone's parade or sounding dismal. But anyone harbouring the illusion that the legacy effects of all that has happened in the economy in recent years have suddenly gone away needs to be disabused of that notion.

While it is absolutely true that the economy is growing healthily and there is every indication that it will continue to do so far into the future as can be seen (which, truth be told, is not very far - at most about a year), a lot of luck will be required over a very long time for the forecasts set out this week by the Government to come to pass.

Those forecasts go all the way out to the beginning of the next decade. They assume that Ireland will be one of the fastest-growing economies anywhere in the rich world every year until 2020. While this is not implausible - there are solid reasons, such as a young, well-educated population that foreign firms will find attractive - and also means that Ireland has the potential to grow faster than most. But there is no guarantee that this will happen as predicted.

If the domestic economy simply runs out of puff or if the European and/or wider global economies slow or slump, then matters would become difficult again very quickly.

That is because all the new borrowing the Government plans on doing will be added to its mountain of debt - for every person at work in the economy now, the Government owes €45,000.

Servicing this debt appears manageable thanks to ultra-low rates of interest on the various parts of the national debt. And with alchemy-like activity planned by the European Central Bank over the medium term, those very low rates should persist for another two years, and possibly more.

But if interest rates normalise by, say 2018, the cost of servicing the national debt will be considerably higher towards the end of the decade. This week's Government analysis is not blind to this risk. Indeed, it acknowledges that even a 1pc increase in base rates would clobber the economy (the effect would come not only via Government indebtedness but also via the impact it would have on the much higher cost of servicing the very high levels of household and company debt).

With such serious risks to be faced over the next half decade, prioritising debt reduction would be the prudent thing to do so that another bout of austerity could be avoided if things go wrong.

But the Government is not prioritising debt reduction above all else. The announcement this week that a bigger-than-expected stimulus is to be given to the economy in the forthcoming budget shows that generating a feel-good factor in the short term is the priority. And that is all the clearer now because the argument, used until recently, that stimulus was needed to revive growth is defunct (as the Government trumpets repeatedly, if somewhat exaggeratedly, Ireland is the "fastest-growing economy in Europe").

All this may be understandable after such a long period of austerity - most people want their incomes to rise now and the Government wants some chance of getting re-elected.

But it points to the continuation of a long pattern. This history of politicians fuelling the economy with spending splurges when it is doing well and deepening recession by cutting when it is doing badly is deeply rooted in Ireland. Instead of using the good times to build up a buffer for bad times so that the economic cycle is smoother and less disruptive to people's lives, governments have almost always done the opposite (the amplification of the highs and lows of cycle in this way is known in the jargon as 'pro-cyclical' fiscal policy).

If the Government now prioritised getting its finances well back into the black it would mean either no new cuts in the event of a downturn over the next few years, or much milder ones than will have to be implemented if it remains in the red, as it plans to do, until 2019.

The stimulus measures being proposed by the Government for the next budget are small compared to bubble-era folly. And the desperation for some boost to incomes is far more understandable now after such a long period of hard times than it was back in boom times.

But the more that is "given back" now, the more that will be taken back again if the rosy outlook does not come to pass. Keep your fingers crossed - for the rest of the decade.

Irish Independent

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