It won't happen fast, but recovery is on the cards
Although flawed, the Government's new strategy is a move towards prosperity, writes Marc Coleman
Published 22/12/2013 | 02:30
I don't know about you, but my favourite Christmas show is the Father Ted special A Christmassy Ted. As a smooth Barry Murphy tries selling Mrs Doyle an automatic tea maker -- "It'll take the misery out of tea making" -- she responds bitterly, "Maybe I like the misery."
It's a scene that captures that aversion to positivity that characterises a certain type of person in this country and over-represented in our commentariat. But the news last week that the economy grew handsomely in the third quarter doesn't fit the misery narrative. In 1.5 per cent for GDP and 1.6 per cent for GNP, the economy is now recovering.
But if you are of the Mrs Doyle persuasion, don't worry just yet. There's enough misery to go around for a few years at least. While falling below 300,000, unemployment is still at 12.8 per cent of the labour force, 12.9 per cent of mortgages are in arrears of more than 90 days and credit to the vital SME sector is, despite various initiatives by governments past and present, down 20 per cent since 2010. Besides that, Government debt is at 124 per cent and household indebtedness is over twice the level of national disposable income.
All this miserable information is contained in the Government's latest missive on the economy. Strangely enough though, the document, entitled A Strategy for Growth, is remarkably hopeful and positive. And with justification. That's because bad as those figures just quoted look, the Government has done something that most of us will be doing over the next week or so: making New Year resolutions. Or, to be precise, resolutions for the next seven years between now and 2020.
Some don't want to believe it -- it violates their repeated messages that Ireland could never, would never, recover from the crisis (or at least not recover within the eurozone). But if it won't be as quick as we want, recovery looks increasingly on the cards -- and if the Government's strategic plan is implemented, it won't take forever either.
In fact, on modest assumptions -- 2 per cent next year and 3.1 per cent on average out to 2020 -- unemployment could fall to 8.1 per cent by the end of the decade. Under slightly better assumptions -- 2.3 per cent growth next year and 3.2 per cent on average out to 2020 -- it falls to 5.9 per cent. That is within shouting distance of full employment.
The Government is under pressure from several fronts to be pessimistic on the economy. And that is as it should be: there would be nothing worse than holding hostages to (mis)fortune. And budgetary prudence demands that while you hope for the best, you plan for the worst.
In October the conservative Irish Fiscal Advisory Council gave its blessing to the Government's Budget Day forecasts, which are the less optimistic of the two scenarios contained in last week's strategic plan.
Like wise men around a crib, government ministers have been waiting for last week's GDP numbers. And for ESRI end-year forecasts also released last week. And both have brought tidings of joy. At 2.7 per cent for GNP and GDP, the ESRI's forecast for growth next year is even better than the more optimistic scenario in the Government's strategy document. Under it, we could reach full unemployment by 2020 or before.
Better still, our national debt could fall to levels last seen during the early days of the Celtic Tiger. By running primary surpluses (which means that when debt repayments are excluded, government revenue exceeds government spending), the national debt pile should start to fall next year and should fall to 93 per cent of GDP by 2020. Aside from 2011, that level was last seen in the year the Celtic Tiger (the real one) was born, 1993.
Does everyone keep New Year's resolutions? Of course not. But do they benefit from having them? Of course. The new strategy is flawed. But it is a strategy. As such it is a good start to a seven-year transition from recovery to something resembling prosperity. As for its flaws, the strategy accepts that our debt is unsustainable but fails to do likewise for spending. As international studies (by economists Vito Tanzi and Ludger Schuknecht) and our own experience (in the late Nineties) prove, growth is highest when State spending is kept at around a third of economic output. In Ireland State spending is 20 percentage points above that optimum. Any sensible long-term strategy needs to target a reduction to levels prevailing in the late Nineties, ie below 40 per cent.
The document is also inaccurate on why we need to cut our debt. It claims this is needed so that we can divert funds into "growth enhancing" spending. As far as infrastructure spending goes this is fair enough, and the emaciated levels of capital spending should be restored as soon as possible. But as current spending goes the Eighties proved that, unlike productive capital spending, current spending is not a growth enhancer but a growth killer.
The strategy also fails to match its excellent and inspirational ideas on bank lending to business with proposals to address the equally important need to get lending going again to consumers and house buyers.
Behind these flaws is a bigger more central blind spot: a failure to detect what must be by far the dominant strategic challenge we will face until 2020. Given our high debt level and given how the US Fed recently announced the beginning of the end of its cheap money, monetary policy around the world will start to tighten over the coming two years -- a process that may last until 2020. Just as loosening monetary policy made tax rises bearable between 2008 and 2013, so tightening monetary policy between 2014 and 2020 will make tax cuts imperative. Unless that, like Mrs Doyle, the Government actually likes misery.
Marc Coleman presents 'The Marc Coleman Show' each Sunday on Newstalk 106-108fm from 9pm