Monday 24 October 2016

We must protect ourselves against the 'three horsemen of economic apocalypse'

Published 17/10/2016 | 02:30

Finance Minister Michael Noonan ‘made a reasonable fist of the Budget’. Photo: Colin Keegan/Collins Dublin
Finance Minister Michael Noonan ‘made a reasonable fist of the Budget’. Photo: Colin Keegan/Collins Dublin

Budgets can be like small dogs, treat them with respect and attention, and they are your best friend; but make any startling moves and they will bite you from behind.

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Like the old dusty barometers that used to hang in the hallways of big houses, they also should be able to give you a good read on the pressures within and without, both politically and economically.

When I was finance minister 25 years ago, the deficit was -0.4, it is now 0.9pc of GDP. When I left office in my last full year in 2007, the current deficit was 7.6pc and the debt-to-GDP ratio was 20pc. Today, it is 74pc.

But we were hit with the banking crisis and, as I have said before, my government got the property issue badly wrong on the back of the worst global financial crisis since 1928.

Thankfully, as this Budget shows, we are on the mend, but given past lessons we must recognise that there may be trouble ahead.

I'm not throwing these figures about for fun, the facts are that we have a lot of debt and there are three horsemen of a possible economic apocalypse which will have to be reined in if that barometer I mentioned earlier is to be set for "fair".

The three horsemen are: Brexit, a significant drop in growth, and a collapse in the corporation tax paid by multinationals.

These are the risks that have to be managed and which will ultimately determine our fate.

The Budget really ought to have been framed with them in mind. In the short term, I think the Government has probably achieved one goal in that it has won some political stability.

I also think Michael Noonan made a reasonable fist of it, given the cards he had to play.

Yet I am worried about the fact that when the figures came out on the Friday before the Budget, we understood that there was €1bn in the pot to play with.

Four days later, we discovered the figure had jumped by 30pc or €300m. Jumps of this magnitude are a bit alarming, given the "known unknowns" we will soon be confronting.

We need ultimately to phase out the deficit and move to surpluses in order to absorb possible shocks.

Whatever the Budget might have done to shore up this Government for another spell, I am not sure that ministers have done themselves any favours in the popularity stakes.

If you try and give everyone a slug out of the bottle when there has been a raging drought, you'll end up leaving most gasping for more and none of them really sated.

Housing tax relief was addressed, but we are still a far distance from the 40,000 new builds needed to meet demand.

It is ironic to think that six years ago there was withering criticism about the number of houses built. I think it is time to revisit the land banks held by either developers or Nama and get things moving in a way that will make a difference.

With the Budget out of the way, the political energy must now be channelled into Brexit. Mr Noonan already cut the growth forecast to 3.5pc, based on expectations.

The UK is still our biggest export market - €14bn of Irish goods, €60bn a year, covering 400,000 jobs between our islands.

Grave challenges lie ahead for Europe. Since the recession in the European context, we are still 15pc behind where we would have been, had the downturn not struck.

Having just returned from Brussels, I can tell you Brexit is still creating shockwaves and confidence in the UK economy has been dented.

The pound is down by 15pc on a trade-weighted basis since the referendum. But on a measure of year-to-year change, Sterling is near the bottom of the 154 currencies tracked by Bloomberg. The final consequences can only be known when Article 50 is triggered.

Listening to people this week, Brexit is a game-changer, which will demand moves to stabilise monetary union. Past reforms are not sufficient. There will need to be enhanced responsibility for member states. But I hope Britain remains a close ally of the EU.

The question of access to the single market will be the core issue; how it is resolved will have big consequences.

But we cannot water down the four core EU principles and they cannot be on the table. These of course are: free movement of goods; free movement of services; free movement of people; and free movement of capital.

Of course economic competit-iveness will determine the future, and the single market will drive it.

Regarding the North, the central issue is going to be what kind of Border we have.

Are we going to be able to keep all of the present arrangements: free movement, no tariffs, harmonious trading relationship, etc? Not without some hard bargaining, I imagine.

But I am an optimist and hope that with good negotiating skills this can happen.

We must keep the EU on the road to reform. A revitalised EU must focus on the needs of its people and secure jobs.

Above all, Europe cannot be allowed slide into turmoil because of a Brexit shock.

Bertie Ahern is a former Taoiseach

Irish Independent

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