Jim Power: The people now have to choose how to keep the recovery going
The country faces one of its most important elections - one that could put the recovery in danger, says Jim Power
Published 17/01/2016 | 02:30
It is probably a truism to suggest that every election is the most important in a generation, but one does get a very strong sense that General Election '16 genuinely fits the bill. Ireland's economy and society have come through an absolutely horrific period since 2007 during which massive pain has been inflicted on the vast majority of the population.
Thankfully, over the past couple of years the situation has started to gradually improve and, despite what some might suggest, the recovery is becoming more real and more broadly based. However, there is still a distance to go to address the legacy issues from the period of boom and, more importantly, from the subsequent bust.
It was never remotely likely that Ireland would bounce back immediately from such a calamitous collapse and that all of the problems would be solved overnight.
It will clearly take a considerable period of time, and more importantly, a considerable investment of scarce resources, to sort out the many problems that still exist. We all know what they are.
The point, though, is that steady progress is now being made - and the question people who care about the future of Ireland should ask is if it would now be sensible to change course, from a policy perspective, in a significant way. I think it would be dangerous and irresponsible.
A comparison of most economic and financial statistics from the end of 2015 with those that prevailed when the last election was held suggests that the current Government has done a pretty good job. When the Government was formed early in 2011, Ireland was in a very bad and a very dark place.
Many believed it would take years to get the economy back on track. That has not turned out to be the case. During 2014, the economy re-attained the levels of activity that prevailed prior to the crash and it has subsequently expanded strongly.
The most recent economic data show that on a seasonally adjusted basis, gross domestic product (GDP) in the third quarter of 2015 was 16.8pc above the first quarter of 2011. The level of gross national product (GNP), which is in many ways a more real measure of activity, was 18pc higher.
I have consistently argued over the past five years that the success or failure of the current Government should be judged at the end of its term by the state of the labour market in general, and the number of people in meaningful employment in particular. Between March 2011 and December 2015, the number of people signing on the Live Register has declined by 115,700 and, on a seasonally adjusted basis, the decline from the peak of August 2011 is 120,200.
The number of people categorised as unemployed declined by 117,900 between March 2011 and December 2015 and the unemployment rate has fallen from 14.3pc of the labour force (it peaked at 15.2pc in January 2012) to 8.8pc. The total number of people at work in the economy increased by 119,100 between the first quarter of 2011 and the third quarter of 2015. In fact, in the three-month period to September 2015, there were 139,700 more people at work than the there were at bottom of the market in the third quarter of 2012.
The progress in turning around this very difficult labour market is impressive - as is the progress with the public finances. The general government deficit has fallen from 10.3pc of GDP in 2011 to an estimated 1.5pc in 2015. Over the same period the debt/GDP ratio has fallen from 109.3pc to an estimated 97pc. Indeed, this ratio peaked at 120pc.
Virtually every economic indicator in 2015 is significantly better than in 2011. In addition, personal debt levels are coming down; the banking sector is returning to profitability, and, while nowhere near adequate, credit availability is getting better; mortgage arrears are declining; long-term interest rates have fallen massively; and water services are improving.
Arguably, where most progress has been made is in relation to our international reputation. At the beginning of 2011, Ireland's reputation was in tatters, but the country is now generally viewed in a very positive light overseas. The view from sensible observers is that, while mistakes have been made, the Government has taken tough policy decisions and turned around what was a very dire situation.
It can of course be argued with justification that the Government merely continued on with the policies that the late Brian Lenihan started, and that Ireland has been the beneficiary of some very benign external forces.
Mr Lenihan did put the fiscal adjustment plan in place and the Troika ensured that we did the right things after 2011. Ireland has also benefited enormously over the past couple of years from ECB interest rate policy and quantitative easing, the collapse in oil prices, the weakness of the euro and the relative strength of two very important trading partners, the US and the UK. All of these factors are outside of our control and have been a major driving force behind the economic recovery.
However, the fact is that Fine Gael and Labour formed a stable government at a time when the country badly needed stability. The Government pursued policies that were sensible, albeit very tough at times, and those policies were instrumental in restoring international confidence in the economy. They also helped restore confidence among those domestic players who create the jobs and drive the economic growth that generates the resources to fund vital social services and enable social spending. The Government that came into power five years ago has helped rescue our tattered reputation and turned Ireland into the fastest growing economy in the EU.
Fianna Fail in government would never have succeeded in restoring international confidence following its dramatic mismanagement of the economy, and the populist left-wing policies proposed by Sinn Fein and other politicians on the hard left following the crisis would arguably have prolonged the depression and prevented the restoration of confidence in Ireland.
This is not to suggest that Ireland still does not have problems. The quality of public services such as health, education and law is poor; there is a significant shortage of housing; sovereign debt levels are still too high; unemployment needs to be taken down further; mortgage arrears are still too high; and of course the country is vulnerable to external economic and financial frailties.
The question is whether policies similar to those that have been pursued over the past five years will do the trick over the next five - or should we vote for those on the hard left who are promising all sorts of populist policies? In my view, the risk of changing the policy approach in a significant way could be very dangerous and totally counter-productive at this stage.
Over the coming weeks we will find out exactly what the politicians of the far left are proposing. What we know to date would not fill those who care about the future of Ireland with confidence.
For example, over recent years the hard left has proposed to increase the marginal rate of tax on earnings over €100,000 by 7pc, introduce an employer's PRSI rate of 15.75pc on salaries in excess of €100,000, implement a wealth tax, abolish mortgage interest relief for landlords, increase CGT to 40pc, reduce the pension cap to €60,000, abolish the property tax, end water charges and reintroduce a second home charge of €400.
Sinn Fein claims it wants to encourage the contribution that the self-employed make to our economy and is conscious that the current taxation system discriminates against them. Yet it is recommending that the earnings cap for tax relief on relevant pension contributions is reduced (once again) to €60,000. This would add yet another headache for the self-employed/business owner/professional who is attempting to save for retirement. Ireland has a pension timebomb waiting to explode, and by undermining pension provision by those who are willing to fund their own pensions, a serious problem is being built up.
It is also important to recognise that the populist option of just increasing the tax burden on so-called high earners will only serve to discourage people with ability who want to work hard from locating here. This would undermine entrepreneurial activity and employment and damage economic activity. It certainly would not be good for FDI.
It is worth considering how Sinn Fein has now abandoned Syriza, having been its number one cheerleader. Syriza discovered that populist economics doesn't actually work in practice. Those who care about the future of Ireland should bear that in mind.
In summary, Ireland has felt a lot of pain since 2007, but the situation is improving and the recovery is becoming more real. If we implement the policies of the hard left, we risk undoing all the progress that has been made, destroying our reputation, increasing the cost of debt servicing and undermining the growth potential that is badly required over the next five years to improve vital public services.
The last thing we need is a lurch to the left, to populist policies of the type that destroyed the economy back in 1977 and the type of political instability that destroyed the economy in the 1980s.
General Election '16 is indeed the most crucial election in a generation. We have a choice to make - do we want to continue with the policies that have delivered recovery or elect politicians with policies that will destroy Ireland's future? I know what I will be doing.
Jim Power is an independent economist