Friday 20 July 2018

Wolves ready to pounce if we stray from fiscal path again

'All three of the of the old main parties have faithfully followed this well-trodden path since 1976 - except when they were fighting off the financial wolves.' Stock image
'All three of the of the old main parties have faithfully followed this well-trodden path since 1976 - except when they were fighting off the financial wolves.' Stock image
Brendan Keenan

Brendan Keenan

Don't stray from the path; never eat a windfall. Granny's warning in Neil Jordan's movie 'The Company of Wolves' neatly sums up the fiscal advice proffered to government, but as usual the Little Red Riding Hoods of Kildare Street seem in no mood to heed it.

In this case, "as usual" goes back a long way. For 40 years now, Irish finance ministers have been straying from the path at every opportunity and cannot seem to see a windfall without gobbling it up.

Twice, they have strayed so far from the path that they have had to fight off packs of wolves to survive. Yet this way of doing things remains unchanged, even though the woods are full of howls.

The method - it would be going too far to call it a strategy - is now deeply ingrained. Governments set the minimum possible targets for fiscal respectability. Being minima, they are quite often exceeded, but the excess is recycled in the form of higher spending or lower taxes (usually the former) so that the original target is met rather than beaten.

Yet one looks around the Dáil in vain for any sign of a serious alternative to this "one year at a time, and let's see how we get on" approach.

All three of the of the old main parties have faithfully followed this well-trodden path since 1976 - except when they were fighting off the financial wolves. It looks fine when things are going well but the fundamental weakness of such an approach is exposed when they go wrong.

The plans for progress in the medium term might have been drawn up by a tortoise planning a trek. They appear to stick to the fiscal path but their credibility depends on where we are right now, which in turn depends on one's view of how well things are going.

On the face of it, they are going very well. Employment keeps increasing and unemployment, under whichever heading one looks, keeps falling. Growth in output and incomes is more difficult to assess.

PRSI receipts endorse the employment figures but income tax revenues are less than might have been expected, especially since the last survey shows substantial growth of 5pc in full-time jobs. The high proportion of self-employed in these may be affecting income tax forecasts, legitimately or otherwise.

Cross-border shopping may be knocking something off excise receipts but in general, the tax returns point to strong personal spending. The really difficult question cannot be answered from data like this, however; how much of the growth is catching up from the crash, and what happens when the catch-up is completed?

Over the long-run, from 1960-2000, allowing for the Irish economy's violent paroxysms up and down, growth averaged 4pc a year. That is what transformed Ireland from one of the poorest countries in western Europe to the one of the richest.

The paroxysms of the 2000s make it impossible to gauge the present long-run growth rate as yet, but given the economy's under-development in 1963, it can hardly be as high as 4pc a year. At present, it is growing by more than that (something like 5pc seems the best estimate) but it could be a big mistake to regard that as a new normal.

This is what has been happening. In its pre-Budget analysis the Fiscal Advisory Council pointed out that the day-to-day public finances, before the €7bn a year debt interest cost, hardly improved at all over the past two years, despite good growth and good luck.

Had the windfalls of unexpected corporation tax receipts and interest savings not been eaten, the total budget, including the €7bn, would be in balance by now. Such a balance might seem unduly harsh in an economy with moderate debt which is growing at its long-term trend, but neither criterion applies to Ireland.

The lack of enthusiasm for staying on the path is clearest in the official targets for debt - although it might be going too far to call them targets.

If it turns out we still have the 4pc a year economy of the 1990s, debt could fall to 45pc of GDP in the next five years: if it is somewhat less buoyant the maximum permitted figure of 60pc of GDP is to be attained.

The use of discredited GDP numbers casts doubt on political willingness to change the old incremental ways. Government accepts that national income, now known as GNI*, is a better measure. Using that, that target range changes to an unimpressive 70pc-90pc.

One can see what may be going on under the red hoods. Average national debt in the EU is now over 80pc of credible measures of GDP, and rising. Last week's data from Britain put the ratio at 89pc.

Using GNI*, Ireland has the fourth-highest debt in the OECD - which takes in the whole developed world. Getting that down to 90pc, ministers could argue, would put us back among the average - perhaps even below it by then.

The big assumption there is that this international trend of ever-increasing debt can continue for another five years. The possibility that lenders' nerve will crack, just as it did in 2007, cannot be ignored. If it does, being among the average of countries swimming in debt, by historical standards, will not be much help. Assuming we get there at all.

Last week, analysts at ratings agency Moody's pointed out Ireland's vulnerability to any rise in interest rates which would follow a market panic - or even fright.

Their main point was that Irish banks' rating has improved to "stable", but that is on the basis of loan books continuing to shrink in relative terms. Many domestic analysts question whether strong growth can be maintained while credit is falling. Some are surprised that it has lasted this long.

A more unusual source - British Labour leader Jeremy Corbyn - raised a more pressing danger than global market turbulence or an Irish credit squeeze - a 'run' on sterling.

The betting must be that at some point in the lifetime of this parliament (a fixed lifetime, thanks to some bloke called Cameron), Mr Corbyn will move into 10 Downing Street, with the Scottish Nationalists having no choice but to support his minority government. Add Brexit, and one would not even get odds against a run on sterling.

One can only imagine the responses which Mr Corbyn and his team are planning in their "war games" for this scenario. As a matter of fact, I can imagine them all too well and war is not a bad word to describe it.

There were also those World Economic Forum competitiveness rankings. These can be something of an echo chamber, being based partly on inhabitants' views of their own country.

But the Irish ranking of 108th out of 137 when it comes to debt is a precise figure. It is also hard to argue with the rating of 69th in financial market development.

With all that is going on, it may not be long before we regret the minimalist approach which has left the country still in these positions in 2017, but there are not regrets as yet.

None of the above features much in the pre-Budget discussions: just grudging compliance with EU rules, and discussion on how much extra investment, and where, coming a very distant second to unexplained rises in pensions and the recycling of social welfare spending even as unemployment tumbles.

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