Business Irish

Sunday 22 April 2018

Chairman, Fiscal Advisory Council: 'There's been a very strong recovery - we are now living within our means'

Ireland must avoid the boom-bust cycles of the past. But will the Government take heed? Seamus Coffey talks to Colm Kelpie    

Fiscal Advisory Council chairman Seamus Coffey. Photo: Daragh Mc Sweeney/Provision
Fiscal Advisory Council chairman Seamus Coffey. Photo: Daragh Mc Sweeney/Provision

Colm Kelpie   

Seamus Coffey says the speed of the recovery of recent years was unforeseen.

Four years ago, this newspaper ran an interview with Mr Coffey's predecessor at the helm of the Irish Fiscal Advisory Council. The overriding theme was austerity. The Budget, announced just months before, brought in €2.5bn in tax hikes and spending cuts. At the time, John McHale, the-then council chairman, wanted an even greater correction.

Gross debt was forecast to peak at 124pc at the end of 2013. The deficit was set to narrow to 4.8pc at the end of 2014.

Fast forward to the present day.

Last year saw the State take in a record tax take of over €50bn. Growth, in GDP terms last year, is forecast in some quarters to top 7pc. While a large chunk of that can be attributed to the distorting affects of the accounting activities of multinationals, growth, when you strip those out, is still expected to be around 4pc to 5pc.

Unemployment could dip to around 5.5pc this year, with the Department of Finance forecasting that we're on track to reach full employment. The numbers at work look set to surpass the 2007 pre-crisis peak this year. "A large part of that growth was unexpected," Mr Coffey says. So let the boom times roll? Steady on, he adds. "Our concern is that we try to do too much too quickly," he says.

"Steady growth rates of 3-3.5pc, is what the Irish economy potentially can do, but the Irish economy doesn't do moderation. It's either growth rates of above 5pc or growth rates of below 2pc. We don't tend to hit the average too often."

We've replaced the problems of the crash with those of a thriving economy. We've been feeling the effects of a dramatically scaled-back infrastructure spend, with too few houses the most obvious example of that.

Mr Coffey - who took over as Fiscal Council chairman a year ago - broadly backs a recent analysis by Ibec which argues that we're now richer than ever before.

The problem with making that claim though, is that we just don't feel it, he adds.

"One issue with Ibec's analysis is not so much what you say, or how you say it, it's how you feel," Mr Coffey says.

"Do we feel the same as we did back in 2006/2007/2008? There's no doubt we don't. A large part of our spending then wasn't based on our income, it was based on our borrowing. So while our income might be back in 2007/2008 levels, and recent work in the CSO would suggest that's where we are, the sentiment isn't, because now we're living more within our means."

The University College Cork academic said there was a "certain merit" to what the analysis offered.

"Some of the reaction was overplayed somewhat," he adds. "There has been a very strong recovery. We are now living within our means and not supplementing our spending with huge borrowings."

Coffey has emerged as an important player in public policy. Before chairing the IFAC, he was tapped by government to review Ireland's corporate tax regime. The 40-year-old remains a relatively reluctant public figure though, batting off anything remotely akin to a personal question.

As for the reasons behind the recovery, Government policy has played a part, Mr Coffey says, but so have circumstances beyond our control.

"We've had tailwinds at our back. Mario Draghi's promise to do whatever it takes to save the euro and the ECB's quantitative easing, which has driven interest rates down," he says.

"These extremely low interest rates have been of large benefit to Ireland. A couple of years ago there was a suggestion that the annual interest bill on the Government debt would exceed €10bn possibly rising to €12bn. The latest figures for 2017 show that it was close to dipping below €6bn. Similarly for households, those on tracker rates would have seen those tracker rates fall."

With a strong recovery in the eurozone, the European Central Bank's massive bond-buying programme has been extended, though scaled back.

Despite concerns from the Government and ESRI about the impact of the ending of QE on the State's borrowing costs, Mr Coffey isn't worried. In fact, he sees a potential upside for the economy.

"On Irish growth I don't think it will have a huge impact. We're still not seeing interest rates rise yet," he says.

"The ECB is likely to taper its purchases of assets but interest rates are likely to remain low. A lot of the debt that we have refinanced at these lower rates, is for long maturities, so we won't see that debt coming around for 10, 12, 15 years. Indeed, over the next three years, we have upwards of €50bn of debt which is set to be refinanced. It is likely that that will be refinanced at lower rates than currently exist on that debt. So that interest bill is likely to continue to fall, even though the debt is over €200bn and it does present concerns in terms of people's willingness to lend to us.

"I don't see the ECB's tapering off having a significant impact on Ireland. In fact you could argue that as the economy has grown so strongly, in relation to house prices and other asset prices, that a rise in interest rates would actually be beneficial, given our place in the economic cycle."

Mr Coffey said the ending of QE could dampen mortgage lending, and thereby act as a drag on current house price growth. "Previously, back in 2005/6/7 we had interest rates that we knew were too low for us," he says. "There's probably a risk at present that interest rates in the future could be too low. So maybe seeing interest rates rise now wouldn't be the negative that some might perceive it to be."

The council has warned about the risk of overheating as the economy continues to grow strongly. Mr Coffey says this is a risk for the medium to long term, but there is no guarantee that it will happen.

He warns that with the budget deficit now almost closed, there may be pressure on the Government to loosen its hold on the public finances.

He has taken solace in the public pronouncements from both the Taoiseach and Finance Minister that they want to avoid the boom/bust cycles of the past. Time will tell, he adds. Budget 2019 will likely see the public finances in balance.

"The guiding role of the fiscal rules is now hugely reduced," Mr Coffey says. "It's now up to us to guide ourselves."

Housing is a big concern. Given the demand, and need, for a massive increase in the number of houses being built, Mr Coffey says that while housing output needs to increase, spending may need to be reined in elsewhere to allow for it.

"One concern is, if we're going to do all of this, where are the workers going to come from?

"If housing output is 15,000, 16,000 and we need to get it to 35,000, where are the 40,000 or 50,000 workers that are required to reach those levels going to come from?

"We don't have spare construction workers. Either they've moved to other sectors within the economy or they've left the country altogether. So are we going to attract workers from other sectors back to construction, thereby adding to wage pressures and pushing up costs, or are we going to bring workers back in from abroad?"

Housing output so far, has been "modest", and falls short of what is required, he adds.

Another concern of course is the well-flagged over reliance on corporation tax. Those receipts now account for 16pc of total tax receipts. About 16pc of total CT receipts are coming from companies paying less than €1m, while 36pc are coming from companies paying less than €10m.

"I don't think there is much we can do about it," Mr Coffey says. "It is far better to be getting these revenues than not getting them. But there is a danger that just as they could come in quickly, they could equally go out. That doesn't look like it will happen over the short-term, but over the medium to long-term there should be concern about their permanency."

One option is to put the extra CT cash into the rainy day fund, he says.

"You could introduce measures around the edges that might smooth corporation tax receipts. We have seen one of those introduced in the last budget, with the changes in relation to the taxation of profits linked to intangible assets.

"When it comes to corporation tax itself, maybe as the recovery continues we may see more revenue come in from indigenous companies that may reduce reliance on the foreign multinationals.

"Multinationals are 80pc of the tax base, that is a very high concentration."

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