Sunday 25 February 2018

We must cut dangerous debt levels to lessen risk of crisis

Alan McQuaid

Alan McQuaid

We are halfway through the year and we still await the official Irish GDP data for the first quarter. However, the key manufacturing, services and construction purchasing managers' indices have performed well in 2017 to date.

Furthermore, consumer spending has been strong too, auguring well for our national output numbers. Ireland has been the best growing economy in the EU for the last three years, and it looks like it won't be far off that again in 2017. Unemployment continues to fall as well, with the jobless rate edging ever closer to 6pc, having been as high as 15.1pc at the height of the financial crisis.

So on the surface, everything looks rosy in the garden, but when one delves deeper there are a number of causes for concern.

The hope of many was that the appointment of the young and energetic Leo Varadkar as Taoiseach would herald a new era in Irish politics. But the early signs are not encouraging. Sometimes you wonder what planet politicians are on as they place far too much emphasis on issues that have little interest or relevance to the ordinary man and woman in the street.

The amount of time that has been taken up with the controversial appointment of former Attorney General Máire Whelan to the Court of Appeal is a case in point. This may be an important issue for the political parties and their inner circles, but for the rest of us, it has little relevance.

There are far more pressing things that need to be addressed, particularly in relation to housing, health and "Brexit". And if politicians are that concerned about how individuals are appointed, then maybe they should tackle the whole thing of nepotism that exists in the Irish labour market.

It is clearly not a case of "what you know" but rather "who you know". My daughters have experienced it first-hand and it stinks to high heaven.

Varadkar has been accused of a lack of gender balance in both his senior and junior ministerial appointments, and still in the 21st century it seems to be very much a man's world, with women treated as second-class citizens in terms of job opportunities and pay.

The Brexit vote in the UK and the election of Donald Trump as President of the United States have also raised another thorny issue as regards the labour market. Should a sovereign state look after its own nationals first before giving jobs to people from other countries?

As regards housing, there appears to be no simple answer. There is a shortage of every type of housing and it needs to be addressed urgently.

Our GDP numbers may point to a rich developed country, but you wouldn't think it judging by the number of people sleeping rough on the streets in our major cities.

Meanwhile, first-time buyers continue to be priced out of the market. Subsidising purchasers through tax breaks is not the answer, so maybe the time has now come to penalise investors. Irrespective of which solution is proposed, there is likely to be some flaw. But if housing is about providing a place to live in at an affordable price, then those who want a house simply to live in should be given precedence over those who are in it purely for investment purposes and looking to make a quick buck.

Then there is Brexit. People have accused UK Prime Minister Theresa May and her Conservative Party of sleepwalking into Britain's departure from the EU, with no coherent plan or exit strategy.

Well the same could be said about us here in Ireland.

For such an important event, that will have a long and lasting impact on the Irish economy, there appears to be a sense of "not to worry lads, we will be grand". It's great to have such optimism, but reality is likely to play out a lot differently.

Already we've seen the knock-on effect of a slowdown in the UK economy and weaker sterling on Irish food exports to Britain and the number of British tourists visiting Ireland. Tourism is an important contributor to the Irish economy, so there is no room for complacency.

Recently a New Zealand tourism academic criticised the product on offer here, saying Dublin was overly expensive and passport control in Dublin Airport left a lot to be desired.

As someone who has lived and worked in Dublin all my life and firmly loves my city, I unfortunately have to agree.

The banking sector, which played a big part in bringing the country to its knees during the financial crisis, was back in the news again last week with the successful sale by the Government of a 25pc stake in AIB. How the €3bn raised through the flotation should be used has been a topic of heated debate. Some are arguing that the money should be invested in capital infrastructure.

But the EU sees the situation differently, saying the funds must be used to pay down Ireland's national debt, well aware that for one country spending the money wisely on capital investment, there would be another who would see it purely as a means of boosting current spending, and we all know where that would go. Rules are rules.

As things currently stand, Ireland's debt/GDP ratio compares favourably to other European countries but this is simply due to the "artificially high" national output data for 2015 as a result of the statistical treatment of intellectual property, whatever that is.

But on other metrics our figures don't look so good. Indeed, on a debt-per-capita basis, only Japan has a higher figure than Ireland in the developed world. So when will we learn that adding to debt is not the answer when your debt level is already extraordinarily high? It simply doesn't work and is a recipe for disaster.

There is an element of 'Groundhog Day' about Ireland at the moment. The number of building cranes across the skyline is increasing rapidly, property prices are rising as if there is no tomorrow and the public sector unions are flexing their muscles again.

Given the level of both government and household debt, we better hope that there are no major unforeseen external shocks to the economy in the next couple of years - if there are, we will be back to square one. Prudent management of the country's public finances is what's required at this juncture, not some gung-ho approach to public spending.

Getting our debt levels down as quickly as possible should be our main priority. We don't want another repeat of the financial crisis.

Fool us once, shame on you, fool us twice shame on us.

Alan McQuaid is chief economist at Merrion Capital.

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