Thursday 14 December 2017

We can't afford to loosen purse strings until our massive debt starts to come down

Protectionist: US President Donald Trump (AP Photo/Pablo Martinez Monsivais)
Protectionist: US President Donald Trump (AP Photo/Pablo Martinez Monsivais)
Donal O'Donovan

Donal O'Donovan

Public sector unions already gearing up for pay talks this summer would be mad not to seize on the Davy forecasts, as well as on growth figures that had already been revised up by the Department of Finance.

With more cash in the Exchequer and an election likely to be in the offing as soon as the ink on Budget 2018 is dry, the political temptation to buy off those big unions is going to be enormous.

The capitulation to Garda unions last year has already set a dire precedent. The relatively rosy data coming out of the economy will make it easier for unions - whose members were battered, along with the rest of the population in the crash - to frame their demands.

Meanwhile, every increase in the so-called fiscal space makes it easier for ministers to justify giving in to those same demands and to fudge tough decisions in particular around public service pensions.

At a psychological level the current growth trends also makes it far less likely that anyone will heed dire warnings that the economy could yet be knocked off course.

It's a recipe for budgetary looseness in October that needs to be resisted.

It is true that the worst didn't happen. Expectations that last June's Brexit vote would paralyse investment decisions for months, or even years, haven't materialised. There was a bit of a corporate go-slow last summer but it is well and truly over. Consumers both in the UK and here have continued spending, largely unaffected by the UK vote.

Read More: Growth forecast hiked to 5pc as jobless rate 'dropping like a stone'

The latest view from Davy in essence is that solid growth lifted the real economy here last year and has barely slowed in 2017.

It's being felt positively in hiring rates and the invoices being sent out from businesses all over the country as new orders pile in.

Less positively, rising prosperity combined with the grants for first-time buyers and a premature decision to relax Central Bank's mortgage caps is driving house prices even further out of the reach of many buyers - including front-line staff in the public sector.

Brexit has had little or no impact on most parts of the Irish economy, despite acres of hand-wringing newspaper commentary.

The election of a protectionist Donald Trump hasn't knocked a feather out of US markets, despite those markets being totally reliant on free trade. In France the nightmare of a far right takeover has been averted - at least for the next five years. Through Brexit, Trump and Le Pen, the economic plates just kept spinning.

Many of us hit with lower wage packets and higher taxes, or who lost jobs, businesses and homes after the last 'economic miracle', will look warily at the Davy forecast. The elephant in the room is debt.

Using the standard debt-to-GDP measure, Ireland's national debt has plunged in the past four years from around 120pc of the size of the economy to 75pc. That's all been thanks to the increase in GDP.

Using the more old fashioned method of tallying the amount owed by the State, debt levels actually increased in the same period.

Unions will argue that normalisation of the economy means emergency measures introduced during the crash should now be reversed.

Perhaps they are correct, but the State owed a record €185.6bn at the end of last year compared to €37.5bn in 2007. Until those figures start to move closer, any talk of normalisation should be taken with a big pinch of salt.

Irish Independent

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