Friday 15 November 2019

Economic tsunamis are coming

Don't be surprised if there is an emergency Budget within the coming weeks, writes Marc Coleman

For the inhabitants of small islands in the Pacific, this weekend was a time to hide. And wait. From Saipan to Santiago, the worst tsunami in over a century washed over the Pacific.

For areas on high ground -- Indonesia, the Phillipines, the south American land mass, it was taken in its stride. But for little atolls a few feet above sea level, it was a potential disaster. In the coming few weeks, two tsunamis of the economic variety are heading Ireland's way. One is totally beyond our control and has its epicentre in Frankfurt. The other has its epicentre in Government Buildings. And in both cases, Ireland is a low lying atoll, rather than a sturdy land mass.

Like any geologist, economists have a set of seismographs they use to try and predict quakes. Seven years working for the European Central Bank -- three of them in its monetary-policy division -- have told me that when the ECB President uses the words "strong vigilance", a rate rise is coming soon.

On March 3, that is exactly how Mr Trichet described the bank's attitude to inflationary risk. Whether he is right is for another article. One way or another, a rate rise is now almost certain when the ECB next meets on April 7 to consider interest-rate policy.

On the Richter scale, the first will be modest enough: the rise is likely to be no more than a quarter point. And it will be a tentative start to a process that will be slow to speed up.

Less modest is the economy's ability to endure it.

Like one of those low-lying Pacific islands, what matters more is not the height of the wave but the height of the wave relative to the height of land above sea level. With around €300bn worth of private debt in the economy, there are few places to hide: A quarter point increase implies a loss of around €750m from the economy, ball park.

What about the second tsunami? My second seismograph is the ESRI. Closely in touch with thinking in important policy circles, when one of its leading members makes a policy pronouncement, a needle in my brain starts moving up and down rapidly.

Two weeks ago, ESRI director general Frances Ruane and I addressed the Association of Compliance Officers in Ireland. When, in the middle of a discussion on financial regulation, Frances called for the introduction of a property tax, that needle started doing overtime.

Professional and decent though they are, few in the ESRI have ever worked in the real private sector and they simply don't conceptually understand the need to reduce costs before imposing taxes.

In fairness, the ESRI wants to help small businesses which are being crucified by local-authority inefficiency via the imposition of rates. But the solution is not to crucify homeowning families. The solution is to drastically overhaul local government.

Political logic tells me this instinct is right. Governments elected on the back of a crisis have a short honeymoon in which to raise taxes and blame it on the last Government. So don't be surprised if an emergency Budget is held in April or May.

The National Forum, a think tank established last November, set out clearly what needs to happen: With a population less than Greater Manchester, Ireland needs no more than nine local authorities.

As well as achieving vast savings to this Exchequer -- thus avoiding or greatly reducing the need for property taxes -- this would have three further huge advantages.

By giving each region a voice in the Seanad, it would ensure effective representation for regions that is no longer based on the vagaries of cabinet appointment, but built into the system in a fair way.

Secondly, it would create entities large enough to organise the effective provision of road, broadband, water, public transport and other vital infrastructures.

Thirdly it would at last allow effective management of regional economies by proper planning of urban development, foreign investment (in conjunction with the IDA), ports and airports.

If needed, those regions would be free to raise their own local taxes and create additional substructures at county or town level. We would at last have truly democratic local government.

Instead of this long-range planning, we are likely to get property taxes without any fundamental changes in local government.

A final point, if I may. As ministers who have seen and dealt with earlier crises, the appointment of Michael Noonan and Brendan Howlin to the Department of Finance is welcome. Having said that, on leaving the Department of Finance in 1997 to join the ECB, I was suddenly struck by how -- apart from having more skilled staff -- the ECB had a much greater representation of women.

Reeking of testosterone, if one department badly needed a woman in charge, it was Finance -- and not appointing Joan Burton is a missed opportunity to not just restructure the department, but reculture it.

Marc Coleman is a candidate for election to Seanad Eireann for the Dublin University panel (TCD)

Sunday Independent

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