Monday 20 May 2019

Emmet Oliver: Noonan would love us to spend way out of recession

IT IS a recovery, but not as we know it. News that the Irish economy has resumed growth for the first time in three years will surprise many, apart from maybe a small band of statisticians and economists.

Growth, however anaemic, is good news. But usually when economies recover from the kind of deep recession Ireland has been through, they bounce back very vigorously, by say between 3pc and 4pc.

Incomes start to rise, retail sales jump and the housing market gets fresh impetus, but this recession is different and consumers will feel like the recession is still lingering even after growth has technically resumed.

Hence the latest numbers from the Central Statistics Office (CSO) are unlikely to impinge much on the everyday habits and perceptions of consumers, who power about 58pc of the country's entire economic output.

In some ways this is a pity because Ireland's export performance is no myth. The amount of goods exported from Ireland grew by 21pc year on year, with chemicals, IT and pharmaceuticals all playing their part.

But exports alone will not get the Irish economy back to growth rates of 4pc or 5pc and at this stage the economy looks very lopsided and twin track. As exports expand, the contribution from the rest of us is shrinking.

Long term, this is arguably a healthy development giving the Irish economy a better balance, but in the short term, a key engine of growth -- the consumer -- is missing.

But two questions arise in this context. Do we really want to go back to the high levels of consumer spending of the past?

Some economists argue that our current spending levels are the "correct" long-term spending level and any big increase in spending will lead to dangers down the road, particularly when Irish people are already so heavily indebted.

But equally there can be too much saving and not enough spending. The economist John Maynard Keynes called it the "paradox of thrift" and it essentially means if everyone saves at elevated levels it can actually damage the economy, by reducing the overall demand for goods and services.

Is this what Ireland is suffering from? In some respects, yes, when one considers one astonishing statistic -- depositors have €134bn on deposit in the six Irish banks at present. If even some of this money was recycled into the broader economy, Ireland's annual budget deficit could be wiped out almost overnight.

So what can the Government do to spark greater levels of consumer spending, at least in the short term? In Ireland's case the options are quite limited.

Ireland's public exchequer finances mean that an actual stimulus programme, a la the Obama administration in the US, is not possible. We are already spending €18bn too much each year. There is no room for additional discretionary spending.

Other governments have tried all sorts of innovative ideas over the years to get their populations into the shops. In 2008 the South Korean government famously gave out shopping vouchers to its entire adult population, regardless of income.

In a now infamous speech in 2002, US Federal Reserve chief Ben Bernanke (then an academic) suggested the way to respond to a deep recession was to cut interest rates to zero and distribute dollar bills from the sky. This led to him being dubbed 'Helicopter Ben'.

Other smaller projects to spark a consumer response have been tried here. One is the car scrappage scheme; VAT cuts are another. The car industry believes the first of these was successful, the jury is still out on the latter.

Other ideas that can be tried are cutting income taxes (as advocated by the US Republican party), lowering interest rates, cutting business taxes or lowering the value of your currency -- in other words devaluation.

Ireland with its deficit cannot reduce taxes any further, except at the margins. Due to handing over the reins to Frankfurt and the ECB, Ireland has no say in interest rate policy and devaluation is completely out of the question while we are members of the eurozone.

This leaves something like cutting business taxes, which, according to the textbooks, should mean businesses starting investing again, which will eventually create a spin-off across the economy.

This could be tried here, but the IMF/EU have made it very clear that any taxation measures Ireland introduces must be "revenue-neutral", meaning that if business taxes were cut, the tax burden would simply have to rise somewhere else.

Where the Government can have an impact is in the fuzzier area of confidence and sentiment. A lot of what drives Irish saving rates is uncertainty.

Nobody knows what is going to happen in their immediate economic future. Are taxes going to rise? By how much? Are wages going to fall, rise or stay the same? Where are house prices going to be in a year's time? Where are interest rates going to be?

These are just some of the questions that gnaw away at the consumer. The Government for example is going to introduce a swingeing Budget in December, but as we enter July, nobody has told the public yet how much of the €3.6bn that will be taken out of the economy will be in the form of spending and how much will be in the form of tax hikes.

There is also talk of water charges and property taxes on the way, but so far the public have not been enlightened about the kind of rates involved or the system that will underpin these new levies.

The interest rate question is also a substantial factor for many consumers. Those on variable rates literally have no idea where those rates might be in a year or two. While they are going to be higher than today most likely, the Irish banks are in a unpredictable funding situation (relying heavily on the ECB), which means that there are virtually no certainties.

Finally, the issue of the European debt crisis looms large, with talk in the media of defaults in Ireland or Greece. This is like a poison for consumer sentiment, so much so that Greek consumers are now stocking up on gold bars, worried the country will be forced out of the eurozone.

There is no danger of that for Ireland, but the mere mention of the word default has made some consumers (not to mention taxpayers) nervous.

In that context, there is little government here can do. Like in life generally, time is a great healer. At a certain point, consumers will feel they have saved enough, paid down enough debt and are likely to keep their jobs after all. That moment will come, it is just not there yet.

Irish Independent

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