Monday 11 November 2019

Brendan Keenan: Lady luck must smile on growth bid

Whatever option the Coalition chooses first -- stimulating the economy or tackling the deficit, or a bit of both -- ministers need to be upfront about it

ONE could hardly call it a "dash for growth". A trot would seem more appropriate. But the phrase came to mind as I listened to Enda Kenny go through his plans for the first 100 days.

Of course the plans were in the Programme for Government -- cut the lower rates of VAT and employers' PRSI; make provision for 15,000 new places in training and education; start whatever can be done in 100 days on the big "NewERA" construction programme for national networks.

Yet it still came as a bit of a shock to hear the newly elected Taoiseach repeat them again. Without a doubt, Sean Lemass's dictum about abandoning election promises once the polls close has itself been abandoned.

If it is part of a new honesty in politics, then it is all to the good. The question mark will not be over their honesty, but their wisdom.

Anyway, memories of the last "dash for growth" came to the fore, and they were not comforting. That was the 1977 Fianna Fail Government -- one with a record majority, only now superseded.

It also broke up the old departmental structures, with the creation of a Ministry of Economic Planning to loosen the dead hand of Finance. (What we would have given for that dead hand in 2004!) And -- this is where the heebie-jeebies started -- its plans were derailed by an oil price shock.

That was a real dash for growth, with the starting gun fired by the abolition of the domestic property tax, then known as rates. I am not suggesting that anything on this scale is contained in the coalition programme. Still, Joan Burton seemed to confirm that the thinking is along the same lines.

She, not I, described the government plans as very ambitious. They would be met, she told RTE, by "intelligent" use of the National Pension Reserve Fund and a heavy reliance on economic growth.

It is worth pointing out that using the pension fund is borrowing by another name. The national balance sheet is the same as if the fund had been left alone and the money actually borrowed.

It is just cheaper to raid the fund, although, since the fund is meant to earn 6-7 per cent a year over the long term, not that much cheaper if the targets were met. The point is that the combination of borrowing to encourage growth is exactly the principle, if not the scale, behind 1977.

That dash for growth ostensibly failed because of external events. That is the problem. Governments can perhaps make a contribution to growth, but the actual outcome is beyond their control.

A recent analysis by Ernst and Young suggested that a global recession induced by high oil prices would see the Irish economy shrink by 3 per cent.

Just for the sake of argument, let us suppose they are right and, also, let us suppose that coalition policies would add one per cent to growth. All we would see after an oil price shock is a 2 per cent recession and the collapse of government plans.

Oddly enough, this could still be taken as an argument for stimulatory policies. A decline of 2 per cent is better than one of 3 per cent, providing the Government had not borrowed too much to achieve it. But the politics would be terrible. The stimulus would have to be reversed and the pension fund money would be gone.

A government needs luck for a dash for growth to come off. Quite a lot of luck. The global economy, even if it does not have an actual recession, is apt to run into some kind of trouble every three or four years and a growth package requires longer than that to work.

It may be that two things are getting mixed up in the discussions. It is undeniably true that a country cannot get out of a debt trap as deep as Ireland's without growth. It is less often noticed that growth on its own will not be enough, unless one imagines implausibly high levels. Growth of 3 per cent a year would close a lot of the €11bn deficit on running the country, but not all of it.

Stimulating the consumer and paying for new jobs will not do the job on their own. Higher taxes and lower spending are part of any solution. The choice essentially is whether a government goes for growth first, and then closes the remaining gap; closes the underlying deficit first and then waits for growth; or applies a bit of both together.

However paradoxical it may seem, when you look closely, the Coalition is actually applying the last option, with its concurrent pledge to stick to the deficit targets in the EU/IMF agreement. It might be more comfortable for it in the end if ministers were a bit more honest about that.

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