Monday 16 September 2019

Beware the perils of our politicians making promises that we simply can't afford

Finance Minister Paschal Donohoe. Photo: Gareth Chaney Collins
Finance Minister Paschal Donohoe. Photo: Gareth Chaney Collins
Ivan Yates

Ivan Yates

Mark my words - the countdown to the next general election is on.

The selection of candidates is in train. War-chests are being stocked. The marshals are frantically strategising, scanning focus groups to get ahead of the curve and capture and channel a tide of public opinion strong enough to carry Leo, Micheál or Mary-Lou to power into 2020.

The electoral cycle should carry a heavy public health warning as far as the strength of the economy goes. Fiscal promiscuity is a clear and present danger.

In the scramble for votes and the rush of political populism, reason is the first casualty. Amnesia and short-sightedness are the first symptoms of poll-mania.

Promising punters "good news" started at the weekend with Paschal Donohoe telling employers to stump up extra cash, stirring the desires of expectant employees.

All very reminiscent of 2007. Remember the ESRI foretold a decade of sustained growth, subsequent to four years of spectacular increases in output, employment, exports, incomes and prosperity. And Bertie Ahern almost achieved an overall majority in the Dáil by doling out massive hikes in public sector pay through benchmarking, a €16-per-week increase in old age pensions and significant tax cuts topped off with a bonanza windfall of SSIA pay-outs.

Sure, what could possibly go wrong?

And nobody in Opposition parties Fine Gael or Labour cried "stop"; they too were busy promising further improvements in health, education and most public services.

Fast forward to today. The Dáil mood music is wildly up tempo. All parties are for sanctioning public sector pay rises.

So pay parity for 60,000 public servants recruited since 2010 on agreed revised differential terms and conditions is set for a green light - an average pay hike of €3,300 without any enhanced productivity.

A schedule is set to be agreed for an additional €200m.

Then there are the fixed annual costs to the burgeoning €20bn annual liability. Simultaneously, the Defence Forces seek a special revised pay deal across 9,000 members, like the one given to the Garda.

Recruitment of 12,000 public servants is inevitable arising from several billions more in spending commitments for new hospitals and schools.

Our population has increased by 400,000 in the decade between 2007 and 2017. More civil servants and gardaí are planned.

Meanwhile, the amalgamated public sector union Forsa is ready to flex its muscles. Efficiency measures agreed are set to be unpicked. Specifically, 27 extra minutes per day or two hours and 15 minutes per week meant a 37-hour week was the new norm.

The worst day in the public sector week is better than the best day in the private sector, where the norm is a minimum of 38 to 42 hours per week. This is calculated to require another 12,000 extra staff. Old habits die hard. Cultures don't change.

No political party seems to remember taxation receipt forecasts cannot be automatically assumed.

Given that 2pc of Ireland Inc's GDP growth last year emanated from the invoiced sales of one product (iPhones) that weren't even made here, one has to question the vulnerability of our €8bn corporation tax base. It now accounts for 16pc of all State revenue. More than €2bn of this multinational moolah can easily disappear in a boardroom twitch.

As if there were not enough storm clouds on the horizon, the 2019 Budget in October coincides with the culmination of the Brexit withdrawal treaty text negotiations. As of now, our 'backstop' is in bits.

Frictionless trade both North-south and east-west is irreconcilably caught between the rock of Tory determination to exit the customs union and the hard place of EU border restrictions. If the UK economy nosedives and sterling significantly devalues, all bets are off on our growth assumptions.

When Lehman Brothers crashed in 2008, the US sub-prime tsunami waves rocked our banking system. Donald Trump's trade war rhetoric has direct implications for our US exports of €49bn in goods and services.

Protectionism may start with the Aughinish Aluminium bauxite refinery and Harley-Davidson bikes, but who knows where it will end.

Our national debt stands at €206bn. Low servicing costs of circa €1.6bn are because the NTMA can sell 10-year bonds at historically miniscule rates. Inevitably this cycle is set to swing as inflation and interest rates edge upwards.

Despite our new-found Klondike, we still don't have a current budget surplus on day-to-day national finances. Households on average still carry debts of €80,000. Cosseted politicians don't seem to have the risk averse scars of economic crash victims.

The summer statement of last year predicted we'd have fiscal space for Budget 2019 of €3.2bn. Since then, the Government has gobbled up €2.6bn, even before more public sector pay commitments. The National Development Plan requires a doubling of annual capital spending.

Don't forget the demographics. The birth rate means an extra 125,000 school places, our ageing population an extra 30,000 pensioners per year, pension liabilities of €1.5bn and an additional 2,600 acute hospital beds. It all amounts to expanding health and education capacity incrementally by around €400m annually.

So we are back in the good times. There can be no political mention any more of widening the tax base.

We could start with the banks, now making multi-billion profits annually - entirely free of profits tax.

The Public Accounts Committee's proposals to time limit the tax holiday was wrongly rejected by the Government.

The Local Property Tax is deemed to be a Dublin tax, yet of the €477m yield only a little over a third - €171m - was paid to Dublin's councils. 60,000 new homes (since 2013) are liable to enter the tax net. House values have increased by 70pc since the baseline computation in 2013.

TD terror means two current reviews will forsake an orderly increase from this non-income tax source.

Ireland Inc faces external threats from Brexit, Trump's trade war and corporate tax harmonisation. Yet our greatest peril lies from within - politicians seeking to buy popularity with limited resources. We must not allow Budget 2019 to be a sucker punch.

Irish Independent

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