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The economy is growing, but we have to cut the jobless rate before we talk of recovery


There is no recovery while unemployment is still in double digits

There is no recovery while unemployment is still in double digits

There is no recovery while unemployment is still in double digits

When will we know if there has been a recovery?

Minister after minister repeats a version of this line: people don't feel the recovery, which is surely happening, in their pockets. We will introduce policies in the forthcoming Budget to help them feel the recovery.

Beyond the frankly gruesome semantics of statements like these, there is a truth being expressed by the various government flak-takers that economic growth is something experienced qualitatively, in holidays families can afford and cars they can now afford to service, rather than quantitatively, which is how nerds like me experience it.

We count the value of all goods and services produced in the economy in a given period, typically a year, and then compare that value to last year's value. If this year's value is bigger, when we adjust for inflation we typically say the economy has grown.

The Government needs more and more voting families to experience Ireland's recovery qualitatively, or it is toast come the next election. The history of Irish public policy, which Fine Gael in particular experienced in the 1997 election, suggests that voters will not care about painful policies enacted three years ago if their most recent experience of fiscal policy is positive.

Hence all the talk about tax reductions and three-year plans to give more back to the voting public in tax reductions and spending increases.

The Irish economy will grow this year, with some forecasts saying we will see between 4pc and 5pc growth. This may be a little overly optimistic but, without doubt, the economy is growing again. As UCC economist Seamus Coffey has recently said, the recent employment figures suggest a 1.7pc increase in employment, meaning those who were on the lower income ranges will now typically move up into higher income ranges, helping their families and the Exchequer as they pay more tax and draw less in transfers from the State. The world's best anti-poverty programme is a job.

In Ireland today there are still 11.2pc of those who want a job but can't get one, and more in training schemes, or under-employed positions they would like to get out of.

There is no recovery while unemployment is still in double digits, and anyone who claims a recovery while hundreds of thousands draw dole payments unwillingly is either doing so for political reasons or not living in the real world. Or both.

We will know the recovery has taken place when reductions in the unemployment rate to 5 or 6pc correspond to increases in domestic demand of the same amount, when the State achieves a primary surplus in its finances, and when the larger holdings of the bank-related debts are pushed off the State's books, dropping the ratio of our debt to national output to normal levels.

This year, the debt ratio will, hopefully, peak at 123pc, the second highest in the eurozone. Getting that ratio down will take the rest of this decade.

ESRI Studies on long-term unemployment show that, once entrenched, it can be very hard to reduce as vital labour market skills are lost and confidence in getting a job is lost.

Ireland has some of the weakest labour market programmes in Europe, so any decrease in long-term unemployment will have to be the result of increases in demand for labour, driven by the increase in domestic demand from private investment and government spending.

A recent paper by Central Bank economists Daragh Clancy, Pascal Jacquinot and Matija Lozej shows us what increases in government spending by small, open economies can do in the short and medium run.

The problem with being a small, open economy is that any increases in spending by the Government 'leak' out because so much of what we buy is imported. Looking at this problem for Ireland and Slovenia, two similar open economies, they find that fairly large fiscal expansions, in the order of 1pc of national output, have strong positive effects on the small, open economy but also on its trading partners - even when those trading partners do nothing.

Ireland trades with most of the world. That's what small and open really means. Any movement by the UK or European authorities to increase their spending to help themselves will perforce help us.

Similarly, Ireland's next two 'giveaway' budgets will also help our neighbours and their recoveries, if only a little.

The blessing and curse of being inside a monetary union is that, once in, we are wedded together, and divorce is not really a option, and we can help or hurt each other with our actions.

A new report on debt and deleveraging by Luigi Buttiglione, Philip Lane, Lucrezia Reichlin and Vincent Reinhart has shown that world total debt excluding financial debt has increased from 165pc of total world output in 2001 to 215pc in 2013.

This vast increase in both public and private debt has taken place alongside sliding growth rates across the developed world, and the threat of secular stagnation is now a persistent phenomenon across the eurozone.

Europe's balance sheets in particular appear damaged.

Where is Ireland in this picture of debt and leverage?

We are one of the worst performers over the last few decades, with our current household debt to disposable income ratio above 190pc.

The recovery, when it takes place, will happen on the balance sheets of Ireland's households, firms and its Government.

Irish Independent