Friday 15 November 2019

A long year for the economy lies ahead as politics slows

Time is short for politicians.
Time is short for politicians.
Brendan Keenan

Brendan Keenan

TIME is short - especially for politicians. Harold Macmillan's comment, that a week is a long time in politics, is justly famous.

He was referring to the endless unexpected challenges of government - what he called on a different occasion, "Events, dear boy, events." But there is another sense in which time is especially short for Irish governments.

This is because of the speed at which things change in a tiny, absurdly open economy. It is too quick for politics to keep up. This makes economic management difficult and dangerous. The political cycle is long enough to ruin the economic one.

A couple of years seems to be enough to do the damage. In modern times. Charlie Haughey delayed corrective action in the early 1980s on the not entirely unreasonable grounds that, with IRA hunger strikers standing in the general election, this was not the time to introduce unpopular austerity measures.

I suspect Mr Haughey would have found some excuse anyway but many a Taoiseach might have taken the same view in similar circumstances. The point is that those 18 months or so were enough to turn a serious problem into national bankruptcy.

There was actually less excuse for Charlie McCreevy, Brian Cowen and Bertie Ahern in delaying the termination of property tax incentives from 2003. There is evidence that the two finance ministers were aware of the dangers, although no record of any official warnings form the civil service. We will probably never know what exactly Mr Ahern thought about anything. We do know he was not impressed by any talk of making the boom less boomier.

What they may not have realised is that just waiting until after the 2007 election would be long enough to repeat that disaster of 1982 - only worse because the private sector was on an unprecedented borrowing spree as well. The Canadian finance official Rob Wright gave it as his opinion to the banking inquiry that action in 2005, while it might well have meant recession, could have been enough to prevent this second bankruptcy.

Things happen quickly in both directions. The pace of the current recovery is remarkable, especially in commercial property. But then, the amounts of money which foreign investors are shoving into Ireland is petty cash compared with their total portfolios, but more than enough to turn the Irish market downside up. That's what comes of being small.

The recovery is not complete, far from it, and time is short to copper-fasten it. The worry is that the time will not be used. Also, for understandable reasons, the Government is minded to tread water (no pun intended) until after the 2016 election. That may be too late. This could be the critical year.

The coalition's procrastination bears no comparison to the shenanigans of Messrs Haughey and Ahern, but the situation is far more fragile than the ones the inherited. The turbulent little economy needs a favourable wind from abroad. It is not clear that it will get it.

The 2015 Budget takes a big bet that it will do. The failure to raise the originally intended revenues from water charges makes the bet even bigger. It would require only a small reduction in forecast growth for the budget targets to be missed, with all the negative publicity and loss of ground in Brussels and Berlin that this would entail.

The dramatic fall in oil prices adds an unexpected complication to forecasts for 2015. On past form, cheaper oil should add to global growth, and domestic Irish growth as well. But the consequences for Russia could frighten financial markets, while the loss of Russian purchasing power will be bad news for many European companies.

It will probably be all about Europe this year. After stagnating since 2008, the Eurozone is expected to grow by less than 1pc. "Eurozone" is a bit of a misnomer of course. That overall figure represents little or no growth in France and Italy, although the headlines may well be made, once again, by Greece.

The general election which we mused about before Christmas is under way, with the hard left Syriza party expected to lead the new government. We shall then see if it is Frankfurt's way or Syriza's way or if office changes Syriza's tune, as looks like being the case. Even if it does, there could still be a battle royal. Hostilities may be enough to frighten European consumers and investors, adding another downward twist to the Eurozone economy.

Then there is the British election in May. The combination of a UK recovery and a squeeze on Irish wages seems to be the best explanation for the Irish recovery but both may be coming to an end. The expected post-election austerity programme in Britain makes the Irish official forecasts beyond 2016 look that bit more optimistic.

It is not that they are wildly out, or that another recession is inevitable. It is rather that a political failure to deal with circumstances of this kind could throw things askew with the same frightening speed as in the past.

Politics, however, looks like moving very slowly. If the economy performs as hoped this year, the proceeds - along with some hoped-for future proceeds - will be used to pay for as generous a Budget as possible in 2016. One would expect the deficit to be no smaller than the current target of 1.8pc of GDP, even if that means cash borrowings greater than the planned €4bn. If the economy fails to meet expectations, the coalition may not even make it until October. It is an intriguing thought that, if the last national bankruptcy is dated as beginning in 1982, we are now at the equivalent of 1989. By then, there had been four different governments - three of them by 1982 - but the public finances were back on a sound footing and the political system was stable. Which was just as well, since there was a major recession and a European currency crisis in 1991.

History is not repeating itself. The next government, even in 2016, will inherit a fragile set of public finances, a return (already with us in the case of Irish Water) to the pursuit of the excessive pay and employment demands which have threatened the solvency of the State since its foundation, and the inevitable international difficulties.

Meanwhile, the civil service is also preparing for something the rest of us hardly know about - that from next year EU rules will break the connection between revenue and spending, so that if taxes are better than expected, they cannot be used to fund extra spending, only debt reduction.

Going by the opinion polls, one must work on the assumption that the next government, whatever its composition, will be a weak and vulnerable one; ill-equipped to withstand such challenges. We could, in other words, see a period of political instability and a financial mess which could easily spin out of control.

We will need a buoyant 2015 to have any chance of avoiding a fresh crisis. With political will crumbling everywhere, and even the putative new party talking about the abolition of USC, the fear is that even that might not be enough.

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