Wednesday 16 October 2019

Conor Skehan: Five of the likely successes and mistakes that Budget 2020 should avoid

As we approach another Budget, Conor Skehan highlights some of its likely successes and some mistakes that should be avoided

'Budget 2020 occurs at a time in the economic cycle when the seeds of the next recession are usually sown' (stock photo)
'Budget 2020 occurs at a time in the economic cycle when the seeds of the next recession are usually sown' (stock photo)

Conor Skehan

Sometimes the hardest thing to notice is bad things that don't happen.

Budget 2020 occurs at a time in the economic cycle when the seeds of the next recession are usually sown. These typically consist of what economists call 'pro-cyclical' moves - when 'the boom times are getting even more boomer', to quote a former Taoiseach.

All indications are that the most important thing to notice about this Budget will be how many stupid things are not included. Here are the successes and the calamities that have been avoided.

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1. There will be no artificial stimulus for housing supply

We are seeing a 'Softening Housing Market' - which occurs when supply begins to match demand. Supply is increasing because of a lot more building and more importantly, because the significant increase in sales of second-houses is now starting to spread nationwide, as owners increasingly find that their property is now worth more than their debt - i.e. they are no longer in negative equity.

At this stage in the property market, the construction lobby usually tries to press for incentives to artificially increase demand by using tax breaks or even grants for schemes such as First Time Buyers, Buy-to-Rent, tourism-related housing - the list of foolishness is long - but there are no predictions that this will happen in this Budget.

2. There will be no incentives to favour tall buildings

An early rumble - a weak signal -can be detected in strong lobbying for increasing building heights (as opposed to density) which is a way of maximising profits for site owners - unless it takes place within the context of a clear overall plan that provides developer-supplied parks and amenities in the vicinity of new tall buildings.

Developers over-paying for scarce sites and needing excessive returns to pay for this extravagance is another cause of pressure that causes bad Budget decisions.

3. There will be no measures to unwind the effectiveness of the Central Bank rules on lending criteria

These rules, combined with the significant increase in housing supply, are responsible for the gradual slowing and reversal of house price increases. This huge success was decried as impossible by commentators less than nine months ago, yet is taken for granted today. Critically, this reversal will very soon begin to increase affordability - both for purchase and rent. Once this happens the levels of homelessness will begin to fall as its root cause is addressed.

In summary, the less that the budget says about housing, the better. Policy volatility is a key cause of instability and hardship in the housing market. The most important healing needed by that beleaguered sector is a few years of policy stability and consistency to allow everyone to make rational plans and choices.

4. There will be no cutting back on capital projects for critical infrastructure such as water projects and roads

Quite the opposite; it is believed that up to €1bn extra may be allocated for capital spending.

Sustained commitment to capital spending on public projects is an important safeguard against the worst excesses of future cyclical economic downturns. Long-term spending that continues through recessions reduces unemployment, keeps money in circulation and ensures better value for money. This is a characteristic of mature economies.

5. There will be no resources wasted on trying to stop the unstoppable decline of tradition main street retail

Retail is changing, all over the world, as online shopping makes deep and deeper inroads into traditional patterns and places of shopping. It is true that this is causing unprecedented contraction of the space requirement and affordability of retail spaces. It is true that vacancies are eroding the vitality of main streets everywhere from the largest to the smallest settlement. It is true that the loss of rates from retail premises will have a significant effect on local tax take.

Solutions will not come from spending money on addressing the symptoms, while the online cause persists and grows [Ireland has one of the world's highest per capita levels of online shopping]. Solutions will only come from accepting that these changes are inevitable and unstoppable. The solution will come from a significant re-orientation of our traditional shopping areas, so that they can be used for commercial and residential uses. This will take time, planning and significant capital investment in transport, amenities and land acquisition. All challenges for a future budget.

In a panicky reaction to the threats of Brexit, an unwise Budget might be tempted to direct resources toward the growth of indigenous rather than multinational business.

Any country in the world can innovate to export better seafood chowder, better raincoats or nicer pet food - but how many have a workforce, regulatory environment and sustaining services to excel at the quality standards required to build and operate scores of the most sophisticated manufacturing operations in the world?

Many are unaware of just how successful we are at attracting such a wide spectrum of these industries and activities. How many people realise that over 60pc of our economy arises from the exports of chemical, pharmaceutical compounds and medical devices with a further 20pc from electronic and telecom devices? How accurate is our self-image of ourselves as an agricultural economy when our aviation exports are nearly as big as our meat exports? Yes, taxes may have had a role in attracting these - but productivity, reliability and excellence are what retains these and makes them grow and grow.

Ireland is already a hugely successful exporter of world-class products and services in some of the most advanced fields in the world. Attracting and retaining internationally mobile investment is Ireland's specialisation. Other nations envy our success in this field. Why should we plan to lessen our key competitive advantage?

Successful governance is a complex task that needs to satisfy many, often opposing forces. Making progress requires the ability to respond to short-term pressures while pursuing long-term goals. Governance can resemble sailing - where progress needs to be made, often against the headwinds of short-sighted self-interest. This requires leadership to change course frequently, to respond to strong temporary pressure, while always veering back to follow the best long-term course.

Commentary on governance, especially at Budget time, can easily fall into the temptation to amplify the din of lobbies for self-interest. Where adjustments need to be made, to reflect strongly-held opinions that may be widely held, despite contradictory evidence, these can be decried as 'flip-flopping' or 'u-turns' as if these were signs of weakness or an admission of prior errors.

It is true that 'weather-vane' leadership is worse than useless - lacking all conviction or direction - drawn or driven this way and that to follow fashion or please a fickle mob. But it is also true that, to the uninformed, a well-skippered sailing ship can look lost, tacking back and forth as it steadily makes way upwind - unless the observer notices that it is following a plan.

If our Budget makes changes and new choices without making these mistakes, then we are in safe hands. A good rule of thumb is that the best governance should often appear to be sailing against the wind of public opinion - providing that the skipper has a plan.

Sunday Independent

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