Sunday 15 September 2019

David Chance: 'Spending may yet prove to be a smart move by Donohoe'

  

Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins
Finance Minister Paschal Donohoe. Photo: Gareth Chaney, Collins

David Chance

It has not been a good few weeks for Finance Minister Paschal Donohoe. First the Irish Fiscal Advisory Council accused him of playing fast and loose with a surge in company tax receipts, and what it said was lax budget planning. Then the Economic and Social Research Institute made similar, although more muted, comments.

Both chided him for failing to reach a balanced budget in 2019, as promised.

But what if the Finance Minister is right? With Brexit looming, it is better to keep some fiscal gas pumping just in case?

It is not as if he has mortgaged the nation, as was the case in 2008.

Britain is our second-largest trading partner, accounting for 12pc of goods exports, so there will be an impact - quite how much, though, is unknown.

Most estimates say a hard Brexit could lop three-plus percentage points off economic growth over maybe 10 years.

With economic gross domestic product growth slowing to 4.9pc in the third quarter from 8.7pc in the second and 9pc in the first, it might not be such a bad idea to run the economy slightly hot.

While it is true Mr Donohoe will not deliver a balanced budget in 2019, Government balances look relatively healthy and the country is rated "low risk" in the medium-term debt sustainability analysis of European Commission.

And the biggest factor in our ability to keep debt at sustainable levels is economic growth, so it is not unreasonable to keep it going, even at some cost to the path of budget consolidation.

Analysis from the Department of Finance shows that a one-off hit to economic growth of 3.5 percentage points versus their forecasts would result in the ratio of debt to gross national income being 25 percentage points higher by say 2025 than otherwise. Crucially, however, it would still be on a downward path.

Consumers still look to be shy of spending, and personal consumption in the third quarter rose by just 1pc from the second and 2.9pc from a year ago.

Household savings marked their 16th consecutive month of gains in September, with the result that outstanding lending of €90bn is lower than deposits, which stand at €97.3bn.

Even with wages rising 3.2pc over the past 12 months, and rapidly falling unemployment rolls that have pushed the labour market close to full employment, there is no sign of higher inflation.

In fact, it is trending downwards. The annual rate of consumer price inflation was 0.6pc in November, down from 0.9pc in the two preceding months.

The problem with much of the world's post-crisis recovery has been an unwillingness to use government firepower to boost the economy. Given that the European Central Bank has neither the willingness nor the ability to deliver a stimulus to Ireland in the event of Brexit, it is perhaps just as well that Mr Donohoe is doing so now.

Irish Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss