Sunday 24 March 2019

Economic glass is half full, but expect more hikes in taxes

The first quarter national accounts figures, which were published by the CSO yesterday, paint at best a mixed picture of the Irish economy. The good news is that the economy, as measured by GDP, grew in the first three months of 2011. The bad news is that using the much more relevant GNP yardstick, which excludes repatriated multinational profits, the Irish economy shrank by a further 1.3pc.

The first-quarter contraction means that the Irish economy, as measured by GNP, has shrunk by a quarter since its 2007 peak. That's not a meat-and-two-veg economic recession, but a fully-fledged 1930s-style recession.

So what solace if any can be drawn from yesterday's figures? Well the first thing to remember is that quarterly GDP and GNP figures are extremely volatile and can be influenced by such once-off factors such as the timing of the repatriation of profits by multinational firms based in Ireland or when Irish companies with overseas operations choose to bring their profits back to this country.

A far more reliable indicator of what is really happening in the economy is to look at how the first-quarter 2011 figures compared with those recorded for the first quarter of 2010. According to the CSO, GDP is virtually unchanged over the past 12 months while GNP has shrunk by about 0.7pc. In other words, the Irish economy, having shrunk by a quarter since 2007, is now bumping along the bottom.

If one is determined to view the glass as being half full, this means that the precipitous falls in economic output that we experienced in 2008 and 2009 are now behind us and that the volume of Irish economic output has now settled, albeit at much lower levels than we enjoyed at the peak of the Celtic Tiger.

For those who prefer to look at the glass as being half empty, a flat-lining economy threatens to make a nonsense of the budgetary forecasts contained in last November's four-year plan, which was supposed to chart our way back to a 3pc of GDP budget deficit by 2014 -- a deadline that has slipped to 2015.

Under the four-year plan economic growth was supposed to average 2.75pc a year between 2011 and 2014. Yesterday's figures from the CSO show that we are nowhere near having reached the level of economic growth targeted by the four-year plan.

While most of us might be tempted to let our eyes glaze over while economists argue over their competing economic growth forecasts, a continuation of below-target economic growth could hit taxpayers hard in the pocket.

This is because the government is relying on economic growth to deliver almost half of the €11bn increase in tax revenues it needs to balance its books by the end of 2015.

If this economic growth fails to materialise, taxpayers could find themselves forking out up to a further €5bn in higher taxes.

Still it might not be good idea to get too carried away with the doom and gloom. The CSO also published strong trade figures yesterday showing that Irish exports of goods and services grew by 7pc and 8pc respectively in the first three months of 2011. This means that Irish exporters, boosted by a newly competitive Irish economy, are gaining share in export markets. There is likely to be further good news in the second and third quarters with hoteliers and other tourist interests reporting a strong upsurge in the number of overseas visitors.

Even if the rate of economic growth does eventually climb to the levels projected in the four-year plan, the government will still have to raise taxes by a further €6bn by the end of 2014.

As today's Irish Independent/Milward Brown Lansdowne opinion poll shows, the overwhelming preference among voters is that these higher taxes come in the form of so-called "stealth" taxes, services charges, tolls etc, rather through higher income taxes.

This is very good news. Voters clearly recognise that allowing the current fiscal crisis to serve as an excuse for giving Labour's redistributionist tendency free rein would cripple the economy and eliminate any chance of recovery when our circumstances finally do improve.

Irish Independent

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