Ignore the warnings of IFAC at our peril
When it comes to our economy, things can turn with lightning speed, says
Fine Gael has paid a high price for a fiscal rectitude that has verged, at times, on the politically ridiculous.
Ernest Blythe was finance minister between 1923 and 1932, under the party’s direct predecessor, Cumann na nGaedheal.
In 1924, in a move calculated to delight austerity fetishists, he cut the old-age pension from 10 shillings to nine shillings a week (45p). Delighted opponents of the party were still bringing that up on the doorsteps at election time a half-century later.
Mr Blythe also backed the groundbreaking Shannon hydroelectric scheme, but few remember that.
In the 1950s, another Fine Gael finance minister, Gerard Sweetman, pursued vigorous austerity policies as thousands of Irish headed for the emigration boats. His government was soon turfed out.
After the oil crisis in 1973, finance minister Richie Ryan tightened the fiscal screws. This infuriated the voters and Mr Ryan featured as ‘Richie Ruin’ on a very funny political satire. His measures were beginning to work when the much put-upon voters took their revenge in June 1977.
In recent times, finance minister Michael Noonan and his labour colleague, public expenditure minister, Brendan Howlin, squeezed people hard. The medicine tasted awful, but it largely worked. People were less-than-impressed. An electoral rout ensued.
Fast forward to last week and the publication of the latest report by the Irish Fiscal Advisory Council.
The council, established in 2012, is a product of the years when the dreaded Troika held sway.
Its first chairperson, John McHale, a senior academic at NUI Galway, was a thorn in side of the Fine Gael/Labour government.
Arguably, Mr McHale’s advice erred on the hawkish when it came to fiscal policy. The council’s role has always been that of the family scold, trying to rein in the spendthrift Mr Micawbers in the household.
Mr Micawber was arguably novelist Charles Dickens’ greatest creation, a jolly optimist forever hopeful that something would turn up. But Mr Micawber understood only too well how easy it was for ordinary folk to fall through the financial cracks that led to the debtors’ prison.
Mr McHale’s successor, Seamus Coffey, has always been balanced in his approach to policymaking.
This is why his latest hard-hitting assessment of the Government’s performance, in the wake of the recent budget, should be taken seriously.
The budget is dismissed as “not conducive to prudent economic and budgetary planning” and the medium-term outlook is “not credible.” Mr Coffey’s key point is that economies have cycles: booms and busts, or, at least, periods of fast growth followed by slowdown, followed, hopefully, by recovery.
The Irish economy has been in growth mode for six years. Foreign direct investment has acted as a turbocharger. The national books have been boosted by a surge in corporation tax receipts, which are related, in part, to OECD reforms. The council is uncertain about the reasons for the surge in such tax revenues to close to 20% of the total. There is no guarantee that this revenue bonanza will continue.
So, what we have is an ordinary cycle of recovery that has been boosted by foreign-direct-investment flows.
In other words, we have been in the middle of a super-cycle, with strong growth, in real terms, of 5% a year, when you strip out artificial factors.
Ireland has been top of the EU growth league by a country mile. This has meant an upsurge in revenues. As a country, we have also benefited from strong tail winds, which may now be changing course.
We are one the world’s most indebted countries, when you combine household, corporate, and public debt, ignoring IFSC debt.
The long era of easy global and European credit policy has greatly benefited us, but the US Federal Reserve has been tightening policy.
During this period, cash-rich technology firms have invested heavily in Ireland, but Donald Trump’s tax reforms suggest that the picture going forward may not be so straightforward.
Former Central Bank governor, Patrick Honohan, advises us to ignore GDP and use the new GNI measure developed by the Central Statistics Office.
On this basis, our stock of public debt is still close to 100%. In terms of debt burden, we are far from being out of the woods.
The Fiscal Council clearly agrees with Mr Honohan. It is best to ignore GDP, even if certain pro-spending lobbyists often use it for their own purposes.
Mr Coffey appears to suggest that the current government and, in particular, finance minister, Paschal Donohue, and his boss, Taoiseach Leo Varadkar, maybe a lot closer to Mr Micawber and rather more distanced from Messrs Blythe, Sweetman, and Ryan than they would have us believe.
Seamus Coffey is scathing on the way public spending, in particular, has been allowed to drift away from targets, at a time when the sun has been shining on the Irish economy.
The surge in employment, and related drop in unemployment, has benefited the national coffers. The cost of our national debt has been at record low level, greatly reducing the carried interest cost. All of which has freed up resources for other purposes.
Despite this, what we have witnessed is an increase of 5% in real spending. It could be worse. At the height of the bubble-boom, in 2005/6, real government spending grew by a staggering 12%.
But Mr Coffey has spotted a serious drift, all the same. In 2018, a real increase of 3.5% was budgeted for. It ended up at above 5%, due to unplanned increases.
An increase of 3.5% is again promised for 2019. What odds on the increase being kept to this level?
The culprit? Health spending, in the main.
Regular overruns on the health budget are a feature going back to 2013/14. As Seamus Coffey observes, these are “permanent and long-lasting.” The health workforce has risen from 100,000 to 120,000. Perhaps, we simply need to be honest with ourselves as a society.
The numbers of people aged over 65 are increasing fast. The numbers aged over 80 — the period when illness really kicks in — are soaring.
Life-saving drugs proliferate, but at a huge cost.
The Taoiseach dangled the promise of tax cuts at his party’s recent ard fheis. Can such cuts be afforded without offsetting increases elsewhere?
There are promises that the health budget can be held at €17.3bn in 2020. Just how credible is that promise? Not at all, says the council chair.
And he warns that when it comes to our economy, things can turn with lightning speed.
The current forecast is of a ratio of debt to GNI of 84.5% by 2023. Mr Coffey warns that the debt ratio could quickly soar to over 120% in the event of an economic shock. Here, let’s take one’s pick, starting with a chaotic Brexit, a global financial crisis, and so on.
In which case, Mr Donohue will understand what it is like to be Mr Micawber and we could all be headed back to the debtors’ prison.
