Let’s not get carried away with progress

In October the Government ignored the advice from domestic and international agencies such as the Irish Fiscal Advisory Council, the European Commission, the European Central Bank and the International Monetary Fund, by implementing a mildly stimulatory budget rather than the €2 billion adjustment that had been pencilled in for some time.

On the surface, at least it chose this course of action based on the stronger-than-expected economic recovery and the lower-than-expected level of government borrowing on the back of the economic recovery.

In reality this budgetary stance was heavily motivated by political considerations and the growing unpopularity of the Government. While the budget has done little to improve the popularity of the Government thus far, one can only imagine how unpopular it would be if it actually had delivered a further €2bn in revenue raising and expenditure cutting measures.

The end-November Exchequer returns earlier this week provide further vindication of the Government’s approach. In the first 11 months of the year, the Exchequer ran a deficit of €5.8bn, which is €2.8bn lower than the equivalent period last year.

At the end of November, tax revenues were running €1.13bn ahead of what had been expected. Income tax was €122m ahead; Vat was €312m ahead; corporation tax was €209m ahead; excise duties were €245m ahead; and stamp duties were €218m higher than expected.

November is one of the most important revenue collection months of the year. Some €6.2bn was collected during the month, which was €35m higher than had been forecast by the Department of Finance. These higher-than-expected revenues reflect the increasingly broad-based economic recovery story that is building.

The performance of the labour market and the 30% increase in new car registrations, in the year to November, is crucial to the strong performance in income tax and Vat. Last week we saw that employment increased by 27,700, or 1.5%, in the year to the end of September, and this week we saw that the number of people signing on the live register declined by a further 4,100 during the month and the unemployment rate has fallen to just 10.7% of the labour force.

This stood at 15.1% as recently as the first quarter of 2012. From the Government’s perspective this should all represent very good news, but at least those who are most vocal in our society, at the moment, clearly do not appreciate the manner in which the Government has managed to lift the economy from a dire situation into a better place, although there are still many issues to be sorted out.

Only those with a strong political vested interest would fail to admit that progress is being made, but it is essential that our policymakers do not get carried away and, ultimately, undermine the near-term recovery prospects and the longer-term sustainability of the economy.

We are starting to hear more soundings about the need for wage increases in both the public and private sectors. We would need to be very careful about how we respond to those pressures. Nobody could deny that personal disposable incomes need a boost after some horrific years, but the question is how this should be achieved. Increasing wages in the public sector at a time when we are still borrowing over €7bn to run the country does not seem very sensible, at least not to me. Increasing private sector wages might not be the wisest course of action either, as it would undermine the competitiveness of the economy.

We should heed the warnings about competitiveness from the National Competitiveness Council earlier this week, but we don’t have a great track record in heeding the sage advice of that body. The best way for Government to put money back into people’s pockets would be through a gradual reduction in the personal tax burden, particularly via a reduction in the draconian Universal Social Charge (USC). One wonders if it is not time to revisit the type of social partnership that was effective from 1987 to around 1997. It would be a real pity if we contrived to blow that hard-gained progress of recent years.