KYRAN FITZGERALD: We must avoid bloating ourselves back into an economic crisis

Construction cranes working on the new courthouse building on Anglesea St, Cork. Picture: Larry Cummins

Ireland finds it hard to resist the temptation to feast in the good times. We must avoid bloating ourselves back into an economic crisis, says Kyran Fitzgerald

It is a common enough experience for those of us lacking self-restraint.

Halfway through a convivial meal comes the realisation that one has eaten and drunk too much and that indigestion is setting in. It is, of course, too late to do much about it.

So has the Irish economy reached this stage ? Is it about to endure a bad bout of wind?

A form of financial bulimia does appear to afflict much of Irish society.

In good times, when the barns are well filled, like peasants before the era of cold storage, we find it hard to resist the temptation to feast.

Last week the chairman of the Fiscal Council, UCC academic Seamus Coffey, warned that economic growth at 5% or more is running ahead of our long term capacity and he questioned its ability to deal with a surge of investment without in the process sparking widespread inflation.

Recently the new Taoiseach Leo Varadkar has appeared to favour ramping up capital investment in an effort to tackle gaps in infrastructure.

But the concern is that in the process, he might end up pouring petrol on what for now is a modest bonfire.

Growth is ticking along nicely. An investment boom could overheat a construction sector which already appears overstretched following years in which key skills have drained away to other countries.

The ESRI expects growth, this year to come in at a solid but more sustainable 3.8% with another 3.6% in 2018.

This growth level is not quite as high as that estimated by Mr Coffey, but it is frisky enough, being well over twice that expected for the eurozone as a whole.

True, Ireland is coming out of a deep recession, but we are now into the fifth year of our recovery.

The authors of their latest ESRI Quarterly report do point to a paradox.

On the one hand, our labour market is buoyant with unemployment set to fall to 5% next year, bringing us close to full employment. The jobless rate has all but halved since the start of 2013, an achievement which deserves due recognition.

On the other tax receipts have disappointed, leaving the new Finance Minister Paschal Donohoe with little room for manoeuvre in the run up to the budget next October.

Kieran McQuinn, lead author of the report, suggests that the revenue outcome in the year to date could be down to a number of factors.

A key one is that the reductions in the USC charge in may have cost the exchequer rather more than expected.

This is linked to the fact that many of the new jobs created are relatively low paid.

Many new building jobs are filled by the self employed, another factor.

Mr McQuinn remains hopeful that the exchequer figures could benefit from strong corporation tax receipts in June and October.

But he raises another concern. Anecdotally, signs of inflation are there for all to see in surging rental costs and in rising labour costs being passed through in higher hotel and restaurant bills.

The fear is that we may already be pricing ourselves out of key markets. Witness the fall off in UK tourism — some, but arguably not all related to Brexit-related sterling weakness.

Officially Irish inflation remains modest, in part because of recent falls in the price of goods, but recent rises could be captured in the official data in coming months, resulting in a rise in recorded inflation.

We may be relying on an upsurge in immigration to put a cap on the rise in prices, but this only increases the pressure on accommodation.

Capital investment must be kept in limits, with key priorities — such as social housing — being identified.

During the years of the Tiger, a lot of money was wasted on glamour projects. This must be avoided at all costs.

Kieran McQuinn argues that a renewed emphasis on strict cost benefit analysis is required and he accepts that the setting up of a UK-style Infrastructure Commission would be welcome.

Looming over all of this is Brexit.

A year on, the referendum vote has yet to have the freezing impact on economic activity envisaged, though certainly, businesses have put investments on hold.

However, as the ESRI warns, a hard Brexit outcome could wipe almost 4% off national output, putting scores of thousands of jobs at risk.

We must not forget that the impact of the financial crisis continues to be felt, 10 years on.

Certainly employment is almost back to Celtic Tiger levels, and the jobs are better spread, though with heavy reliance on a relatively small number of large corporations.

However, Irish borrowers continue to pay a large price for the banks’ past mistakes. In March 2017, the average rate for new loans to all Irish corporates stood at 2.77% compared with a eurozone average of 1.83%.

Irish SMEs, key players in any economy, are especially hard hit. They must pay, on average, a loan rate of 4.7% compared to a euro area average of 2.54%. Such a premium is simply unacceptable.

Kieran McQuinn, a former central banker, places the blame in part on ourselves.

A national reluctance to countenance widespread home repossessions has slowed the pace of bank balance sheet rebuilding and has helped discourage investment in this country by new loan providers.

Such investment would have helped push down fees and charges while offering fresh forms of lending.


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