Global events will shape economic and fiscal policy here

For any naïve fool who may have believed that this year’s general election might be characterised by economic and fiscal prudence, these are indeed worrying times.

Election promises are coming thick and fast, and the so-called fiscal space is being stretched to its very limits.

Sinn Féin produced a very wide-ranging and comprehensive election manifesto this week, but as with the others, its coherence is totally based on very favourable economic winds over the next five years.

Amongst other things, Sinn Féin is promising to abolish water charges; abolish the local property tax; the exemption of 277,000 workers from the USC net; an increase in employer’s PRSI to 15.75% for earnings over €100,000; a reduction in tax benefits for pension contributions; and a 7% addition to the tax rate for earnings in excess of €100,000. On the expenditure side, major promises are being made on health, education, and — somewhat ironically — on law and order.

The problem is that it is not at all clear how this package and the rest can be funded.

The first three tax measures above will cost over €1.1bn, while the 7% proposal will bring in only a fraction of this.

Of course, this is to ignore the impact of the tax increase.

Why would anybody of ability and/or high levels of educational attainment and skills possibly want to live in a country where they would effectively be actively discriminated against by a government that clearly regards them as a species to be reviled rather than appreciated?

People do respond to incentives, and if the incentives are stacked against them, many will react in a predictable manner.

Can we afford to lose people of ability, who are typically the ones who create the jobs and take the entrepreneurial risks in the economy? I think not and I certainly hope not.

This measure, along with the PRSI increase will deter employment creation. Sinn Féin is, of course, returning to the old chestnut of retrospective recapitalisation of our banking system.

In general, I find it difficult to make the Sinn Féin package add up from a financial perspective, and Sinn Féin’s package is not unique in that regard.

Of course, it all depends on the assumptions that are made about the fiscal space.

The fiscal space is basically the amount of money left to play with once the various fiscal commitments on borrowing, debt, and expenditure are adhered to.

Unfortunately, the concept of fiscal space is, like most economic concepts, deeply problematical and totally dependent on the assumptions one makes.

It depends on the level of economic growth, the nature of economic growth, the structural characteristics and sustainability of tax revenues, and future spending obligations.

The one thing that should be clear to any sensible person is that the concept of fiscal space is not an exact science, and to base an election manifesto on it is pretty braindead in my humble, and possibly flawed, opinion.

Anybody observing what is evolving on the global scene should be extremely concerned by the auction politics that most of our political system seems to be engaging in at the moment.

Equity markets have had a catastrophic start to the year, with the Chinese market already 22% down; the Irish market is down almost 16%; the UK Ftse 100 is down almost 15%; the US S&P 500 is down almost 13%; and Germany’s Dax has shed almost 12%.

Ten-year bond yields in Japan are in negative territory and the German government can now borrow for 10 years at a rate of 0.2%.

One might be tempted to conclude that these extraordinary market developments are only of interest to financial market nerds, but the reality is that they reflect ongoing very serious global economic imbalances that date back to the beginning of the ‘great recession’ in 2007.

What is really of concern is the fact that the markets have effectively lost confidence in the ability of policymakers to sort the problems.

This global backdrop is scary and should be top of the agenda for our political auctioneers.

Voters should remember, that there is a high probability that most of the political promises will not be capable of being delivered and vote accordingly.

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