Two weeks ago, Goodbody published a report entitled “End of the lost decade”, highlighting that the real level of domestic spending in Ireland is set to return to its pre-2007 peak this year.
The report generated a lot of catchy headlines in the media and attracted a lot of general attention, some of which might have obscured the substance of our conclusions and the data behind them. Consequently, the public and professional reaction to our report has been mixed. Some have agreed with its conclusions, while others have derided me personally for not understanding what is going on around the country.
Given the reaction, it is worth clarifying what Goodbody is and isn’t saying in our latest Irish economy Health Check. First of all, based on our projections for the rest of the year, the aggregate level of spending in the economy will indeed reach pre-crisis peaks this year, exactly a decade on.
A “lost decade” is not something that should ever happen to an economy; Ireland is among an unfortunate list of countries to have had experienced such misery. By definition, the end of the lost decade is not something that we should be celebrating.
It also does not mean that everything is suddenly rosy. Given the 12% growth in the population, real consumer spending per head is still 5% below 2007 levels. Significant collateral damage has been done, too. This is most visible in the public finances, where government debt is more than four times higher than prior to the crisis, leaving little room for manoeuvre should another shock come along.
Day-to-day government spending is up over the past 10 years, but primarily due to higher spending on social protection. There are legitimate calls for improvements in public services, such as health, but this was also something that Ireland was grappling with in times of plenty before the crash.
The current dysfunctional state of the housing market is another legacy that hangs over the country and provides the biggest threat to ongoing positive economic prospects into the medium-term. The unprecedented nature of the crash decimated the productive capacity of the industry in terms of construction firms and the planning system. Efforts have been made, but do not expect the crisis to be resolved in the foreseeable future given its scale and complexity.
Unfortunately, there is also evidence that policymakers are not learning from the mistakes of the past. Despite pledges to the contrary, Ireland’s tax base has narrowed over recent years, with 37% of earners not paying any income tax, not far below the 42% seen in 2007. This is in the context of income tax receipts growing by 50% over the period. Workers, particularly in the middle to upper-income scales, have borne the brunt of the adjustment in the public finances.
Despite these painful legacies, some elements of the current economic situation should be celebrated. Overall economic growth continues to exceed most of Ireland’s European peers for the fourth consecutive year.
Out of the so-called PIIGS — Portugal, Ireland, Italy, Greece, and Spain — Ireland is the only one that can claim to have regained its pre-crisis levels of spending. Spare a thought for Greece, where spending is more than 30% below levels of a decade ago.
Jobs are being created in Ireland at a rate of over 5,000 per month, while the current rate of growth in full-time employment has not been seen since the real Celtic Tiger period in 1999. Full employment has not yet been achieved, but it is not far off and could be reached by the end of next year. Ireland still faces many risks over the coming years, with Brexit being the most prominent. The likely outcome here is unknown.
If, as hoped, Brexit turns out to be of the “soft” variety, the challenge for policymakers will be how to deal with potential overheating in the economy.
Implementing policies in such an environment may appear less daunting than those made during the crisis years but may be even more challenging.
Dermot O’Leary is chief economist with Goodbody
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