Is austerity working? NO

FOR the first time in half a decade, Ireland now has choices in terms of overall budget strategy.

The tough decisions of recent years mean that the budget deficit is now firmly on a downward trajectory.

Implementing an austerity programme in the depths of the recession was certainly far from ideal, but the Government had no room to manoeuvre. Austerity was not a choice, it was a necessity.

In his Budget 2010 speech, the late minister for finance Brian Lenihan stressed if we had not taken decisive steps to curb expenditure and increase tax in the previous two years, the gap between government income and day-to-day expenditure would have ballooned towards 20% of GDP. This clearly would not have been sustainable.

Although painful and often unpopular, the steps taken to restore order to the public finances have worked. Ireland has met all the deficit targets in full and last year overachieved by a full percentage point.

Thanks to a combination of successful budgetary adjustment and EU-level decisions which have eased the cost and repayment schedule of our sovereign debt, 10-year bond yields have come down to below 4%, having peaked at 14%. The economy is back on a sustainable footing.

This has not only a significant impact on the ability of the State to exit the troika programme at the end of this year, but also on the funding costs of Irish corporates and semi-states.

Over the coming years, the country will require substantial investments in infrastructure — roads, schools, and hospitals — as well as plant and machinery to expand the productive capacity of the enterprise sector. The funding costs for these types of investments are closely linked with that of the sovereign.

The decline in the bond spreads means that projects that just 12 months ago were simply too costly are now feasible again. These investments will spur activity in the short term, but most importantly, will boost Ireland’s potential growth rate for many years into the future, which in turn will support job creation.

Despite the progress in closing the deficit, tax hikes and expenditure cuts have slowed the economy. The ESRI’s medium-term review shows that GDP this year is about 3% lower than would have been the case otherwise. The impact on the domestic economy, however, has been far more severe, and consumption is about 7% lower.

Households’ financial position is improving thanks to a brighter outlook for employment, incomes and the property market, but demand in the domestic economy remains fragile.

Consumer confidence, at least prior to the bout of exceptionally good summer weather, has remained in the doldrums, and the savings rate remains high.

Until confidence recovers, we will not see a sustained improvement in domestic demand and the job creation that goes with it. Ireland has endured five years of austerity. The belief that tax hikes will never end is becoming entrenched and risks leaving the domestic economy in a semi-permanent weakened state.

This need not be the case. Thanks to the front-loaded adjustment, the Government can now think strategically about how best to support growth in the economy. The goal should be to achieve a balanced economy, where both exporting and domestic sectors thrive. This is the only sustainable model and the only way to effectively tackle the unemployment crisis.

The forthcoming budget is a powerful opportunity for Government to send a clear message to consumers that austerity is coming to an end. In particular, it should abandon the planned €500m in new taxes. Last year’s budget delivered more in tax increases than had initially been planned. Government should redress this in next year’s budget, providing certainty to households and helping unlock consumer spending.

We also need a strategy to encourage investment and entrepreneurship. In Ibec’s budget submission we presented three tangible ways Government can support growth and job creation. The employment and investment incentive scheme, which provides tax relief on new investment, is a good model with poor take-up. It needs a rebranding and a drive to create awareness around the opportunities it offers.

Secondly, we need to get more entrepreneurs to reinvest profits back into the economy. A preferential entrepreneur’s capital gains tax regime is needed to support investment in the job-creating enterprise sector of the economy.

Thirdly, a simpler R&D tax credit scheme for SMEs would help more indigenous companies invest in research and development. This would enable more businesses to bring new products and services to the market, giving them the potential to develop into companies with global reach.

We have made significant progress in recent years and this has given us choices. Our economy has the capacity to grow by 3%-4% per year for the next decade, but only if we take the right decisions.

Budget 2014 is an opportunity to drive Ireland’s recovery by helping the domestic economy return to growth and supporting enterprise. It is vital that the opportunity is not missed.