Our fragile recovery can easily be derailed
The end-July tax returns showed good growth in tax revenues a few weeks back and supported the notion of economic recovery. The labour market data this week confirmed this picture of an economy that is steadily lifting itself up, but the quarterly National Household Survey also provided a strong note of caution.
Total employment increased by 31,600 in the year to the end of June and has now edged over the 1.9-mark. Full-time employment increased by 33,500 and part-time employment declined by 1,900. This is a very positive trend.
From a sectoral perspective, some interesting trends are emerging. Employment in the construction sector has increased by 3,600 over the past year; Agriculture, forestry & fishing is up by 6,400 (which has to be treated with caution due to sampling issues); Professional & scientific is up by 6,100; and employment in accommodation & food Services is up by 8,100.
On the downside, industry shed 2,700 jobs, financial, insurance & real estate shed 1,700 jobs; and the wholesale & retail sector shed another 2,000 jobs.
Some key messages are emerging. The ongoing pressure on personal sector finances is continuing to make life very difficult for the retail sector. This highlights the absolute requirement not to implement a budget adjustment of €2bn in October. On the contrary, some easing of the Universal Social Charge (USC) is just what the hard-pressed consumer requires, if not this year, then certainly next year. A recovery in consumer spending would quickly translate into employment growth in the sector.
The ongoing strong growth in employment in the accommodation & food services sector is reflecting the rebound in Irish tourism that I wrote about last week. In my view this makes a strong argument for retention of the 9% Vat rate and not its return to the higher rate as some have suggested.
It is clear that the tax incentive has been effective and is helping generate more activity, jobs and tax revenue in the sector. Would it make sense to risk this positive momentum by a reversion to a higher rate? I think not.
Tax and other incentives can be effective in achieving certain objectives, and if this is the case, then why risk it? A lower tax burden can have a significant impact on activity and tax revenues, and the 9% Vat rate is a case in point.
Furthermore, while many Dublin restaurants are now doing much better, it would be interesting to observe what life will be like for many restaurants outside Dublin once the tourism season wanes.
Other data released over the past week show that in the year to April 2014 there was inward migration of 60,600 to Ireland and outward migration of 81,900, giving net outward migration of 21,300, which is 11,700 lower than the previous year. Net outward migration amongst Irish nationals was 29,200, while there was net inward migration of 7,900 among non-Irish nationals.
Policymakers need to ensure that they continue to promote sustainable economic recovery and employment in the economy in order to provide opportunity to those who want to stay in the country. Hopefully, the rhetoric from ECB president Mario Draghi at the weekend is pointing towards more growth-oriented policies in the eurozone, which would be unambiguously positive for Ireland.
All in all though, the past week has seen further confirmation of the positive momentum that is developing in the Irish economy, but there is still a distance to go, so policymakers need to be careful not to derail it.
