Italy in crisis, EU downturn and Brexit... The rainy day is coming, so let’s not blow the recovery

IN pre-crash Ireland, anyone who raised the possibility that Ireland’s economy was overheating at unsustainable levels was ridiculed. Famously, the then taoiseach Bertie Ahern even suggested those who questioned the great economic miracle should go off and commit suicide. For our part in opposition at the time, Fine Gael also did not do enough to question just how robust the public finance position actually was.

If there is one important lesson I hope we have learnt in politics, it is about the necessity now to question decisions at all levels and to do so without fearing the ridicule of the mob.

Our politics needs to support those who take contrarian views. Experts need to be listened to and not denigrated.

One of the most unfortunate aspects of the Brexit debate in the UK has been the casual disregard of opinions from people who actually know what they are talking about.

So when people like Séamus Coffey, chair of the Fiscal Advisory Council, or Philip Lane, Central Bank Governor, speak about risks we all should take notice and ask questions.

When the European Commission last month set out its latest assessment of the Irish economy – laced with many risks and warnings – we should test the underlying assumptions it makes.

I cannot remember any debate around this vital economic assessment of our country within the national media.

Austerity

The other lesson I learnt from the crash and its appalling impact was to always take the precautionary principle when applying tax and expenditure decisions.

Austerity is the simple difference between tax and expenditure. When you spend more than you take in, you either cut spending or raise tax or do both.

That is austerity. It is imposed not by outsiders but rather by ourselves when public policy goes wrong.

We saw how our entire tax receipts, in the space of 12 months, during the crisis, were hollowed out by close to 25%. Protecting the public finance position now, against the background of so much European and international uncertainty must be the priority. Things have changed in the eurozone in very recent times; sentiment has swung against the prevailing period of EU economic expansion.

It is time in Ireland to apply the precautionary principle and explain to the public that after every period of growth comes a period of downturn.

It’s how we prepare for a downturn now that will dictate our economic performance into the future. I believe the time is right to plan for a neutral budget this autumn, a budget that puts more money aside, limits growth in public spending and, crucially, tries to pay down debt.

If things aren’t as bad this time next year, a more expansionary budget might be considered. But now is the time for precaution.

Right now, the Irish economy is in a sweet spot – strong growth, rising employment levels and increased wages and incomes.

In an open economy like Ireland, when recovery takes hold, strong economic growth is to be expected. But as sure as night follows day the current exceptionally high growth rates will not continue.

The challenge for policymakers now is to keep the economy on a steady, sustainable growth path.

Currently, the risks are largely external: Brexit, Italy, the dangers of trade wars, rising energy prices and increasing political tensions in the Middle East. There is also evidence that two key markets for Irish exports, the UK and the EU are beginning to show signs of a slowdown.

The internal risks are an economy reaching capacity constraints and overheating.

International financier George Soros gave a stark warning that we should be bracing ourselves for a new global financial crisis. This is coming from a man who has made his billions from studying the international markets, so his warnings should not be taken lightly.

Also, the Italian political crisis has ramped up a gear and could develop into a full-blooded eurozone crisis.

It looks more and more likely that whenever new Italian elections come – and they are never too far away – they will effectively be a referendum on whether or not Italy should remain in the eurozone.

Growth

Irish corporate tax intake is also a source of risk in the current volatile international business climate. It has shown spectacular growth during the past four years, rising from €4billion to more that €8billion, contributing 16% of all taxes collected.

That’s 16 times more than the residential property tax.

But Séamus Coffey is right to point out that corporation tax here has a narrow base with 40% of it being paid by just ten companies. We need to take a series of measures to make our economy more resilient. During this period of buoyant revenues, we should aim to run a budget surplus, pay down debt, and save more as a country.

We should consider ramping up significantly our commitment to a rainy day fund as a shock absorber for any downturn that happens.

We also must continue the process of widening the tax base and reward work by targeted tax cuts, where it is due. In particular, the threshold for the higher rate of income tax needs to be raised above the average wage which now stands at just over €38,000. Nobody on the average wage should be paying the top rate of tax.

Additionally, long-term capital spending on social and physical infrastructure, through the National Development Plan, must be a central part of our economy’s resilience into the future.

But despite some tidying up of the tax system, it would be a mistake now to inject more money into the economy by widespread tax cuts or significant new public expenditure.

History teaches us that economic downturns are inevitable. In the last crisis our one saving grace was the National Pension Reserve Fund, but generally there was very little planning for the bad times.

Let’s not make the same mistake again.