Deja vu all over again with budget giveaways
IN just four months’ time, provided it is still in office, the Government will unveil the details of its final budget. It has already revealed that it intends Budget 2016 to be the most expansionary since before the crash.
Spending increases and tax cuts will be implemented even though the economy is the fastest growing in Europe and does not need such stimulus. They will be implemented even though all the money that is “given back” in the budget will be borrowed. They will be implemented even though the independent public finances watchdog has said that planned spending increases are a breach of the “spirit and letter” of the Government’s own rules.
Pointing these facts out irks some people in Government. The Minister for Public Expenditure and Reform Brendan Howlin is irked more than most.
In an article earlier this week, he took issue with anyone who holds the view that it is unwise to splash out with borrowed money when the State is already so indebted and the European economy and financial system so fragile.
He wrote (as Greece hovers closer than ever before to crashing out of the euro) that the “potential threats” to the economy are “overstated”, going on to say that these threats “frankly do not accord with the Government’s track record in bringing the Irish economy, and the public finances in particular, back from the brink of disaster”.
This, for starters, is a failure of logic, and quite how it got past him team of advisors is more than perplexing. Let’s be quite clear: there is no connection between the Government’s past record and the many future risks that Ireland faces. That is because the greatest and most immediate threats facing the economy come from the world beyond Ireland and no Irish Government has, or can have, any control over them.
Every fair-minded analyst and commentator gives at least some credit to the Government for the recovery that has taken place.
It has provided stability, met its budgetary targets thus far, worked hard on rebuilding Ireland’s international reputation and deserves 100pc of the credit for the enormous achievement in restructuring the promissory note used to prevent a collapse of the banking system.
But having a decent record does not entitle any governments to claim that others are wrong to take different views on the threats facing the economy. Howlin’s comments this week have echoes of the attempts during the bubble to silence those who warned of the risks with the accusation that they were “talking down the economy”.
It is perfectly true that the economics profession missed the risk of the banking crisis and those who believed there were risks of a hard landing did not articulate the dangers strongly enough or frequently enough. Some of us try to learn from past mistakes. Brendan Howlin appears less interested in learning lessons.
Perhaps the most worrying aspect of Mr Howlin’s article was the question he raises over whether he even understands the nature of risk. He said, “Having gone through the difficult task of getting things back on track, we have no intention of allowing the recovery to be derailed.”
If Mr Howlin and his Cabinet colleagues were omnipotent, this statement would make some sense.
But they are not. Ireland’s recovery could be derailed within the coming weeks if a Greek exit from the euro causes all hell to break loose in Europe. When considering how this could derail Ireland, Mr Howlin’s “intention” is neither here nor there.
All the Government can do is be as prepared as possible for a re-eruption of the crisis.
And the best way of doing that is to get the public finances back into the black so that it has maximum leeway to respond to another slump. Simply put, the bigger the budgetary surplus the Government runs in the current good times, the smaller the dose of austerity it would have to dish out if things take a turn for the worse.
But lest readers believe this columnist is a dyed in the wool pessimist, it should also be said that, with luck, things could turn out as Mr Howlin is banking on.
Although it would be prudent to prepare for the worst, there is reason to hope for the best.
That is because there is more “upside risk” in the domestic economy right now than “downside risk”. In other words, if the euro crisis does not re- erupt and there is no other major shock – such as a crash in credit-fuelled China – then the balance of probability points to an acceleration in Irish growth, rather than a petering out of the recovery.
Almost every indicator across the economy’s dashboard is pointing to healthy expansion and the momentum in the economy is such that it is very hard to see anything happening domestically that would end recovery this side of the general election.
There are also a number of things that could happen which would cause the economy to grow even more strongly than it is currently doing.
Thus far, the recovery has been “growthless” when it comes to pay. But now private sector wage growth is showing tentative signs of returning to life.
With unemployment falling, workers bargaining power is strengthening. It is possible that wages will rise more over the next 18 months than in the past seven years.
Another “upside risk” is the possibility that households will spend more of their incomes, and cut back on saving.
Over the past five years, around one in every eight euro earned has been saved. Most of this saved money is used is to pay off debt.
But some of it is “precautionary” saving. If people saved a little less for a rainy day and spent more today, the domestic economy would grow more rapidly.
Yet another potential additional shot in the arm to the economy is from the banking sector.
The domestic banks, when taken together, have returned to profitability and can now borrow money at very low rates.
They clearly have a much greater capacity than in even the very recent past to support the economy by lending more to growing businesses.
But none of this can be taken for granted. We are cursed to live in too interesting times. Great uncertainty prevails. The range of economic outcomes, even in the short term, is large.
We can only hope that the downsides do not come to pass.
Ireland’s recovery could be derailed within the coming weeks if a Greek exit from the euro causes all hell to break loose in Europe. When considering how this could derail Ireland, Mr Howlin’s ‘intention’ is neither here nor there