Budget played it fairly safe – but we are still vulnerable –
TEN years ago, Brian Cowen was finance minister. He delivered the last boom-era budget at year’s end. It committed to taking more people out of the tax net. Public spending was to rise by almost a tenth in 2008. The gap between what the government took in and what it would spend was budgeted to be well over €1bn. By the following summer, that ill-fated budget has been binned.
Could Budget 2018 meet the same fate?
Despite Paschal Donohoe’s sober-sounding talk in his Budget speech, he has presided over a deficit between revenue and spending this year of €1bn. Despite saying repeatedly that he will “broadly” balance the State’s books next year, his Budget foresees an overspend of another €1bn over the next two years. Only in 2020 does he expect the public finances to be back in the black.
It would be much more prudent at this point in the economic cycle if the State was running budget surpluses this year and in the coming years. But if Budget 2018 is not as prudent as it should be, it is not madly imprudent.
Total Government expenditure is pencilled in to rise by less than 4pc in 2018. Mr Donohoe resisted the temptation to narrow the tax base by taking lots more people out of the tax net. Although he has chosen to keep the Government’s finances in the red, the deficits are small relative to the size of the economy.
Should the economy continue to grow strongly over the next 15 months, the happy scenario painted in the Budget should materialise. There are reasons to believe that it will.
The global economy, upon which Ireland’s very open economy depends, is doing well. It is motoring in spite of lots of uncertainty. Wars, terrorism, tensions and Trump have had little impact on economic activity across the planet.
Continental Europe, Ireland’s most important trading partner, has been growing strongly over the past year. Employment is at record highs, and rising. The expansion is geographically broad-based. There is more momentum in the European economy now than there has been in 10 years.
The US is Ireland’s second biggest trading partner. It also continues to expand solidly.
It is worth noting, particularly given the amount of media attention devoted to Donald Trump, that American presidents don’t have many levers to pull if they want to influence the US economy – interest rates are controlled by an independent central bank and Congress has far more sway over national budgets than the Oireachtas does in Ireland.
Closer to home, the UK, which now accounts for just 15pc of Ireland’s trade in goods and services, is doing less well.
In the second half of last year, the British economy grew robustly, as consumers and companies brushed off the mid-2016 Brexit referendum result. That was partly thanks to competitiveness gains from a weaker sterling.
But currency depreciations have cons as well as pros. This year the downside of a weaker pound has hit consumers, as imports have become more expensive. That has eroded the purchasing power of wages. That, in turn, has crimped consumer spending. As a result, the British economy grew at its slowest pace in four years in the first half of 2017.
But this slowdown should pass. With sterling stabilising, inflation is likely to trend down again. With Brexit not due to take place until 2019, at the earliest, the big hit to the British economy will not happen during the timeframe of Budget 2018.
HERE at home, there have also been some signs of softness in the economy of late. Growth is not guaranteed and vigilance is needed. But, yet again, there is plenty of reason for optimism. Wages are finally picking up. Though some prices – such as rents – are rising, others are falling. Overall, the price level is lower today than 10 years ago and Ireland currently has the lowest rate of inflation in the EU. All this means that higher prices are not eroding aggregate earnings gains.
There are other positive trends too. Households continue to pay down debt and fewer people are in negative equity. Stronger balance sheets make consumers more likely to spend.
With export markets doing well and many home-focused sectors, such as construction, in expansion mode, the rosy outlook for the economy that underpins Budget
2018 is realistic, not rose-tinted. It is certainly not of a kind with its
2008 forerunner.
A decade ago, the world economy was feeling the first tremors of a financial crisis that would cause the worst recession in the post-World War II era.
While a small number of analysts and economists saw a financial crash coming, none foresaw its impact on the world economy. That is because nobody understood how the many parts of the financial system work and how they interact with the real economy. Unfortunately, that remains true today.
Humankind has created a complex system that is neither adequately understood nor controlled. With prices of almost every kind of asset soaring across the world, there is no reason to be certain that another giant bubble is not inflating under our noses.
If there is a big negative shock that upsets the applecart of the global economy, it could well come from the same source as last time.
A decade ago, the world was feeling the first tremors of the financial crisis