Strange things are happening in the economy — and budget outlook is bleak
A new Taoiseach and Finance Minister are likely to be in place soon, but their honeymoon will be short, writes Dan O’Brien
THE average person in Ireland is worth the princely sum of €137,000. What’s more, people are getting wealthier at quite a clip, according to the Central Bank’s latest figures released last week.
One reason for this is that the value of the nation’s housing stock is rising. A second reason is that other assets, like pensions and cash on deposit, are also on the up. The third is that personal debt is falling, as the number of households repaying debt exceeds the number taking it on.
When these three parts of the personal wealth jigsaw are put together, a quite rosy picture emerges. The wealth of the nation’s households has almost returned to its alltime peak, reached exactly a decade ago.
This is in keeping with a number of other indicators on the health of the economy.
Employment is up. Joblessness is down. More goods are being shipped overseas. Consumers continue to spend more. Inflation is looking a little bit more normal.
The positive recent news on the economy has made some economists more upbeat about the future. This was reflected in two forecasters’ prognostications published last week.
Last Monday, Davy stockbrokers upped its expectation of economic expansion this year. Later in the week, the European Commission did the same. Brussels’ economists now believe that the Irish economy will expand more rapidly in 2017 than they thought a few months ago. The Commission expects Ireland to be the second fastest-growing economy among the 28 members of the EU this year.
I don’t want to rain on anyone’s parade, but something is not quite right. There are some contradictory signs from sentiment surveys and the property market (see the boxed section for further details on house prices and turnover). And, while most indicators point to an economy that is motoring along nicely, not all do. Manufacturers had a weak start to 2017. So did sellers of new cars.
The somewhat confusing picture coming from the economy’s dashboard is also to be seen in opinion surveys. A recent poll by this newspaper found sentiment to have picked up strongly over the past six months. The latest KBC/ESRI sentiment index, published last week, showed less optimism.
The indicator that gives most cause for concern is the amount of cash flowing into the State’s coffers. Tax revenues are as important as an indicator of activity in the wider economy.
They are also important in multiple ways for politics. If the smallish but growing hole in the public finances gets much bigger, squaring the many budgetary circles that have to be squared later in the year will become much more difficult.
To see what’s happening to the revenue side of the public finances, it is important to consider the trend. In 2015, the increase in the amount of cash that the Government took in was consistent with a robustly growing economy. That changed in 2016. Last year, annual growth in total Government revenues was half the rate recorded the year before. Much of that slowdown was accounted for by a sharp deceleration in tax revenue growth in the second half of the year.
Had it not been for a surge in tax receipts in November, which is the biggest receipts month every year, politicians and mandarins in the Department of Finance would have had a less than jolly Christmas.
The slowdown in tax revenues in the second half of last year has not, mercifully, turned to outright contraction in 2017. But there has been no growth.
Given the general state of the economy, as discussed above, one would expect at least some increase in revenues. Yet in the first four months of the year, the amount taken in tax and social insurance contributions was almost identical to the same period in 2016.
This is not a cause for panic, as it does not suggest the economy is heading for bust. But from a political perspective, it is quite ominous.
Because the dismal scientists in the Department of Finance had forecast a rise in tax and PSRI receipts, they are now more than €400m behind target. If actual outturns continue to fail to meet targets by the same magnitude over the course of the rest of the year, whoever replaces Enda Kenny and Michael Noonan over the coming months will have a very short honeymoon.
Their successors should be in place in a month or so. Fine Gael’s new leadership, along with their coalition partners and the coalition propper-uppers on the Opposition benches, will then have just four months to agree a budget, which has to be ready by mid-October.
With spending pressures rising while the fiscal space shrinks, squaring the many growing circles will test the new Taoiseach and finance minister from the moment they get behind their new desks.
‘Given the general state of the economy, one would expect some increase in revenues’