Will the penny drop on financial prudence as election looms?

AWISE man once said, ‘when I have it, I spend it’, or words to that effect. Of course, Budget 2020 was framed in a very different manner, focused on the threat of a no-deal Brexit, which was expected to reduce Irish GDP growth to just 0.7pc in 2020 and open up a €2bn deficit in the public finances.

In truth, the Government has utilised the political space created by Brexit fears to push through a sorely needed slowdown in expenditure growth.

This should help address some of the criticism from the Irish Fiscal Advisory Council that spending has grown too fast and we should have built up more substantial budget surpluses during good times.

Indeed, Budget 2020 was notable for what it didn’t contain. There were no headlinegrabbing €5-per-week increases in social welfare payments, such as the basic state pension, unemployment or child benefit.

The justification for holding back this time around was the threat of a no-deal Brexit, which no longer looks likely.

Although the outcome of the UK election remains uncertain, the prospect of a nodeal Brexit has most likely receded to a remote possibility. Should the Conservatives win an overall majority, they will surely push through Boris Johnson’s (pictured) withdrawal agreement with the EU, ushering the UK into the transition period, which will no doubt have to be extended out to 2022.

In the event the Conservatives fail, the price of any coalition between the

Liberal Democrats, Scottish National Party and Labour would surely be a second referendum. Despite protestations, the EU would almost certainly grant another Article 50 extension for a referendum. The true deadline for the UK to exit will probably be in late 2020, when its continued membership of the bloc will start to disrupt preparations for the next multi-annual EU budget.

In either case, the likelihood of a nodeal Brexit looks remote. The UK has now stared over the cliff edge on two occasions and is unlikely to convince anyone it will be prepared to jump if a third arises. So where does that leave our public finances?

Speaking earlier this month before the Oireachtas Budgetary Oversight Committee,

Finance Minister Paschal Donohoe said that if a no-deal Brexit was avoided, his department expected Irish GDP to grow by 3pc in 2020. This would prevent the sharp slowdown in tax revenue growth pencilled in to Budget 2020, and allow the €600m surplus expected this year to grow.

Moreover, €1.2bn of Brexit contingency spending will not have to be deployed. Hence, Donohoe also said the department was likely to revise up its forecast for the Government balance to a surplus of 0.5pc of GDP in 2020, around €1.6bn.

And there could be even further good news to come. November is typically the most important month for collection of corporate tax receipts. Donohoe also gave a clear hint the out-turn in November could be far better than expected.

If so, the €600m surplus in 2019 could actually exceed €1bn. Given a better-thanexpected starting point, the Government might have to revise up its projection for the budget surplus in 2020 to above €2bn. That’s an enormous amount of cash lying idle, especially for nervous Fine Gael TDs eyeing XXXXXXXXX up the next election.

Of course, paying down debt should be the appropriate course of action. Speaking to the Budgetary Oversight Committee, Donohoe got his retaliation in first, reiterating he was committed to running surpluses over the medium term, and highlighting the challenges the Irish economy still faces from the weaker global outlook and the OECD’s programme of tax reforms. Still, Ireland clearly has form in this area. It remains to be seen whether our political system can sustain consistent budget surpluses to reduce public debt — or if we will find they have inevitably been spent next year to bribe the electorate with their own money.

Home-building up, up and away

IRISH home-building is slowing down, a sad indictment of Government policy, or so goes the narrative. Anecdotal evidence from estate agents and home-builders suggests new development projects and housing transactions are being delayed because of uncertainty on the future of the Help-to-Buy scheme, Brexit and concerns that house prices might continue falling in Dublin.

More left-wing voices have been caught up in the fray, eager to assert that if the private sector can’t deliver, the Government should ‘just build houses’ — as if there was a simple switch that could be pulled to quickly deliver new housing. So the news that housing completions rose to 20,000 in the 12 months to September, which might have been considered good, has been received almost with dismay in some quarters.

Furthermore, BCMS housing starts were up by 33pc in the third quarter of this year, totalling 26,000 over the past 12 months.

This is a level of home-building that many commentators said would be impossible to achieve in the immediate future.

Given the normal lag, housing completions should exceed 25,000 in 2020. Of course, this will not be an immediate panacea for our dysfunctional housing market — but it cannot be dismissed as bad news. Clearly, the pick-up in housing completions has further to run. Once spades are in the ground, housing starts tend to turn into housing completions 12 months later.

One explanation is that many commentators fail to appreciate Ireland’s housing market extends beyond the M50. Completion of units in development schemes in Dublin was down 18pc to 2,879 in the first three quarters of 2019, but offset by a rise in apartment completions, up 58pc to 1,769. Total completions in Dublin are up only 1pc.

In contrast, completions in Kildare, Meath and Wicklow were up by 47pc to 3,308, and in the rest of Ireland by 22pc to 6,589, in the first three quarters. So the perception that house-building has stalled appears to reflect too narrow a focus on the capital and disregards completions of apartments.

Of course, some may argue all homes built should be reserved for first-time buyers, but purchases by institutional property funds of newly built apartments will add to sorely needed rental stock.

Another false perception is that housing market transactions have fallen this year. This is plainly untrue. The Property Price Register shows that residential transaction volumes will actually be up 4pc this year, compared with 2018. The mortgage market tells a similar story. Mortgage lending in the first three quarters was up 11pc and should total close to €10bn this year.

So, although Irish house price inflation slowed to 1pc in September, with prices in Dublin declining, it is clear that underlying conditions in the property market for firsttime buyers are improving. That house prices are rising at a slower pace than incomes is surely a good thing.

Yet too many commentators still seem upset that house price inflation has slowed.

It is as if they need to cling on to the logic of the Celtic Tiger — that economic development is a sequence of housing booms and busts, entirely dependent on confidence and sentiment, and it is the Government’s duty to pump up the next bubble with every tool at its disposal. Hopefully, the news that home-building is still expanding in 2019 can help illustrate there is a better way.