Brendan Keenan: ‘Memories of dark past in some heady figures from the present’

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Brendan Keenan: ‘Memories of dark past in some heady figures from the present’


What we saw during Charles Haughey’s first government was how much damage can be done so quickly if loose policies are pursued for too long
What we saw during Charles Haughey’s first government was how much damage can be done so quickly if loose policies are pursued for too long

One figure which leapt from the pages of the Exchequer returns for last month was the one which showed spending up by 8pc. It seemed like a relic from a dark past.

But we are assured – and not just by the Government – that this time is different and all is well, or pretty well.

It may look like a duck, and walk like a duck, but it is not a duck. No two ducks are exactly the same however. A closer look makes one even more suspicious about the nature of this bird.

There is the fact that inflation is unprecedentedly low, so an 8pc increase in spending is more in real terms than it would have been for most of the past. Then there is the peculiarity that this figure is “below profile”. The budget plans were for even more.

If spending were not below profile – if it was what the Department of Finance forecast for February – it would have been be up 9.5pc on last year. Part of the saving was on capital spending. Whatever about long-term overruns on hospitals and suchlike, not unreasonably it is often below target on a monthly basis.

The day-to-day current spending figure is the important one and it was 7.6pc higher than last year. The profile was for an 8pc rise.

These are extraordinary numbers but no one is panicking. The simple fact is that the public finances themselves are in rude good health. Despite the surge in spending, revenues exceeded it by €139m in the first two months of the year.

Admittedly, this was €76m less than the surplus in the same period last year, with the tax revenue increase of 3.7pc less than half the growth in current spending.

That is not a trend which could continue indefinitely but it is a new trend. It has been exactly the opposite for the past decade, with revenue growing faster then spending. A deficit of 11.4pc of GDP in 2009 has turned into a balanced budget

Ireland has shown the world that it can do the business. The general assumption is that it can do it again if required. But there may also be another, more dangerous assumption; that nothing of the kind will be required.

These considerations were raised in the recent review of Ireland’s credit ratings by the Moody’s agency. As might be expected, high levels of public and private debt, pressure on wages and the possibility of excessive credit growth were seen as the main threat to such assumptions.

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Oddly enough, credit does not seem to be growing fast enough. If that means unfulfilled demand, there could yet be a borrowing boom.

Growth beyond almost anyone’s expectations 10 years ago has been at the centre of everything. It has enabled the Government to get the debt ratio down and the budget balanced even though serious spending restraint, on any reasonable definition, ended five years ago.

That in itself is not grounds for criticism. It would have made no sense to continue with the austerity of 2010-13 when the economy, both foreign and indigenous, was spinning off large increases in tax revenue.

It will be grounds for criticism if the pattern continues beyond the point where it makes sense. An awful lot of the revenue was foreign, and still is, but the questions involve more than the future of multinational corporation tax payments.

To overdo the metaphor a bit, they are whether this apparent duck might indeed turn out to be the old familiar fowl if and when the tide goes out.

But nobody really seems to expect the tide to go out, although Brexit, to quote the Duke of Wellington, is a damned close-run thing. Moody’s assume no crash exit and no major threat to Ireland’s corporation tax regime. They might be technical assumptions but they are also not anticipated.

The agency does say that it watches for signs that Irish policy might be returning to its bad old ways but so far is happy enough with what it sees. If the economy keeps on growing apace, debt ratios will continue to fall.

The agency does say that progress has been slower than it might. On present form, it will be surprising if the Government makes much more progress at all by moving from balance to surplus. It is more likely to take the view that zero deficit is good enough.

That is almost good enough for Moody’s too. It rates the country’s fiscal strength as ‘Moderate’ with the chance of an upgrade to the ‘High’ status enjoyed by Ireland’s economic strength. Given the ongoing rows about repossessions, it is significant that the dud loans in the Irish banking system are still seem as posing risk.

As might be expected, the deputy governor of the Central Bank, Sharon Donnery, stressed the dangers in a speech to the IIEA institute. They are an unusual mix, combining the risk of recession, whether Brexit-led or not, and the risk of overheating if, not for the first time, forecasts of recession turn out to be wrong.

Ms Donnery name-checked the usual remedies; reducing Ireland’s high debt to safer levels, saving rather than spending the windfalls gains from unexpected corporation taxes or interest costs. Yet we may have passed the point where there is much of use in advocating policies which are patently not being pursued.

Another uncomfortable memory, from the early 1980s, is the danger posed by postponed general elections. One cannot expect the political system to change course until the voting is over and done with. The next election seems already past its ‘best before’ date.

Nothing like the recklessness of Charles Haughey’s first government is on display now. What we did see then, and again in 2005, is how much damage can be done so quickly if loose policies are pursued for too long.

Right now, the objective not so much to avoid an imminent crisis, which is not on the cards, as it is to prevent another one happening at all. As Ms Donnery said, we also now have tough central bank ‘macroprudential’ policies to complement fiscal ones.

That does allow a little more room on the fiscal side but it is difficult to believe budgets would have been any tighter if the central bank were as accommodating as many want it to be. We might then be well down the road to another crisis.

Spending is growing faster than the economy can sustain in the long run, and credit is growing more slowly than is needed in the long run.

The balance has to change at some point but we know the political system has very limited machinery for reducing spending growth, other than emergency brakes for use in a crisis.

The European Commission produced its substantial annual country report on Ireland last week. Like the ratings agency, it describes the progress on reducing the debt-to-GDP ratio as “limited”. “Some progress” is its description of the efforts to reduce the tax breaks so beloved of Irish governments and broaden the tax base away from taxes on income.

This was before the announcement that the property tax was to be frozen at present levels. Assuming it was an announcement. It is hard to know these days what is and is not an actual proposal in ministerial comments.

The purpose of the objectives agreed with the EU is to guard against an uncertain future, but also against things which are more or less certain. There appears to be no progress in improving cost efficiency in the health service, which will be needed to meet increases in age-related spending.

Progress is slow in reform of the pension system and the hard bit of actual implementation is still to come. There is lots of hard stuff still to come if the instability of the 2000s is to be brought to an end.

Growth in public spending will have to fall from present percentages and that is never easy. Households need to reduce their debt further from the still dangerously high level of 135pc of disposal income. That means being able to keep more of that income, instead of handing it over to pay for government services.

Hardest of all is the fundamental change needed in the health and social services to cope with the known futures, never mind the unknowns. Many of the complaints about their present performance are justified but the near-universal claim that more money is the answer is delusional and delusion is always dangerous.

Indo Business

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