This could be the last of the austerity budgets
The simple truth about economic growth merits repeating: it cures all ills
Given how much “fiscal adjustment” has already been done by this Government , taking another €2.5 billion out of the economy was never going to be easy. Fiscal contraction doesn’t help the growth outlook but it is a measure of the confidence of independent forecasters such as the ESRI that they expect the economy to deliver next year, notwithstanding a deflationary Budget.
The simple truth about economic growth merits repeating: it cures all ills. Growth of 2 per cent to 3 per cent, if it arrives, means this is the last of the austerity budgets. If the economy falls short, we will be back again next year for more of the same. That’s the economics.
Politically, if we are not growing again it will almost certainly be true that much of Europe will also be in the doldrums. And that will bring the risk of a resumption of the euro zone crisis.
Right now, the odds favour the growth optimists: the Department of Finance may even have been a touch conservative in its forecasts.
The Minister for Finance spoke about this being the third year of economic growth. A better description would say the economy has been bouncing along the bottom. But for all of the plans to work, recent signs of an acceleration in growth need to be maintained or increase.
Ministers Noonan and Howlin made references to forecasts of a small “primary surplus” next year. That means we have a budget surplus before interest payments on the national debt. That’s important and is a key part of restoring sustainability to the public finances.
But those debt interest payments are likely to be significant for many years, if not decades: we are forecast to see a peak in the debt/GDP of 124 per cent around now.
That’s dangerously high: all of this austerity has been focused on getting this ratio heading downwards.
Growth has an important part to play of course: it will lead to higher tax revenues and lower social welfare payments. Another very important step in achieving sustainability will be when our economic growth rate is bigger than the rate of interest we pay on our debt. That day is getting closer.
Do the measures announced yesterday add up to a coherent whole? In many ways, the political imperatives behind budget set-pieces nearly always resemble a dog’s breakfast. Yesterday’s example is free medical care for the under-fives. Universal benefits paid irrespective of means or needs rarely, if ever, make sense. The only possible rationalisation for this measure is Labour’s standing in the polls.
Ireland does have a problem with entrepreneurship: we don’t form enough new businesses. As the Minister said, we have a culture that encourages us to become employees not employers. Job creation in any economy typically comes from small and medium sized companies, not from the corporate behemoths. The measures he announced are welcome but the necessary cultural change will take time and more effort.
But this is where the new jobs have to come from. As economists like to say, growth is a necessary but by no means sufficient condition. Extra taxes on savings and investment combined with an extension of our own wealth tax (the now permanent pension levy, which is actually hiked in 2014) speak volumes about what we really think about entrepreneurs .
The Government is forecasting a smooth transition back to economic sovereignty. Growth will come from the export sector, with employment growth leading to a better outlook for the consumer.
The Government itself will not be making a contribution to growth for quite some time.
It has done what it can: what happens next is largely out of our hands. It’s a funny kind of sovereignty that we are about to regain, but it is better than the alternatives.