David McWilliams: Politicians and economists differ over way forward for Irish economy - but who is right?

This week the Government pressed gently on the accelerator, increasing public spending at a time when the economy is humming along, prompting various economic outfits to predict Armageddon. Generally, politicians want to spend to fix things today, while economists opt for prudence and always vouch for the idea of spending later. For politicians, economists are the sort of people who never think it’s a good time to spend. For many economists, politicians are the sort of people who never think it’s a good time to save. Which crowd is right?

Let’s imagine a conversation between a politician and an economist about choosing the right course of action today for the booming Irish economy.

Economist: Ireland is a small open economy, plugged into the world market, and that world can change very quickly. What happens if the multinational corporate tax take disappears? What will you do then?

Politician: That’s out of our control. In the meantime, we deal with the deck of cards we are dealt. We’ve lots of corporate tax revenue now, what does that tell us?

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Economist: It’s a one-off windfall, we should be saving it.

Politician: But you lot have been calling this a windfall since 2015 and yet every year it increases. Could it be that the structure of the economy is changing? Could it be that you are wrong?

Economist: Impossible! There are laws of economics, and if we spend more than we have, we will end up mired in debt.

Politician: But we are not spending more than we have! That means we are being prudent. We are running a surplus!

Economist: It’s only a surplus for now!

Politician: You’ve been saying corporation tax is going to fall for years and it keeps rising. But let’s say you are right, what should we do?

Economist: We could use it to pay off the national debt.

Politician: Has there ever been a country that paid off its national debt?

Economist: Well, no, actually.

Politician: Then why should we pay it off?

Economist: Because we’ve had three debt crises in the past five decades and the more debt we have, the more likely we will have another crisis.

Politician: But will our interest rates fall if we reduce our debt now, giving us some advantage for all this prudence?

Economist: Well no, we are in a monetary union, so our interest rates are determined by the European Central Bank.

Politician: So what’s the point of reducing our national debt today? Isn’t it falling anyway? Didn’t the National Treasury Management Agency announce as much this week?

Economist: Remember what happened in 2011, when we couldn’t borrow and the International Monetary Fund came in?

Politician: But that was the result of a banking crisis, and a population that was massively indebted, a collapse of the economy and an implosion of the national balance sheet. And most of you didn’t see it coming anyway and were all wise after the event! Where are we today?

Economist: Okay, fair point. Right now we’ve never had so much savings in the banking system, so you are right, today things are very different. But things can change quickly. The markets might punish us!

Politician: Isn’t our national debt as a ratio of national income falling the most rapidly in Europe? Aren’t the markets very happy with Ireland?

Economist: The problem is the economy is straining at the leash. It doesn’t need any more spending. Set aside all this money for the rainy day. Don’t inflate what is already inflated.

Politician: But inflation is falling if the markets are happy, right? What is constraining us? We have a massive domestic problem. We don’t have enough houses, not enough transport infrastructure. Look around Europe, those countries all built their public infrastructure when they had the money to do so, not when they didn’t have the money. Now they have their metros, high-speed links, free creches, and all those arguments about when to spend have been forgotten.

Economist: Yes but their debt rates are high.

Politician: But we are talking about balance sheets here. For every debt there’s an asset and their assets are their public infrastructure. What would those places be like if they didn’t build when they were growing? Our problem is that demand in our economy is too high and supply is not strong enough. Are you advising against increasing supply while restraining demand? Is that what you are saying?

Economist: Yes, but no, but ... What I’m saying is we can’t expand supply because we don’t have enough workers, material or machinery. We are at capacity. The problem isn’t money, it’s stuff – like labour and tools. There are simply not enough hours in the day or enough workers in the State.

Politician: Are you saying we are stuck? In the past, what country decided that it was stuck and could only restrain demand rather than try to expand supply?

Economist: Well, a good example is Germany, which has been suppressing demand for a while, creating massive surpluses and investing those surpluses abroad, living off the proceeds.

Politician: But isn’t Germany a very old society, with a huge bulk of pensioners? They don’t need schools, creches and houses like us. We need these things today, not tomorrow! Germany is living off yesterday, but Ireland didn’t have a “yesterday” in economic terms. Everything here is happening so quickly and it’s happening now. And didn’t Germany grow at phenomenal rates for 30 years?

Economist: But you’ll blow all the money now. Better to delay and build up money for a few years and then when the economy slows down, you can build all the houses, metros and railways you want.

Politician: Have you ever heard of the electorate? They/we want things now. There’s lots of money in our coffers and people want some of it. And, by the way, if we don’t spend it, the next shower will! Are you saying don’t spend or give tax breaks now?

Economist: If you give tax breaks now, you will see all that money disappear on imports or higher local inflation.

Politician: But the tax money is their money, not mine. If we are generating too much tax revenue, surely we should give the people back the money?

Economist: You fail to understand the economic cycle.

Politician: And you fail to understand the political cycle.

Let’s leave it there.