Government should prepare for an economic slowdown

Two important signals this week – one political, one economic – suggest that the only prudent course for the Government is to now prepare for the possibility of a severe economic slowdown in the medium future.

There is little sign that the current administration has either the will or capacity for such a move. Will its post-Enda Kenny incarnation (whenever it finally arrives) will be much different?

The first signal arrived as the Taoiseach and the Government were basking in the mostly justified plaudits for last weekend's European summit. The summit's conclusions copperfastened the diplomatic and political successes of recent months by including strong language about Ireland in the EU's priorities for the Brexit negotiations, and even threw in a declaration about smoothing the way for a United Ireland in the future. The elevation of Irish concerns to European priorities is about as good as we could have hoped for at this stage. But you probably know all that; the Taoiseach was effusive in the praise of his Government, even by his own standards.

Soon after the Brussels success, however, came the signal that dented the move of those paying attention. Leaks – presumed to be from the European Commission – about a fractious dinner in Downing Street last week attended by Theresa May and Jean Claude Juncker, the commission's president, emerged, depicting a completely broken relationship between the two parties that will conduct the Brexit negotiations.

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It got worse. May accused the Eurocrats of trying to influence the British general election; Europe suggested that the British bill for Brexit could be as much as €100 billion.

Sensible conclusion

The only sensible conclusion from the exchanges and reports of recent days is that a complete breakdown of the talks between the commission and the UK looks now more likely to occur over the next 18 months than it has done at any stage so far. Some senior figures in Brussels are putting the likelihood of a Brexit deal – encompassing an exit agreement and a free trade deal for the future – at less than 50:50.

Should that happen, the impact on Ireland would be devastating.

I don’t think – at this point – that this “train-crash” Brexit is the most likely outcome. It would require both the EU and the UK to act against their own manifest economic interests. But that is the sort of thing that happens when people treat each other and talk about each other like this. Brexit is a matter of politics and emotions, not economics. Most divorces are economically unwise too, but they happen all the same.

The second signal to the Government came on Wednesday, when the Department of Finance published the monthly exchequer returns for April, a summary of the State's incomings and outgoings for the month.

They showed that three of the four main taxes are continuing to undershoot projections.

Nobody makes policy or decisions on one month’s figures. You wait for a few months to evaluate trends, especially when you are dealing with the “lumpy” Irish income tax system that is dependent on a relatively small number of high earners and corporates, and therefore unpredictable.

Hold on: last month, the department published the figures for the first quarter, the first three months of the year. They showed the same pattern.

So now we are a third of the year in, and there is a €350 million hole in the State’s finances.

Cause for concern

That’s not actually that big. But it’s significant in two ways. The first is that it may signal something is happening in the economy and the public finances that should concern us. It’s not, yet, cause for alarm, or maybe even for worry. But it is, officials admit privately, cause for concern. They insist that the most likely outcome is that the numbers correct themselves, a forecasting anomaly. But they are not as confident as they were, and they cannot be certain.

The second way in which it’s significant is that while €350 million isn’t a lot of money when you consider that the State spends €60-odd billion a year. But in terms of the adjustments in the budget every year – a bit of extra spending here, a bit of a tax cut there – €350 million is a lot of money.

The two threats – Brexit and the public finances – are clear and present dangers to the State. At least –at the very least – they require an injection of discipline as the Government begins the process to decide its taxing and spending plans for next year.

Right now, Government departments are bombarding the Department of Public Expenditure with demands for more spending next year. The public sector unions, perhaps sensing that the tide is going out, are seeking an immediate round of pay increases (funnily enough, they did the same in September 2008, weeks before the bank bailout).

The character of this Government – or probably the next one, for no useful business will be done until Mr Kenny departs – will be evident in the coming months in how it responds to these questions. The record so far would not fill you with confidence that it values good government over political necessity.