Managing recovery and expectations in budget

 

The good news on the Irish economy, a 7.7 per cent annual growth rate in gross domestic product (GDP) according to Central Statistics Office data, could not have come at a less opportune time – at least for the Government. For weeks the Taoiseach and his Ministers have struggled to manage rising public expectations of tax cuts and spending increases in next month’s budget. Recent signs of a more buoyant economy make it harder for Government to resist the clamour for less austerity in the budget. But the Government knows that to concede too much too soon could not just jeopardise the economic recovery as it gathers pace; it could also ruin the Coalition’s re-election hopes.

A general election must be held no later than spring 2016; most likely, it will be preceded by a budget in which both the political impact and economic benefit of the Government’s tax and spending cut decisions should then be greater, and easier to justify. For now the economics and politics of next month’s budget oblige the Government to exercise restraint, and to adopt a cautious approach.

A year ago the Minister for Finance, Michael Noonan, in presenting the 2014 budget based his spending and revenue figures on a projected GDP growth rate of 2.1 per cent. Within a week Mr Noonan has twice revised – and raised – his growth forecast: first, to over 3 per cent and then to 4.5 per cent. As Mr Noonan has conceded, the sharp rebound in growth marks a strong recovery from a deep economic recession.

Nevertheless some doubts and uncertainties remain about the sustainability of the economic recovery. Public debt at 124 per cent of GDP is very high, as is household debt, while unemployment – at 11.2 per cent – is three times higher than at the peak of the boom. Economic growth has been boosted by the strong rise in exports, up by 13 per cent in the past year, reflecting a strong performance by the multinational sector. The CSO has noted encouraging signs that the traditional indigenous industry sector – a bigger employer than the multinationals and with a greater impact on the domestic economy – is also expanding.

Nine months ago Ireland exited the EU-IMF bailout programme, and the pace of economic recovery since then has surpassed all expectations. The challenge that the budget presents is, as Mr Kenny has said, to decide how best to help and not impede the economic recovery. One way, as the Taoiseach has suggested, is to reduce the 52 per cent marginal income tax rate (including PRSI and the Universal Social Charge) on low and middle-income earners. Such a high rate of tax on those earning less than the average industrial wage is a disincentive to enterprise, investment and job creation, and an impediment to a sustainable economic recovery.