In recent decades, most governments in the rich world have become borrowing addicts. Many have got themselves into such pickles that they need their economies to grow continuously and open-endedly just to remain solvent.
Ireland was among the most heavily indebted states in the world as recently as the mid-1990s. Very fortunately, more economic growth than anyone could have anticipated came along in the shape of the Celtic Tiger. Although the national debt never declined by much in cash terms between 1995 and 2007, it shrivelled relative to the size of a rapidly growing economy.
But then came the hardest of hard landings. Public debt soared again, mostly because tax revenues collapsed. Gaping spending-revenue deficits emerged which have been filled with enormous sums of borrowed money.
This disaster has been made considerably worse by the huge costs of bailing out the banks.
Whether today’s budget targets for 2013 and beyond are met depends more than anything else on economic growth. Without growth, tax revenues will not rise, outgoings will not fall and the State’s debt mountain will rise ever higher.
So what are the prospects for growth next year? Consider first the reasons for cautious optimism. For the first time since 2007, the property market has been stable for a sustained period, with no downward trend in residential property prices for more than six months. Risks of further declines are real, but the fundamentals of the market tentatively suggest that a bottom may have been reached.
This is important for many reasons. All economies need a properly functioning housing market. Ireland’s market has been dysfunctional for half a decade. An end to deflation should mean more homes changing hands as those who fear buying into a falling market take the plunge.
This would fuel spending in the wider economy on refurbishments, furniture, electrical goods and the like. A functioning property market would also boost employment by allowing people greater freedom to move home to take up jobs.
An end to falling prices would halt the wealth erosion that has inhibited spending. Households collectively hold about half of their total wealth in property. The more property prices fall, the more household wealth is eroded.
People are more likely to spend if they are not becoming less wealthy. That may be happening already. In the four months to October, retail sales registered their strongest uptick since the recession began.
If domestic confidence has strengthened, so too has international confidence in the Irish economy’s prospects. The most obvious manifestation of this has been the cost of Government borrowing, which has undergone a near-miraculous decline since the middle of last year. That allowed the Government to dip its toe in the bond market earlier this year. It is now in knee-deep and, if progress is maintained into next year, it could be fully immersed by this time next year.
Changed investor sentiment has also benefited State-linked Irish corporates. Bord Gáis, ESB, Bank of Ireland and even AIB have managed to persuade foreigners to lend money to them in recent months.
Investors’ willingness to take a punt on the Irish economy has been helped by a calming of the euro crisis since September. That happened as the European Central Bank belatedly put in place a mechanism to prevent financial market panics emanating from Italy and Spain spinning out of control.
If Ireland Inc has been reintegrating itself into a becalmed international financial system, its integration into globalised production chains continues apace. Exports of goods and services hit yet another half-yearly record in the first six months of the year and foreign companies created more new jobs between January and June than in the same period a year earlier, according to IDA Ireland. That multinationals are expanding their operations is particularly good news, given that they account for nine-tenths of the Irish economy’s total exports.
If new projects keep emerging from the IDA’s investment pipeline, export growth into next year and beyond is likely to continue.
But while there have been positive developments at home and abroad, there are no shortages of weaknesses. Risks are many and large.
The euro crisis may be in a period of calm, but it is a very long chalk from being over. The bloc as a whole is in recession and growth prospects for next year are poor. This will not only crimp demand for Irish exports, but weakness in Europe’s real economy is one reason why the crisis might well flare up again in the first half of next year.
Another possible trigger for more euro woes is political dithering.
Europe’s leaders are dragging their feet again on addressing the fundamental flaws in the design of the euro project. The usual minimalism has been in evidence on creating the banking union they agreed to construct in mid-year. At the rate they are going, there may be no monetary union by the time they have got round to putting the banking union in place.
Market participants’ faith in Ireland would be shaken by any deterioration in the wider euro zone. It could be shattered if a deal to make the burden of the State’s debts more manageable were to be definitively ruled out or proved less significant than they had assumed.
The statement by the German and French finance ministers downplaying the prospects of debt relief was among the most negative yet from an Irish perspective.
And it is not only developments in the wider world that could scupper recovery. Domestic weaknesses are manifold. Yesterday’s tax revenue figures show that the poor performance recorded in the second half of the year continued in November. Tax returns provide one of the best indicators of the state of the economy. They are certainly not pointing to imminent recovery.
Nor are the latest employment numbers. They show that the economy continued to shed jobs into the third quarter of the year. Given that recovery in the labour market always lags an upturn in the wider economy, a virtuous cycle of output and employment growth is still over the horizon.
And then there is debt – of households, companies and banks. The aggregate balance sheets of all these sectors are very weak. Boulders of debt on these balance sheets continue to pin the economy down. These are being chipped away slowly, but they are so big it will take time to grind them down to the point that they are not preventing recovery.
For all these reasons, those who forecast the trajectory of the Irish economy have been revising their projections for next year. So has the Government. Its budgetary arithmetic is predicated on 1.5 per cent growth of gross domestic product, another year of contraction in the domestic economy, and a halt to the fall in the numbers at work.
These forecasts are plausible, but so were the forecasts last year and the year before. Those projections proved too optimistic. It remains more likely that the assumptions on the economy underpinning today’s budget turn out to be overly optimistic than overly pessimistic.