Dangers on the horizon
Economy in 2017
Ireland has a decidedly mixed record in managing the public finances over the years. Minister for Finance Paschal Donohoe has promised that it will be different this time, but he will inevitably face pressures. Photograph: Alan Betson
Economic growth has continued apace in 2017 and the short-term outlook is favourable. A recovery initially led by exports has spread into the domestic economy, with strong growth in employment and a pick-up in incomes leading to higher spending. Investment has also picked up in most sectors, with construction growing again, albeit from a very low base.
The official figures are likely to show that the economy grew by some 7 per cent this year, when measured by the rise in gross domestic product. Even allowing for the distorting impact of some multinational-related activity on the data, most analysts estimate underlying growth at 4 to 5 per cent, a strong performance by any criteria. Predictions for next year are also generally upbeat and the unemployment rate could fall towards 5 per cent on current trends by the end of 2018.
Fundamental contradictions remain in the UK position and more battles lie ahead
This does not create an easy task for the Government. It is continuing to grapple with a chronic housing shortage, the result of massive under-investment during the economic collapse and the near decimation of the construction sector. While budgetary constraints are easing, it also faces the difficult task of participating in the Brexit negotiations and planning against the background of the huge uncertainty of how these will work out.
The Government made some ground in the first round of the Brexit talks, winning important commitments on the Border on which it can rely as the talks progress. However, fundamental contradictions remain in the UK position and more battles lie ahead.
Ireland wants the UK to remain as closely aligned as possible with the EU in trade terms after Brexit and this would be the clearest way of meeting the Border commitments. Were the UK to stay in the EU customs union and single market, it would be an ideal outcome for Ireland.
However, the Conservative government remains committed to leaving these arrangements, opening up the likelihood of long, divisive and potentially difficult trade talks with the EU.
The focus needs to be on key investment spending projects and it is essential that value for money is prioritised
This remains the key visible risk factor on Ireland’s economic horizon and it is a significant one. The worst-case scenario – Britain crashing out without a deal – looks more unlikely than it did, but it can by no means be dismissed. And this needs to be reflected in our economic planning.
Other risks are also apparent. The new tax legislation in the US will lessen the tax-driven push for US companies to set up overseas subsidiaries as they expand into markets outside the US. This may slow the flow of investment out of the US a bit, though there appears nothing in the legislation to greatly disadvantage Ireland’s drive to attract US foreign direct investment.
Tax changes at EU level, particularly the long discussed plan to introduce a common corporate tax base, may carry a greater threat. However, it remains unclear whether this plan will progress and if so in what shape, with talk also of short-term tax measures to up the tax on the digital sector.
Normal economic life continues in the face of these factors, as we have seen this year. The major economies, with the exception of the UK, have performed more strongly than expected. Together with rock bottom interest rates, this has created an ideal backdrop for Ireland.
We need to use the scope this is giving us to address key issues such as housing, and to put the public finances in a more resilient position for when growth slows, as it surely will at some stage.
Both these things should be possible, but only if the Government can face down calls to increase day-to-day spending more rapidly and cut taxes as well.
This would risk overheating the economy and leaving the public finances vulnerable were, for example, some fall-off to occur in corporate tax revenues.
The focus needs to be on key investment spending projects and it is essential that value for money is prioritised. Clear analysis needs to take precedence over satisfying powerful lobbies and interest groups.
Ireland has a decidedly mixed record in managing the public finances over the years. Typically ministers for finance have spent more in the good times and cut back when times are hard, contributing to the boom to bust cycle.
The current Minister, Paschal Donohoe, has promised that it will be different this time, but he will inevitably face pressures, particularly if, as looks likely, there will be significant revenues to spend in the Budget.
The Government’s other key challenge is delivery, particularly in the housing and healthcare. The short time-horizons of the political cycle are not ideal for tackling these issues and they require the kind of organisation and cross-departmental policies where we have often fallen down in the past.
But if there is one thing which we learned from experience it is that throwing money at economic problems is not the way to solve them.