Safeguarding the recovery
After economic crisis, an air of unreality remains about state of the public finances
As 2017 approaches, the Irish economy is growing, continuing the recovery from the terrible losses of the economic collapse. Notwithstanding the many shortcomings in the way key economic data reflects what is happening in our economy, it is important to realise that growth here continues to outperform most other developed economies, and that this is having a dividend, most notably through strong job creation. As we debate the best way forward, we need first of all to safeguard this positive employment trend, insofar as possible, as it underpins much of the wider progress in our economy.
Growth in the last few years has been surprisingly strong, with all the underlying measures showing a steady performance. The first half of 2016 showed a particularly strong outcome. Growth does seem to have slowed in the second half of the year, after the Brexit vote, though economic indicators for late in the year remain positive. Most forecasters expect continued growth in 2017, albeit at a slower rate than the year just ending.
Clear risks ahead For the Government, the outlook for continued growth will come as a relief. However, there are clear risks looking to 2017. The UK economy, a key trading partner, held up well after the Brexit vote, and so far the fall-out here has been limited, but there can be no doubt that the Brexit talks – due to get underway next year – carry huge potential difficulties for Ireland.
There will be opportunities too, of course, notably to attract new inward investment in areas such as finance. But the analysis of the Economic and Social Research Institute – that the risks outweigh the potential positives – is persuasive.
There are other uncertainties too, of course. US president-elect Donald Trump has promised to cut US corporation tax sharply and put pressure on companies to keep investment at home. He has also said he would take a much more aggressive approach on trade policy. For a small open economy like Ireland, relying on inward investment and trade growth, all this carries obvious risks.
To this can be added the uncertainties in Europe itself, with the Italian banks in difficulty and key elections coming in the Netherlands, Germany and France. If, for example, Marine le Pen is elected as French president, she has promised a referendum on EU membership. The euro remains an unfinished construct, and so these events carry dangers.
The outlook for 2017 – and beyond – is thus clouded in more than the usual level of uncertainty. This should not lead to a “do nothing” stance for Irish economic policy. We have to continue to address our own economic issues. Pursuing the right policies remains vital. Part of this involves preparing for the potential challenges ahead, particularly from Brexit. A key goal of policy must be to have the flexibility to respond as this all unfolds.
Most forecasters expect the economy to grow by around 3 per cent in 2017, or perhaps a little more. If this proves correct, it should give the Government scope to continue on the course it has set. However the scale of the uncertainties should, in themselves, have an impact on policy. The Government needs to create room for manoeuvre in its budgetary management, as well as pursuing policies which underpin future growth to the greatest extent possible.
For a minority administration, this is not easy. The political pressure is to spend to address key economic and social problems, while Fine Gael ministers are still tied to their promises to reduce USC. If the international environment remains calm, this may all be possible, if not ideal. However, there is a now a mix of medium-term issues which need to be squarely faced – the possibility of a hit to growth from Brexit, the need to reinvent our model of attracting foreign direct investment, and the continued uncertainties facing the euro.
A focussed setting of priorities No Government could fully prepare for all this. However it calls for a much more focused setting of priorities than we are seeing at the moment, a greater strategic focus, and a faster pace of implementation. The Government still has to show that it can really tackle key structural issues – such as homelessness, the housing crisis, the soaring cost of motor insurance and chronic under-investment in other areas. It has to move from studying the problems to taking action – and it remains to be seen whether, politically, it can do this.
Meanwhile, after the economic crisis, an air of unreality remains about the state of the public finances. Spending, or investing more means either cutting spending elsewhere, or raising taxes. Much of the public debate avoids this reality. We also need to create some flexibility in our budgeting in case a period of lower growth hits. Having started to repair the damage from the economic crisis, we must ensure, as best we can, that we protect ourselves and seek to hold on to the progress we have made at a time of unprecedented international uncertainties.