Preparing for economic shocks is more important than a tax cut

Now you see it. Now you don't. It appears we are not earning as much as a country as we thought we were. When it produced the 2015 figures for economic growth the Central Statistics Office stunned everybody by estimating that growth had run at over 25 per cent that year.

The leprechaun economics accusations quickly followed, though it must be said that this was not the fault of the CSO. There are internationally agreed ways to count the figures and that is what they were doing.

That said, it was clear that new ways were needed to measure our economic performance. A new twist in the way multinationals were operating – involving intellectual property assets and contract manufacturing – added a huge chunk to our 2015 growth rate and would continue to cause distortions.

The CSO will continue to measure growth and output under the old internationally compliant measures. But now it will also publish separate figures known in the jargon as Gross National Income star (GNI*).

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Stripping out the impact of the largely financial manoeuvres of a few big multinationals presents a different picture of the size of the economy. Before the adjustment, the usually quoted GDP figure came in at €275 billion for 2016.

Stripping out the one-offs from the the tech, aircraft-leasing and other sectors the figure is cut to €189 billion, a drop of one third.

Darkened room

Now, you could go into a darkened room for a few hours to try to think about the implications of all this. In one way it is just a new statistical measure.

We still have the same amounts of euro in our pockets and the same spending power. And, encouragingly, the data published alongside the new figures by the CSO shows that the domestic economy is continuing to grow strongly as people are spending more. The one note of caution is consumer spending growth at 1.8 per cent year-on-year in the first quarter.

So, can’t we just leave measurements of national income to the statistical boffins and the economists who will get weeks of entertainment crunching the new numbers? Well, not quite.

The new figures are important in one way in particular. They do give a better picture of the financial fire-power of our economy. And this is relevant when you look at things like the level of our national debt, which we have to service from what we earn each year.

Under the traditional measure comparing the debt – around €200 billion – to the size of GDP, our ratio had fallen to 73 per cent. In other words, the figures suggested that our debt level was well below our national income, and that we were well on the way to reaching the EU target of 60 per cent.

Measuring debt against the new estimate of our national income, however, shows a ratio of 106 per cent. On this criteria our debt is still above the total earnings of the economy each year and the EU target looks a long way off.

Debt position

Now, the new measures may make our debt position look a bit worse than it actually is. After all, the financial manoeuvres which boosted GDP so much in 2015 will lead to some additional corporation tax being paid here in future years. Indeed, we have already seen some evidence of this. Nonetheless the point still holds – our national debt is still very high and still leaves us vulnerable to any economic shock.

As we get into the season of big demands on the small amount of spare cash in the budget, it is worth reflecting on this. We have done the job of getting the amount the State spends and the amount it raises in revenue each year back roughly into balance. But the overhang of a large national debt remains, consuming €4 billion more to service each year than it did before the crisis.

Amid all the talk of new investment, this calls for a bit of caution in framing the budget plans. It requires a mindset which starts from looking at how to keep the public finances firmly on track, with a margin for error, and then looks at what can be afforded in terms of new tax and spending measures. Rather than doing it the other way around.

If Leo Varadkar and Paschal Donohoe want to undertake big changes in the October budget they need to raise the money from elsewhere rather than risk any rise in borrowing. Because borrowing, obviously, adds to debt.

Caution

There is another pressing reasons for this caution. It is the danger of Britain crashing out of the EU in March 2019, either without a deal with the EU or with some kind of deal but key preparations not completed.

The UK Audit Office, its spending watchdog which is not known for its hyperbole, warned this week that the planned new IT system to deal with customs after Brexit threatened turning into a "horror show". It's head, Sir Amyas Morse, said that "what we don't want to find is that at the first tap this falls apart like a chocolate orange".

This risk of a chaotic Brexit carries huge risks for Ireland as it could plunge the biggest market for many key exports into recession, lead to a plunge in sterling and threaten the free movement of goods. It could also hit confidence.

It may not happen, but we need leeway in the public finances in case it does, as it would hit growth here and tax revenues.

And doing what we can to prepare is surely more important than whether people get a few extra euro from an income tax or USC cut.