Ireland’s economic recovery: are you feeling it?

Spending is up, unemployment is down. But what’s in it for you? Tuesday’s ‘spring statement’ should indicate how the Coalition plans to spend the fruits of recovery

Three key issues: the non-trickle-down effect, spending versus saving, and who’s first in the queue are all up for debate. Illustration: CSA/Vetta/Getty

Sat Apr 25 2015 - 01:00

So if someone were to take €6,500 from you and offer you, say, €1,500 back over the next few years, how would you feel? Furious because of what you had lost? Or relieved that you were going to get something back?

This is the political dilemma of managing the recovery of the Irish economy after the financial crash. Spending cuts and tax hikes between 2008 and 2014 totalled around €30 billion, or €6,500 for each of us, in very rough terms.

Next week’s “spring statement” from the Government on our public finances will outline how the numbers might add up for the coming years.

The statement will have as its central element a set of economic forecasts that will show that growth, provided it continues, will allow this Government and the next one to give us some of this back over the next five years.

1: The non-trickle-down effect

There is no doubt that the economy is growing again. Domestic spending, the missing factor over the past couple of years, is finally kicking in. New car registrations are up 30 per cent. Unemployment is falling month after month. Tax revenues in the first quarter were more than €500 million ahead of target.

Crucially, the low level of interest rates on financial markets, underpinned by the European Central Bank’s moves to print money, has created breathing space for the exchequer by lowering the cost of funding the national debt.

Taking a longer-term perspective, the strength in Ireland’s economic base is again showing through. The Celtic Tiger ended very badly but was not entirely a mirage, with strong productivity growth and surging employment lifting living standards over a prolonged period, before the bubble started to inflate. This left behind a structure on which to rebuild.

"We have many strong sectors that can drive recovery now," says Prof Alan Ahearne of NUI Galway, "such as IT, agribusiness, medical devices and pharmaceuticals".

Their contribution was drowned out in the past few years by the huge fall in construction during the bust, he points out, but now their export sales are again supporting growth.

The spring statement will put some numbers on this, updating previous forecasts for growth of 4 per cent this year and about 3.5 per cent a year over the next few years. The recovery has arrived and, barring major fallout from a Greek crisis, the short-term outlooks is encouraging.

There are, of course, the buts. Living standards overall will take time to rise, and higher taxes and lower public spending are facts of life.

The recovery is not evenly spread between sectors, regions or social groups.

Take the small-business sector, where Chambers Ireland, which represents thousands of small and medium-sized enterprises in chambers of commerce around the country, has an overview.

“At the coalface this is looking more and more like a fundamental change in Ireland’s socioeconomic development,” Ian Talbot, its chief executive, says. “A small number of urban areas are surging forward, but many rural towns and villages are in decline.”

Meanwhile many households remain mired in debt, particularly those who bought property from the mid 2000s, and groups such as the Anti-Austerity Alliance argue that recovery is not trickling down to communities across the country.

The figures are now so striking that there can really be no debate that a recovery is in place. But the shape of it, particularly who is benefiting, is the battleground.

2: Spending versus saving

Then there are the economic risks. There always are. “I am optimistic, but there are fragilities,” says Prof Alan Ahearne of NUI Galway, who worked for two and a half years with the late minister for finance Brian Lenihan in the depth of the crisis.

In particular, Ahearne warns, the turbo charge of low interest rates will at some stage disappear, pushing up the cost of debt servicing for the State. “It may not happen for several years, but when it does it will take a toll,” he warns.

Also, if global growth does not continue to pick up, our prospects could be hit. With a high national debt we remain vulnerable if things do go wrong. Growth is never guaranteed, with the National Competitiveness Council warning on Friday that rising costs could hit our prospects.

The Irish Fiscal Advisory Council, set up to advise the Government on budget issues, has argued consistently for a more cautious approach and warned that we need to leave ourselves room for manoeuvre if growth slows.

Part of the political challenge is selling a new target to work towards. The old one, engraved on all our pockets, of reducing the budget deficit between taxes and spending to below 3 per cent of gross domestic product, will be achieved next year unless things go badly off the rails.

But now Ireland is subject to a host of EU rules, obliging us to reduce borrowing and the debt burden and limiting the total amount that can be given away in any year. The new goal, based on these rules, will be to eliminate exchequer borrowing completely. The question is how fast to try to get there.

It is all about striking a balance. “No one is saying there should be no tax cuts or spending increases,” says Ahearne, “but they shouldn’t overdo it.” The more that is spent in the budget, the more slowly the deficit and the debt burden fall.

The indications are that for 2016 between €1 billion and €1.5 billion will be available, in line with or a bit better than the 2015 budget but not enough to fund a pre-election bonanza.

According to Ahearne, these rules are just pushing us towards the kind of prudent management we should be undertaking anyway.

“At some stage we need to grow up and realise that this is what we should be doing anyway,” he says.

The lesson from our economic history – and busts in the late 1980s and 2008 – is that we should save some cash in the good times, leaving some spare to boost the economy when it is slowing. But politically this goes against the way Ireland has been run for the past 30 years.

“When you have it, you spend it,” the former minister for finance Charlie McCreevy said in the 1990s. Everyone says we have moved on from that kind of budgeting, but the scramble of demands for Budget 2016 suggests that McCreevy may just have been reflecting a political reality.

3: Who’s first in the queue?

The key political challenge – one of the key issues in managing the recovery – is to establish who is first in the queue to benefit from tax cuts and spending increases.

Part of the political strategy of releasing the spring statement is to try to manage public expectations and to put it up to the Opposition to say what they would do within the tightly defined limits of what is available.

The spring statement will be closely followed by the start of public pay talks and then by the grandly titled National Economic Dialogue, in which various interest groups will be invited to outline their visions. Their demands will add up to a multiple of what is available, senior Government sources believe, allowing Ministers to deliver the message that they can do only so much. But it is a risky strategy, with demands already growing and a clear split between interest groups and across the political spectrum between those who want lower taxes as a priority and those who want higher spending.

Jack O’Connor, the general secretary of Siptu, was out of the traps early, saying in January that, as growth was ahead of schedule, we should be looking at “rolling back pay cuts across the public sector”. Talks are due to start with the Government next month, although success is not guaranteed.

Think-tank for Action on Social Change – or Tasc, a lobby group funded by the trade unions – also makes the case for spending to have priority. According to Cormac Staunton, the organisation's policy analyst, taxes on income are still low in comparison with other advanced economies. "But because of this, people are forced to put their hands in their pockets for GP visits, childcare and school books: things that would be free or subsidised in other countries. Investing in these services is a better way to give something back."

Others argue strongly against this approach. Ibec and other business lobby groups want tax cuts firmly on the agenda. “Income-tax rates are too high, are out of line internationally and are a serious disincentive to work, taking a promotion or doing overtime,” Ibec’s chief executive, Danny McCoy, said recently. “We have one of the highest marginal tax rates in the OECD, and it kicks in too early. It needs to be reduced as a priority.”

Business lobbies are warning against an early move on public pay. “There is a real risk that at this stage of an electoral cycle the pressure to increase public-sector pay to unsustainable levels will be tremendous,” says Ian Talbot of Chambers Ireland, who also calls for tax cuts and investment to take priority.

Demands are also building for more spending in a range of areas, notably health. The broad Government strategy is to deliver a budget along the same lines as last year’s. It would mean cuts in tax and the universal social charge aimed at the “squeezed middle” – those earning up to €70,000 – and at low earners. It would also mean clawbacks from higher earners, together with modest spending increases.

On the Government side, nobody, anywhere, is going to suggest moves to raise more money from anyone. Not after the Irish Water mess.

So it will be a case of how to divide the €1 billion-plus that is available rather than looking for new taxes or spending cuts to free up more cash for other areas.

The only significant revenue-raising measures likely to be floated during the general-election battle are those from Sinn Féin, the socialists and others on the left, involving increasing income tax on those earning over €100,000 and introducing a new wealth tax.

There will be an election row about this, but the bulk of the election debate will be about how to use the fruits of economic growth. All parties have seen the Irish Water marches and realise that plans for new taxes and charges are now a no-go area.

Fine Gael, for the moment, is the party putting most emphasis on tax cuts and its plan to help the squeezed middle. Pearse Doherty, Sinn Féin’s finance spokesman, says this is a blatant attempt by the Government to appeal to the voters it hopes will re-elect it rather than to those in most need. “We want to see a shift in the income tax burden from low to high earners,” he said.

Fianna Fáil is looking for a 50:50 split between tax cuts and spending increases. Its finance spokesman, Michael McGrath, is calling for moves on tax credits and the universal social charge, “to spread the benefit of a recovering economy as widely as possible”, with mental health, medical cards and education identified as key areas for spending.

By defining what sums will be available to spend, the spring statement will stick up the goalposts and paint the white lines around the electoral pitch. After it is published, it will be game on in the long run-up to the general election.