The Government’s Summer Economic Statement, due out on Tuesday, is more likely to look like a copy and paste from last year than one written under the threat of a no-deal Brexit or with the possibility of overheating seemingly only round the corner.
It will target an additional budgetary package of about €3 billion, similar to what was signalled last year, on the basis of 3-4 per cent growth. Pretty standard assumptions.
Minister for Finance Paschal Donohoe will make the right noises about budgetary prudence in the face of economic uncertainty while politely declining to reveal what levers he intends to pull come budget day.
And that’s for two reasons.
The Government’s budgetary manoeuvring is rarely flagged in advance and probably isn’t nailed down yet. But secondly, and perhaps more importantly, the threat from Brexit may be overtaken or superseded by the threat from an overheating economy, an imminent danger in the context of near full employment.
A no-deal Brexit may, after all, not happen but employment can’t keep growing at the current rate without wages and prices being bid up. And once that spiral starts, it can be extremely difficult to halt.
The problem for the Government is that a shock to trade from Brexit may necessitate a stimulus, perhaps in the form of additional spending or more generous tax cuts, while overheating implies the opposite.
Governments are typically encouraged to dampen down activity in the case of overheating by extracting money from the economy. Which one of these problems the Government will be confronting come November is anyone’s guess at this stage.
The State’s chief economist John McCarthy said recently the economy was on a knife edge, poised between overheating and “underheating” as a result of a major Brexit-related downturn.
Formulating budgetary policy in such an environment was extremely difficult, he said. It may be that all the Government can do is sit on its hands and wait.
