(This is an unedited version of my Sunday Business Post column from yesterday.)
'To be Irish is to know that in the end the world will break your heart.' You can usually tell a lazy opinion writer by the number of pithy quotes they use. But it’s worth breaking my rule this one time because Daniel Patrick Moynihan’s words give me pause when thinking about Ireland’s recovery.
I live in Limerick and I can hear the chest thumping from the government all the way down here. “Ireland is the fastest growing economy in Europe, yes it is”. Thump. “We did that”. Thump.
Real gross domestic product growth in 2014 is estimated to have been 4.8 per cent in 2014.
It the recovery real? It is. I look at three things when trying to gauge if the economy is recovering: total domestic demand, which is people buying and selling things, employment, and credit without financial intermediation and property. All three are increasing, and increasing strongly.
I think the statistics will break the government’s heart in the end, and I urge caution. As surely as no snout ever refused a trough, all the special interest piggies will be queuing up to advise the government on how to spend the ‘extra’ money the government will make in windfall taxes from unexpectedly strong growth.
Fiscally the tax take continues to improve. Where should these windfalls be distributed?
A giveaway budget in October is a dead cert at this point. The only question is how much will be given, and to whom. An endless queue of applicants and supplicants will now line up at the doors of Ministers Noonan and Howlin, and it will be heart breaking. It might even be bank breaking.
Let us take re-electoral needs as given. Despite all the talk of not returning to boom and bust, we can assume if they have it by July 2015, they’ll spend it. Let us also take the position of our European partners as given. They don’t want us to spend it. They want us to pay down our debts faster.
The government is composed of very smart people who correctly understand the economic growth is experienced qualitatively. This is a paradox as economic growth is obviously a quantitative issue. We measure Gross Domestic Product, which in 2013 was €174 billion, in 2014 looks to have been around €185 billion. But the average person needs to ‘feel’ the growth via increased living standards, opportunities or just increased spending. This why the halfway return of the Christmas bonus is a great example of where the government can change the way people feel about their prospects.
When the little economists are in short pants, the stories they are told of Irish fiscal policy are normally horror stories: The giveaway budgets of the late 1970s, particularly 1977. The disastrous early mid-eighties. Almost all the McCreevy budgets. These budget stories give the little economists nightmares. UCC’s Mark Coughlan has studied the political economy of each of these in detail, and his findings show budgets are responsive to the electoral cycle.
Almost the only fairy tale budgets, from the point of view of well-done fiscal policy, are the Quinn budgets. On this metric Ruairí Quinn was, easily, the best Minister for Finance the state has ever seen. He held that office from 1994 to 1997. Quinn reduced the overall tax burden while controlling government spending during a growing economy, moved the state’s finances into surplus while keeping inflation under control. Quinn’s policies undoubtedly laid the foundations for the Celtic tiger. And he was rewarded for his excellence by being bounced out of power at the earliest opportunity. Remember Moynihan’s quote: 'To be Irish is to know that in the end the world will break your heart.'
Politics so often trumps economics, at least in the short term, because the Irish people respond to qualitative increases in their living standards in the short term, not quantitative increases in some statistic. From the point of view of those seeking re-election, Quinn’s example is therefore a cautionary tale to today’s policymakers and not an ideal to ascribe to. This one of the many paradoxes of Irish politics.
A huge amount of research collated by the IMF’s Ari Aisen shows that for electoral success, the public only needs between 6 and 9 months of good economic news before the election to favour the incumbent. The good news-ifying, chest-thumping, stability-championing has a few more months to go, so.
Let’s assume the government has an extra 2 billion to play with, coming from interest savings on the national debt from the refinancing operation the NTMA carried out in 2014, increased consumption and investment taxes, and profits remitted by the central bank as well as some ‘pass through’ items from last year. Where will it go? The government will undoubtedly increase child benefit by another 5 euros per week, restore the Christmas bonus, expand free GP care and increase the early childhood care and education scheme. The prudent course, the one the Ruairi Quinn of 1996 would have taken, won’t be taken this time. That should tell us something.