Cliff Taylor: All is well in the Irish parallel economic universe - but for how long?

Ireland seems to be in a kind of parallel economic universe. Here, the talk is of budget giveaways, booming tax revenues and growth this year of 6 per cent plus. This weekend we learn that tax revenues are so flush we can afford to put another €1.5 billion in gross spending in to government departments for this year in a late round of supplementary estimates and still meet our borrowing targets.

The headlines internationally tell another story. Just this week the IMF was warning of the risk of a new world recession, and the likelihood of low growth. There was news about how the slowdown in emerging markets was hitting German exports. And the Bank of England left interest rates at 0.5 per cent for the 79th month, yet another illustration of the mix of low growth and low inflation prevailing across most of the developed world.

Yet in Ireland it is all different. Big business is growing fast, despite lacklustre world markets. The wider economy is gaining, too. Total employment – one of the best indicators – increased by almost 90,000 over the last two years.

Savage toll

The political problem for the Government is that the downturn took such a savage toll on living standards that people are still significantly worse off than they were before the crisis. And take-home pay is only now starting to rise for many people – and not yet for all. Yet even so,the bounceback in the economy has been extraordinary.

Trying to forecast where economies might go next is a sure way to look like an idiot – often very quickly. Ireland’s ability to buck the international trend is encouraging. From problems of unsold houses and empty hotel rooms, we are now talking about a housing crisis and a severe shortage of average-priced accommodation for tourists in the big cities .

The last few years suggests that Ireland does not need a booming world economy to prosper. But we do need growth in at least some of our major markets – and some sense of stability internationally. The export sector dragged us out of recession, and we need it to keep going, even if it is at a slower rate. The ingredients are there for growth to continue but we need a benign international environment. We may get one – but the international mood suggests there are risks, and that they are significant.

Strong figures

Is this the time for a generous budget? Or would we be better cutting our risks by eliminating the deficit quickly and lowering our debt level? Economics suggests one answer, politics another. The advantage for the Government and for Michael Noonan and Brendan Howlin is that just now the tax figures are so strong that they can simultaneously afford the supplementary estimates for this year, give a bit away in the budget for 2016, while still aiming to cut borrowing to below 1.5 per cent of GDP next year.

I don’t think you could accuse the Government of throwing caution to the wind in its budget plans to give away up to €1.5 billion. After all, tax revenues will be more than €2 billion ahead of target this year. We are not in the realm of the Fianna Fáil pre-election budgets for 2002 and 2007 in terms of the boost to people via welfare and tax measures.

But the public finances are not finally “fixed”. We are still borrowing to plug the gap between spending and revenue and our debt is still high. And the fact that we need to spend another €1.5 billion in gross terms in “supplementary” estimates this year shows old pressures are returning. This is cash being put in to plug holes in departmental budgets this year, with health taking the biggest share. Such estimates are not unusual, though the amount involved is about the same as all the spending increases and tax cuts planned for Budget day.

You could argue about what the underlying increase in government spending will be next year after all this. Technically, the adjustments via the supplementary estimates are to meet 2015 spending pressures. But the Government is also moving to take advantage of the supercharged rise in tax revenues – and is giving itself maximum flexibility in the budget for 2016, while still staying within EU budget rules. The background, of course, is that in key areas such as health we are still struggling to achieve meaingful budgets and that with recovery under way spending pressures are emerging elsewhere, after a few years of extraordinary discipline imposed by Howlin’s department.

Risky place

The opportunities being created by our surge in growth are significant. If we are lucky we may get strong growth for another short while, and slower but still steady growth after that. Heading in to 2016 with a growing economy and aiming to borrow about 1.5 per cent of GDP leaves us reasonably well placed. But growth is bound to slow from current rates sooner or later – and rock bottom interest rates for national borrowing will not continue forever. Meanwhile, the world is looking like a risky place, with a real sense of growing unease internationally about the outlook.

With a high national debt, pressures emerging on day-to-day spending budgets and a need to boost investment, there will be big challenges for the next government. If we can stay for a while longer in our parallel universe of high growth, it will make it all a lot easier.