While the Irish economy is performing very strongly on the surface, it is clear on closer examination that the country does have a significant concentration risk. Last week the National Competitiveness Council (NCC) highlighted this fact in a very vivid manner. The NCC expressed concerns that the sustainability of growth could be threatened by the heavy dependence on the performance of a narrow base of firms and economic sectors. It pointed out amongst many other statistics that the top 10 per cent of firms account for 87 per cent of value-added in manufacturing and 94 per cent in services; a third of total exports are accounted for by just 5 firms; and 39 per cent of corporation tax is paid by the top 10 companies.
The obvious risk is that if any of those companies or their sectors experienced a shock, then the Irish economic model could be quickly and cruelly exposed. Just as in the world of investment, having a diversified portfolio is crucial, in an economic context, having a broad-based and diversified economic model is very important.
While there is an inevitability in a small open economy that has based its economic development strategy on attracting foreign direct investment since the 1960s, that a small number of large companies would become very dominant and have a disproportionate impact on the economic and financial metrics of the country, it does create a vulnerability. The main problem and vulnerability for Ireland is the fact that those companies on which we are so dependent are foreign-owned multi-nationals and hence are very much outside of the control or influence of domestic policy makers. In other words, boardroom decisions in Palo Alto or Seattle can have a massive influence on areas such as Cork or Leixlip. We need to strive to ensure that our economic model is as broad and diversified as possible and that indigenous companies and sectors are given as much recognition and support as their foreign-owned counterparts.
There has been considerable speculation and comment recently about the appropriateness of the special 9 per cent VAT rate that applies to the hospitality sector. The Department of Finance research paper written about in this column last week clearly does not think it is a good idea; the trade unions for their own unique reasons do not like it; and Social Justice Ireland does not see much in the way of social justice in the tax mechanism. That body has an ambition to increase the tax take and reduce social injustice. How the abolition of the 9 per cent VAT rate could possibly achieve that ambition I have no idea.
The hospitality sector is the consummate indigenous sector that makes a very significant economic contribution to the whole economy, but particularly to rural areas where there might not be a lot else going on. It is also the most crucial element of the tourism sector. It is all well and good having heavy investment in tourism attractions and lots of beautiful scenery, but if this is not backed up with a high-quality hospitality sector, then tourism will fail. Hotels and restaurants are vital to tourism and should be operating in as supportive an environment as possible.
In 2017, expenditure by tourists visiting Ireland is estimated to be worth €5.3 billion and when spending by domestic tourists is factored in, this jumps to €8.8 billion. Fáilte Ireland estimates that 240,000 workers are employed in the tourism and hospitality industry. This is an incredibly strong economic contribution and acts as a serious counter balance to the small number of dominant firms in the economy.
Many of those businesses, particularly outside of Dublin, do very well during peak holiday season in July and August, but for much of the rest of the year, the environment is much more difficult.
If you tax something more, there will be less of it, and if you tax something less there will tend to be more of it. This fact should be remembered by those caught up in an often-ideological debate about scrapping the very important, supportive and sensible lower VAT rate of 9 per cent.


This Article appeared in the Irish Examiner, 3rd August 2018

If the success of a government is to be gauged by what is happening on the labour market, then the current government and its immediate predecessor should be judged as successful. The economy is now on the verge of the highest level of employment ever achieved and the unemployment level continues to decline. Data released this week showed that the level of unemployment declined by 38,200 in the 12-month period to July and the unemployment rate remained unchanged at just 5.1 per cent of the labour force. Since the lowest point of the labour market in January 2012, the number of people unemployed has declined by 235,300 from 355,800 to 120,500 and the unemployment rate has come down from 16 per cent of the labour force. These figures demonstrate clearly just how flexible the Irish labour market is and just how willing and able businesses are to create employment once the environment is favourable. The 9 per cent VAT rate is a good example.
This week the Department of Finance published its assessment of the 9 per cent special rate of VAT in the hospitality sector. Its main conclusions are that the policy has achieved its objectives and that it is no longer relevant in the current and forecasted economic environment. Furthermore, it argues for an ending to the favourable rate on the basis that hotels and restaurants in particular have experienced a loss of competitiveness and rising prices relative to comparable sectors and that the majority of sectors impacted are now enjoying healthy profit margins. It also estimates that the reduced rate has cost approximately €2.6 billion since its introduction.
The lower rate was introduced in July 2011 at a time of crisis in the economy, and its main objective was to help the competitiveness of Ireland’s tourism sector in particular, to ensure that firstly, as many ailing businesses as possible survived and secondly to boost employment. Between the second quarter of 2011 and the first quarter of 2018, the number of people working in the Accommodation & Food Services Sector increased by 54,400, taking total employment from 117,300 to 171,700 on a seasonally adjusted basis. The sector accounted for 7.7 per cent of total employment in the economy. On the back of this direct employment growth, I estimate that another 25,000 indirect jobs were supported.
The direct jobs created would have resulted in payroll taxes of an estimated €280 million accruing to the Exchequer and possible savings of over €1 billion in social welfare expenditure if it is assumed that the bulk of the jobs created took people off the live register. In estimating the total cost of the 9 per cent VAT rate it would be appropriate to include payroll tax revenues collected and social welfare expenditure saved. In addition, those extra workers employed would have spent their earnings in the economy and made a further contribution to the Exchequer.
Personally, I think it would be mad to increase the VAT rate at a time of such uncertainty for the tourism sector in particular. In the first six months of the year, 4.87 million overseas visitors came into the country, which is 6.7 per cent ahead of the same period in 2017. Visitor numbers from Great Britain increased by 2.2 per cent and accounted for 36.7 per cent of total overseas visitor numbers. However, this is down from 40.9 per cent in 2016. The crucial UK market is under pressure from sterling weakness, but luckily the overall tourism performance is being held up by very strong growth in visitor numbers from elsewhere.
It is worth remembering that the sterling/euro exchange rate averaged 72.63 pence in 2015; 81.92 pence in 2016; 87.64 pence in 2017; and 88.1 pence so far in 2018. This represents a significant deterioration in the terms of trade over the past four years.
It is also worth bearing in mind that the health of the hotel and restaurant sector in Dublin does not reflect business conditions in many rural areas. It is also worth remembering that the costs of doing business are rising and labour costs in particular look set to become a massive issue for the hospitality sector. As an aside, the reaction of the trade union movement to the Department of Finance report puzzles me. I would have thought that trade unions would support employment creation measures but then again, I never professed to understand trade unions.




As the evolution of the Brexit process lurches from one crisis to the next, we have been reminded again over recent days just how vulnerable sterling is to the vagaries of the whole ludicrous process. Since the middle of June, the UK currency has weakened from 87.3 pence to the euro to just under 90 pence at the moment. Not a dramatic move by any stretch of the imagination, but when viewed in the context of where the currency has come from over the past few years, it does represent a significant move. The sterling/euro exchange rate averaged 72.63 pence in 2015; 81.92 pence in 2016; 87.64 pence in 2017; and 88.1 pence so far in 2018. For Irish companies exporting to the UK, this represents a significant deterioration in the terms of trade over the past four years. It says something about the resilience and flexibility of such companies that they continue to trade successfully with the UK, but the challenge is a very real one and could become much more intense over the next couple of years.
We are still none the wiser about how the Brexit process will unfold from here, but from a currency perspective it seems apparent that sterling’s near-term future will be driven by the Brexit process. Simply put, if a ‘hard Brexit’ were to appear the most likely outcome, sterling would weaken further and vice-versa.
In every sense, Brexit does represent a very significant challenge for the Irish economy, as do global corporation tax trends and the anti-trade agenda being pursued by President Trump. Unfortunately, there is not a lot we as a country can do to influence the outcome of any of these three threats. Hence, we need to ensure that we exert as much benign influence as possible over the things that we can control.
From my perspective it is all about competitiveness. In recent weeks the National Competitiveness Council has published two important reports about trends in Irish competitiveness, namely Costs of Doing Business in Ireland 2018 and Ireland’s Competitiveness Scorecard 2018. Both of these reports should be required reading for policy makers and all other stakeholders in the Irish economy.
Competitiveness is not a straightforward concept to define neatly as it encompasses a wide range of factors including all costs of doing business; the quality of public services such as health and law and order; the cost, quality and availability of housing; the physical and IT infrastructure; the tax environment; the quality of the labour force; regulation; the legal system and much more besides. All of these factors combine to create the environment in which the economy and its citizens can thrive and prosper.
The Council begins its analysis with the premise that as a small open economy, Ireland is very vulnerable to negative price and cost shocks that are outside the influence of domestic policymakers. These shocks could include negative exchange rate developments, higher international energy prices, imported inflation or an interest rate shock. Hence the necessity to manage those factors that are within our control. Not surprisingly, the Council is particularly concerned about the inordinate dependence on a small number of firms who are responsible for driving productivity in the economy.
The Council warns that at the moment competitiveness is being eroded again by rapid house-price inflation, transport congestion, failure to meet climate change obligations, failure to invest sufficiently in Research & Development, and the funding crisis in the higher education system. The costs of residential property, labour, credit, energy and services such as insurance and legal are given special mention.
Ireland is described as an ‘expensive location in which to do business with a price profile which could be described as high cost and rising’. The advice given is that policymakers should not pursue domestic policies that would contribute to overheating and that competitiveness should be placed at the head of Ireland’s Brexit response.
The utterances of the National Competitiveness Council were largely ignored in the build up to the crash in 2008. It is imperative that we do not make the same mistake again. Populist politics is really the enemy of sensible and prudent policy making and the electorate should reject those politicians who pursue naked populism. Some chance!



The world of geo-politics is in a state of chassis, with each day bringing fresh challenges to the global order. The antics of President Trump in relation to what are traditionally the two strongest allies of the US in Europe – the UK and Germany – and his cosying up to Putin have been truly bizarre and quite disturbing. Not surprisingly and perhaps somewhat reassuringly, the reaction from some of his Republican colleagues has been quite strong. At the same time, the move towards protectionism is continuing apace, and the Brexit process lurches from one crisis to another. Amidst all of this chaos, financial markets remain pretty unperturbed, with both currency and equity markets displaying an amazing level of resilience. We are indeed living in very strange times.
From a market perspective, the key point is that to date the global economic momentum is bearing up very well and is generally showing very few real signs of stress. However, this could easily change. The latest update to the International Monetary Fund’s (IMF’s) World Economic Outlook published this week concludes that the global economic momentum is still quite strong, but it suggests that the risk of worse outcomes has increased. It points to slower growth in the Euro Zone, Japan and the UK, but also points out that the US is still growing strongly. It identifies rising US interest rates and a consequential stronger dollar, and growing trade tensions as the main threats to the global expansion. However, it is the latter factor that the IMF is most concerned about. A further escalation of global trade tensions would damage confidence, asset prices and investment and is viewed as the greatest near-term threat to global growth. Interestingly, it highlights the fundamental political challenges regarding migration policy as a big longer-term issue for the EU.
Growth in the UK is projected to be well below the EU average this year and next. No surprises there, given the farcical evolution of the Brexit process. The White Paper published last week certainly gave some reassurance that Theresa May is intent on pressing ahead with her preferred soft form of Brexit. However, subsequent events seem to have removed much of the ground from beneath the White paper, and particularly the parliamentary decision on the so-called ‘backstop’ agreement relating to Northern Ireland on Monday.
With agreement on Brexit due by October and with March 29th 2019 rapidly approaching, it becomes less and less obvious how an incredibly weakened Theresa May and a belligerent EU can possibly reach agreement on what is currently on the table. The Prime Minister will struggle to deliver what she desires and the EU will struggle to agree to what she desires, not to mention the alterations that are being foisted on the Prime Minister by a Tory party that is in the midst of an unedifying civil war. The whole situation is totally barmy and it would be funny, if the stakes were not so high.
The impact of Brexit-related uncertainty is impacting on the Irish economy in a number of ways. Sterling weakness continues to drive double-digit growth in used car imports from the UK and this is causing new car sales to continue to decline. The first almost seven months of 2018 is just a repeat of what happened in the motor industry in 2017.
On the trade front, Ireland continues to generate a strong surplus in merchandise trade, but some of the trends therein are of concern. In the first five months of the year, total merchandise exports were 7.1 per cent ahead of the same period last year, with exports to the US increasing by 7.4 per cent and to the Euro Zone by 11.6 per cent. However, exports to Great Britain are down by 8.4 per cent and to the UK as a whole, they are down by 7.2 per cent. Exports of Food and Live Animals to Great Britain increased by 3.4 per cent, but exports of Chemicals and Related products were down by 19.2 per cent. It is reassuring that the food performance is holding up well despite the ongoing weakness of sterling, but the performance of the Chemical sector may be reflecting supply chain changes ahead of Brexit. Only time will tell. Overall, the Irish trade story is very strong, but the dark shadow of Brexit is getting darker by the day. The world is getting curiouser and curiouser!



We generally tend to be very critical of the Irish political system and frequently criticise our very diluted form of democracy. However, the events of the past two years and particularly the past week in the UK make the Irish political system look positively sane and sensible. If somebody had told me three years ago that the UK political system could turn out to be so dysfunctional, I would not have believed it. But dysfunctional it has turned out to be and since last weekend it has turned in to farcical comedy. To lose one senior cabinet member is unfortunate, but to lose two is downright careless.
Last Friday night I was somewhat surprised that the Prime Minister had managed to get the backing of the Cabinet for what is in effect a ‘soft Brexit’, but it did turn out too good to be true. On Saturday morning the consensus was that she had achieved a significant victory over the ‘hard Brexiteers’, but the subsequent resignations of the Brexit secretary David Davis and the foreign secretary Boris Johnson showed just how these two ‘hard Brexiteers’ viewed the ‘semi Brexit’ that Theresa May announced on Friday night. The battle is still far from won.
It is still impossible to call how this saga will unfold such are the extremely complicated and unpredictable politics of the situation. In some ways, Theresa May’s situation looks incredibly vulnerable, but she still does have the backing of the majority of the Cabinet for the softer form of Brexit that she obviously desires. If she is faced with a leadership challenge and loses to somebody like Boris Johnson or Jacob Rees-Mogg, an early general election would seem inevitable and it would be hard to see the Conservatives win that election. Even if the Conservatives were brought back into power under somebody such as Jacob or Boris, it is not clear that they would have sufficient support to engineer the hard Brexit that they desire.
At the end of the day, pragmatism and national self-interest seem to be holding sway at the moment and this was certainly reflected in the approach that the Prime Minister adopted last Friday. Sensible people seem to realise that walking away from a certain market such as the EU would not be a very wise thing to do, particularly given how uncertain the creation of other markets would be. The current antics of Donald Trump in relation to free trade and protectionism should and probably is convincing sensible people that the notion of the UK doing all sorts of free trade deals with the US would not be as easy as it sounds. The bottom line is that free trade is good for economic growth and economic welfare. Walking away from free trade in the EU and trying to do new trade deals in a world that is shifting away from free trade might not be a sensible strategy to pursue. This view seems to be driving official UK policy towards Brexit at the moment.
If a general election were to be held and if Labour were to win, which would appear to be the more likely outcome, we would then be faced with the spectre of Jeremy Corbyn as Prime Minister. Although Corbyn built his political career on an avowedly anti-EU perspective, it is likely that as Prime Minister he would drive the UK towards a soft version of Brexit, much along the lines of what Theresa May announced last Friday night, the exact detail of which will be contained in the impending White Paper. Basically, Theresa May wants a situation where the UK has full regulatory alignment with the EU for goods and agricultural products. This would in effect treat the UK and the EU as a single customs territory.
From an Irish perspective, what was announced last weekend would be the next best outcome to no Brexit at all. However, we cannot take anything for granted because anything is still possible but my long-held gut instinct that pragmatism would eventually win out remains my central view. Certainly, the financial markets remain quite relaxed despite the high-profile resignations and sterling is certainly not pricing in a hard Brexit yet. Hopefully, sanity will prevail.


This appeared in the Irish Examiner 6th July 2018
There was a story out of Chicago this week that such is the extent of the labour shortages in that region of the US, employers are being forced to waive drug tests and hire ex-convicts in order to fill vacancies in what is now a labour market that is facing into the spectre of full employment. Ireland may not be too far from the same situation. Our labour market may soon become a victim of its own success.
Unemployment data this week showed that the rate of unemployment fell back to 5.1 per cent of the labour force in June, down from 16 per cent as recently as 2012. In the year to June, the level of unemployment declined by a massive 34,300 and since the peak of unemployment in early 2012, there has been a decline of 235,700. There are now officially 120,200 people unemployed in the economy. We don’t have information on the skills and qualifications of those who remain unemployed, but it is probable that many are low skilled or do not have the requisite skills to fill the vacancies in the labour market. Youth unemployment is a problem, with an unemployment rate of 11.4 per cent for those aged between 15 and 24 years of age, with the male rate at 12.5 per cent and the female rate at 10.2 per cent.
The reality is that once we go below the 100,000 level, it will require very focused labour market intervention policies to bring those mostly long-term unemployed people back into paid and meaningful employment. Such interventions are socially and economically desirable, but they will not solve the issue of labour market shortages in many sectors that is likely to become a reality in the not too distant future.
The last time the economy approached full employment, many of the jobs were filled by workers from the EU accession states. Those states have now attained much higher levels of economic activity and opportunity, so this is unlikely to provide a source market for labour. In any event, even if we could source migrant labour, there is the issue of where they would be housed and how our already-stretched public services such as health and education would accommodate an inflow of labour.
In the face of these challenges, employers will be forced to do what they did back in the early 2000s, compete for labour through offering higher wages and better packages. This would obviously be good for the workers involved but would not be particularly helpful for the competitiveness of the economy.
This labour market reality is likely to act as a constraint on economic growth, but it will also feed into the public finances. This week, the Exchequer returns for the first half of the year show that economic activity is continuing to drive strong growth in tax revenues. The total tax take was €168 million higher than expected by the Department of Finance, but more importantly was €1.3 billion ahead of the first half of 2017. Income tax receipts accounted for just over 39 per cent of total tax revenues, which is up from 27 per cent just over a decade ago. Corporation tax receipts are also continuing to grow strongly, with €4 billion collected in the first half of the year. This represents a growth rate of 14.6 per cent. The increasing dependence on possibly transitory corporate tax receipts is an issue we should think long and hard about.
It is all good on the revenue side, but the expenditure side does give cause for concern. Expenditure on the day to day running of the country increased by a strong 6.7 per cent, with health spending up by 8.7 per cent and €167 million ahead of expectations. The problem on the spending side is that there is intense political and popular pressure to improve the quality and quantity of public services, which in itself will be expensive. However, there is now the added complication that the evolving labour market is likely to make it more difficult to recruit and retain workers in the public sector, and labour costs will inevitably rise strongly if services are to be maintained, not to mention improved.
Despite the positive complexion, the challenges facing the Minister for Finance in managing these issues are immense. Unfortunately, there are no easy answers.


This Article Appeared in The Irish Examiner 29th June 2018

Last weekend we passed the second anniversary of the monumental decision of the UK electorate to exit the EU and we are now less than nine months away from ‘B-Day’. The intervening period has seen the growth of a major industry around the subject. Every business in this country and indeed in the UK either has or should be considering the potential implications of the impending debacle; thousands of hours of management time have been devoted to it; thousands of reports have been prepared on the subject; the political system in the EU has been forced to hand over an inordinate amount of time to the topic; media here and the UK has been dominated by it; and it has exposed a most amazing level of political dysfunctionality in the UK. More than anything else relating to Brexit, it is the latter than has come as the biggest shock to me. The behaviour of politicians such as Boris Johnson, David Davis, Michael Gove, Jacob Rees-Mogg and Jeremy Corbyn has been quite simply astounding and pretty unbelievable.
It all makes one wonder what we would have been talking about over the past couple of years if the UK electorate had done the sensible thing and voted to stay in the EU? I have believed from the beginning, and I become even more convinced by the day, that the decision to walk away from such a huge market in return for very dubious benefits, makes no economic sense whatsoever. Indeed, the evidence of the damage that has been done to UK economy in the intervening period is becoming more palpable.
What is perhaps most disconcerting, is the fact that we are no clearer today about the eventual outcome than we were two years ago. It is still possible to make cogent arguments for any possible outcome. Uncertainty still reigns.
Based on what we know at the moment, the UK will formally leave the EU on March 29th next year and will then have a transition period that will end on December 31st 2020. During that transition period, the UK will have access to the single European market but will be subject to the rules and regulations of that market without having any influence over those rules and regulations.
Despite all of the confusion and uncertainty, the only really important question to be answered is the nature of the trading relationship that will exist between the UK and the EU from January 1st 2021 onwards. The answer is that nobody knows at this stage and anything is possible.
UK business did not play an adequate role in the run up to the referendum and never really highlighted its concerns ahead of the vote. However, it is interesting in recent days that some big names have started to make noise. Airbus has stated that a ‘no-deal’ scenario would threaten its investment in the UK for the very obvious reason that any border delays or trade tariffs would damage its business. Airbus employs 14,000 people directly in the UK. In a similar vein, BMW has called for clarity on future customs arrangements and has warned that it would shut UK plants if the supply chain is disrupted by Brexit. It employs 8,000 workers in the UK. The Society of Motor Manufacturers and Traders (SMMT) warned that investment in new cars and plants in the UK has weakened significantly and that 850,000 jobs directly and indirectly employed in the sector are at risk from a ‘hard Brexit’.
The issue for all of these businesses is that in the event of no deal and a hard Brexit, their supply chains would be damaged and this would damage profitability. If necessary, they will vote with their feet as they should do if they are to act in the best interests of their shareholders.
The reaction of the Health Secretary, Jeremy Hunt, was interesting and very telling. He basically described the warnings from Airbus as completely inappropriate and that the Government should ignore ‘siren voices’. We have also seen the re-emergence of the old chestnut about the extra funding that will be available for the NHS once it leaves the EU, but the reality is that the damage to growth from a hard Brexit would do so much damage to the UK economy that there would inevitably be less money available for the NHS and other public services. One could not make it up.
Shortly, the UK cabinet will meet in Chequers to agree on a white paper on the UK’s plans for a future relationship with the EU. The problem for the Prime Minister will be to bring both factions together. Her task is not to be envied, putting it mildly, but it is very clear that she still wants as soft a form of Brexit as possibly. Here in Ireland we should hope that she gets her way.


This Article appeared in the Irish Examiner June 22nd 2018

Despite what some media commentators have suggested about the lack of detail contained therein, the Summer Economic Statement released by the Department of Finance is not meant to be a detailed breakdown of what the Minister for Finance will deliver on the fiscal front. The statement merely sets out the economic and fiscal parameters that will guide budgetary policy in 2019. We will have to wait for the budget in October to get the detail of what is planned.
This week’s statement does give us a very good overview of what will guide budgetary policy in 2019 and thereafter. The Government plans to reduce the budget deficit to just 0.1 per cent of GDP in 2019, which will be consistent with a budget day package of a not insignificant €3.4 billion. However, of this total, €2.6 billion is already pre-committed in the shape of €1.5 billion in extra capital spending through the National Development Plan; €300 million will be used up by the carryover effects of the measures introduced in Budget 2018; €400 million will be absorbed by public sector pay increases already committed to; and €400 million will be absorbed by extra spending on the back of demographic developments. This will leave €800 million to be given away on budget day through a combination of tax changes and expenditure increases. It is clear that if any significant tax alleviation measures are introduced, they will most likely have to be largely made up through tax increases elsewhere, for example on the ‘old reliables’.
The bottom line is that Ireland’s public finances are continuing to improve, but the fiscal situation is still challenging and Ireland is still and will remain constrained by EU fiscal rules. So, anybody awaiting a budget bonanza in October will be sorely disappointed. That is just as well because the last thing in the world the economy needs at this juncture is an expansionary fiscal package on top of what is already pencilled in. The Minister stated that the rules would allow him give away an extra €900 million away on budget day, but he is not going to do that. This is a relatively prudent and sensible strategy, and we should hope that the machinations of the current political setup will not force any changes to this approach.
The strategy outlined this week is obviously totally and utterly dependent on the performance of the economy. The level of growth is the most important driver of tax revenue and expenditure and if this were to disappoint, then the strategy would have to change. Of course, we all should recognise the futility of economic forecasting, particularly for a small open economy that is so exposed to the vagaries of global developments. This week’s budgetary strategy is predicated on GDP growth of 4 per cent in 2019; 3.4 per cent in 2020; and 2.8 per cent in 2021. Based on what we currently know and understand about the economy, these growth projections look quite realistic, and possibly a little bit conservative. The Department has identified Brexit, the risk of a global trade war and rising interest rates as the main external threats. The main domestic threat is that of overheating. Hard to argue with that.
The Minister is also going to plough ahead with the ‘Rainy Day’ fund which will see €1.5 billion put in from the Ireland Strategic Investment Fund (this is where some of the proceeds of the lost and lamented National Pension Reserve Fund ended up); and €500 million per year will be put in between 2019 and 2021, taking the fund up to €3 billion. This is a relatively small amount of money in the overall context, but at least it is a step in the right direction. There is a risk that the existence of such a fund could give rise to ‘moral hazard’, whereby less prudent policies might be pursued safe in the knowledge that the ‘rainy day’ fund would be available should things go awry.
Interestingly, the Minister intends to set aside historically high levels of corporate tax receipts for the fund. It remains to be seen how this will work, but it is a sensible strategy not to spend on the back of potentially transitory tax receipts. Pity we did not pursue such a strategy from 2000 onwards.
I have heard some criticism of the fund on the basis that the money would be better spent on capital projects that would improve the long-term growth potential of the economy. This makes sense in theory, but in practice there is now limited capacity in the economy to deliver capital projects.


This Article appeared in the Irish Examiner June 15th 2018

Last week I wrote a pretty upbeat piece on the Irish economy, with a strong focus on ongoing positive trends in two key components of the indigenous economy, namely Tourism and the Agri-Food sectors. Predictably, I got a negative response from certain quarters, with one in particular claiming that it read like ‘a PR piece to encourage inward investment and that as usual there is a certain group in society doing well and feeling positive, but far too many are being left behind again’.
Difficult to know how to respond to that accusation without coming across as callous and cruel. A point to note is that I did not once mention inward investment and my focus was very much on the domestic side of the economy and on the growth that is being experienced in some key domestic components. This is difficult to argue with.
It is a fact that the reality of life in every developed country in the world is that some people will do better than others, due to factors such as educational attainment, social background, the quality of employment, and the willingness to work hard and take risks. Those with higher levels of educational attainment generally tend to get higher quality and better paid jobs, which in turn is often heavily influenced by social background. It is also generally the case that the harder one is willing to work and the more risks one is prepared to take, the better off one will be. I use the term generally, as it is obvious that this is not always the case.
The challenge for policy makers is to ensure that those who do not get the best opportunities to improve themselves, who are unable to work, or who suffer from some other disadvantage are helped to the greatest extent possible. Ireland does this quite well. The country has a very progressive tax system, in the sense that the more one earns, the more one pays in tax. The proceeds of taxation payments are then used to fund a pretty generous and progressive social protection system, and also to fund public services. People can moan forever about the nature of our economy and our society, but the truth is that if we do not have economic growth and if we do not have people in society doing well, the resources to fund social expenditure and public services will not be generated.
I did not and would not argue for one moment that Ireland does not still have many problems, it does. The lack of sufficient housing and under-funded health, education, and law and order immediately spring to mind. It is a fact that having experienced the most significant economic shock in generations back in 2007, there are still significant legacy issues to be addressed, but at least with the strong momentum in the economy, we will be given the opportunity to address those issues. Without growth, very little would be possible.
Thankfully, as I pointed out last week, we are seeing a lot of growth coming through and the latest data releases show clearly that the good news is continuing to pour forth.
This week, the Industrial Development Authority (IDA) suggested that it is having a very strong first half and that the investments already approved so far this year will lead to the creation of over 11,300 jobs, which is marginally ahead of the first half of last year. The IDA is continuing to attract strong overseas interest in its investment proposition, and that is unambiguously good news. Of course, there are challenges and risks involved here, but that is the nature of economic and business life. Managing the risks in a prudent manner is key.
It is not correct to suggest that a rising tide will lift all boats, but a rising tide is still preferable to a falling one. I firmly believe that the best thing that is currently happening in the economy relates to labour market developments. The level of unemployment declined by 15,600 in the 12-month period to May and the unemployment rate has fallen to 5.8 per cent of the labour force. Since the low point of the labour market in January 2012, the number of people unemployed has declined by 217,300 from 356,300 to 139,000. Of course, we can argue with the quality of some of the employment being created, but the trend should be welcomed by any sensible person with an open mind.



The process of interest rate normalisation continues apace in the United States. On Wednesday night the US Federal Reserve Bank increased interest rates by 0.25%, taking the target range for the key Federal Funds Rate to 1.75% to 2%. This rate has been taken up from zero in December 2015.
The Federal Reserve move this week came as no surprise but the forward guidance issued by the interest rate setting body, the Federal Open Market Committee (FOMC,) was perhaps slightly more aggressive than might have been expected. It is important to remember that the mandate of the central bank is to foster maximum employment and price stability. Price stability is defined as a rate of around 2%.
In the statement accompanying the latest rate move, the FOMC justified the latest increase on the basis that the labour market has continued to strengthen and economic activity has been rising at a solid rate. Indeed, in May the unemployment rate fell to 3.8% of the labour force and the economy created a strong 218,000 jobs during the month. The Committee also pointed out that recent data suggest that household spending is strengthening and business fixed investment has continued to grow strongly. At the same time inflation on key measures has moved close to 2%.
The Federal reserve is achieving its mandate and indicated this week that it expects to deliver further gradual increases in its key interest rates over the coming months. It is certainly possible that another 1% will be added to rates over the coming year.
This interest rate trend is purely and simply a move away from an emergency interest rate situation that was put in place to deal with an exceptional economic crisis and now that that crisis has abated and gone away, we are moving back towards a more normal interest rate environment.
The markets are continuing to take the normalisation on interest rates in their stride. The 10-year bond yield is currently trading at 2.96%, which is pretty much where it has been trading in recent months. One would expect bond yields to gradually rise from here over the coming months. On the equity market front, US markets barely reacted to the latest interest rate increase and in the year to date, the Dow Jones is up by 1.95% and the S&P 500 is up by 3.82%. While these gains may look modest, it does represent a very impressive performance in the context of the various challenges encountered by markets in recent months. The large tech stocks are the key drivers of the strong equity market performance, which does represent a reason for some caution.
In Europe, the situation stands out in contrast to the US. The process of interest rate normalisation has not yet started and the European Central Bank (ECB) is not in any hurry to do so.
The ECB has an official inflation target of 2% or slightly lower. The inflation rate has been consistently well below 2% for a prolonged period of time, but in May jumped to 1.9% from 1.2% in April. On the surface this does look worrying, but the surge is largely due to energy costs. In the year to May, energy costs increased by 6.1%, reflecting what is happening crude oil prices. Brent Crude is currently trading at $76.36, which is the highest level seen since late 2014. At one level this increase in oil prices would be seen to damage economic growth in the Euro Zone, but from the perspective of central bankers, the fear is that higher oil prices would start to feed into wage pressures as workers seek to offset the negative impact of oil prices on their cost of living. The ECB will watch these second-round impacts of higher oil prices very carefully over the coming months.
The growth backdrop in the Euro Zone has undoubtedly softened so far in 2019. In the first three months of the year, GDP expanded by just 0.4% during the quarter and the annual rate softened to 2.5% from 2.8% the previous quarter. This is still a decent level of growth, but most economic indicators are suggesting a modest softening in growth. The recent strength of the euro will help allay any nervousness the ECB might be feeling at the moment.
This week the ECB left its key interest rate unchanged at zero and it remains relatively relaxed. However, it did suggest that the monthly bond buying programme (Quantitative Easing) will remain at its monthly rate of €30 billion until the end of September, and this will then be reduced to €15 billion per month and will then end. In relation to official interest rates, the ECB currently believes that rates will remain at current levels at least through to Summer 2019.
This prognosis is all predicated on growth continuing at current levels and inflation gradually converging towards 2%. Of course, circumstances can change, but for the moment the ECB is quite relaxed about the world it governs.
Tracker mortgage holders and other Irish borrowers can remain relaxed for the moment but should also recognise that this nirvana will eventually end. The question is when? The answer is not yet.