A few weeks back I argued in this piece and elsewhere that the Minister for Finance should adopt a very cautious approach to Budget 2019. I suggested that injecting fiscal stimulus into an economy that is growing quite strongly would not be sensible and that Ireland’s level of government debt, properly measured, is still dangerously high. Specifically, I argued that the Universal Social Charge (USC) should not be altered in the budget and that no more people should be taken out of the tax net through changes to that tax. While the USC was introduced as a temporary measure in a time of deep crisis, its one positive attribute is that it helped broaden the tax base. Narrowing the tax base as we did in the run up to 2007 was a disastrous policy mistake that we must not make again.
Earlier this week, I received a letter from a gentleman in South County Dublin who is clearly not terribly happy with my views and for the first time in my life I was accused of having left-wing tendencies. That came as a bit of a shock to my system, putting it mildly. He suggested that I might be ‘better employed in thinking about the business owners who have to work so hard and take so many risks to provide for themselves and their families’. He also expressed the view that economists ‘in their ivory towers sit back and while away their days playing with spreadsheets, graphs and statistics, seeking to find yet more gimmick (sic) to screw the punter’. He seems to have ignored the fact that in my analysis I also argued that in Budget 2019, Government should do nothing to increase the costs of doing business and that on the contrary, every effort should be made to support indigenous Irish businesses in particular, including retention of the 9 per cent VAT rate for the hospitality sector. I also suggested that all forms of Government expenditure should be tightly controlled.
In fairness to the letter writer, he gave his name, address and mobile phone number, which is a welcome change from the usual anonymous abuse that I get. However, I remain unrepentant about the main premise of what I was advising. Injecting excessive fiscal stimulus into an economy that is growing quite strongly would not be appropriate and it is mad that Ireland should still be running budget deficits at this stage of the economic cycle. Ireland’s level of Government debt is dangerously high and creates a massive vulnerability for the economy when it is inevitably hit with some economic shock. Tax concessions in the budget should in my view, be focused on lifting the threshold at which one ends up paying the high marginal rate of tax. Furthermore, all forms of Government expenditure should be tightly controlled and all populist pressures to increase universal payments should be resisted.
Last week the Exchequer returns to the end of August showed that the Government ran a deficit of €1.8 billion in the first eight months of the year. Tax revenues are running 5.1 per cent ahead of last year, while total net voted expenditure was running 8.3 per cent ahead. Not surprisingly, the Department of Health is the main contributor. These details and others with the overall returns show that the public finance situation is nothing like as positive as it should be.
The obvious risk is that the economy is hit with some internal or more likely external shock, and very quickly the precarious nature of the public finances would be cruelly exposed. However, there is a longer-term structural issue that is of much more concern, namely the outlook for Ireland’s demographics.
The Department of Finance has just published a report analysing the impact of population ageing on the public finances. The key conclusion is that shifting demographics in the coming decades will result in a slower pace of economic expansion and put significant pressure on the public finances. An ageing population will put obvious pressures on health and pension expenditure, but tax revenues would also be affected. Now is the time to lay the foundations to cope with this inevitability. Much can and should be done with domestic policies, but inward migration will also have to be a key part of the solution. Wouldn’t it be nice to see our political system take a long-term strategic view for a change?



With less than three weeks to go to the delivery of Budget 2019, the pressure on the Minister for Finance is intensifying on many different fronts. At the annual ploughing event this week, considerable dissatisfaction was expressed about the plight of farmers and many of them suggested that Government was not doing enough to help them in what is a difficult year. It is indeed a difficult year for farmers and could become considerably more difficult over the coming months. However, this is due to weather conditions and is certainly not the fault of Government.
It was a very long and difficult winter, during which many farmers ran out of fodder. This was then followed by a very dry summer, particularly in the South East. Silage yields are likely to be down and if a smaller silage harvest is combined with a very low level of fodder stocks carried over from last year, it could be a challenging winter. Of course, the big imponderable will be weather conditions in the coming winter and spring. Another bad winter will cause enormous difficulties for farmers and could cause serious financial difficulties for those farmers who have invested heavily in dairy expansion, for example. Then of course there is the added dimension of Brexit. We still have little idea as to how this will unfold, and while the suggestions are that a compromise deal will be achieved, the agricultural sector is by a country mile the most exposed part of the economy in the event of anything other than a very soft form of Brexit.
Not surprisingly, the view of many farmers is that the Minister for Finance should open the purse strings and help them through their difficult times. The problem of course is that every other interest group across the economy will be looking for more money, with the overruns on the health side of particular concern. The report issued this week by the Irish Taxation Institute contained no surprises, but highlights again the extent to which the tax burden on personal tax payers has increased over the past decade. I could go on, but it is blindingly obvious that the Minister for Finance will find it a real challenge to balance the insatiable demands for more resources with the reality that those resources are extremely limited.
The external risks to the Irish economy will have to be the guiding principle for the Minister in framing Budget 2019 rather than sectoral interest groups.
The International Monetary Fund (IMF) issued a pretty stark warning this week about the impact of a ‘no deal’ scenario for the UK economy. However, it also stated that all the likely Brexit scenarios will have costs for the UK economy. As the single most important export market for indigenous Irish exporters, the risks to the real Irish economy are very clear and very stark.
Last weekend, Nouriel Roubini, who is a professor at NYU’s Stern School of Business, and a guy who proved very prescient a decade ago, issued some pretty stark warnings about the real risks to the global economy. He cited a number of risk factors, including the unsustainable nature of US fiscal policy; an overheated US economy and the consequent upside for US interest rates; rising inflation and interest rates in other economies; Trump’s trade dispute with China, which incidentally saw further tariffs on $200 billion worth of Chinese goods being announced this week; Trump’s policies towards immigration and critical investment; fragile emerging markets; the debt dynamics in the Euro Zone and the still incomplete monetary union; and the vulnerability of frothy equity markets.
His key point is that in the event of these risk factors feeding through to economic difficulties, policy makers will not have much ammunition in their arsenals to tackle the problems, unlike a decade ago when sharp interest rate cuts, Quantitative Easing and fiscal expansion were all possibilities. There is limited scope for any of these policy options today. He concludes that ‘when it comes, the next crisis and recession could be even more severe and prolonged than the last’.
For a country such as Ireland, with a very high and dangerous level of government debt and with a very stretched housing market, the risks are very real. The Minister for Finance will need to be mindful of the vulnerabilities of the small open Irish economy and adopt a very conservative and cautious approach to fiscal policy in Budget 2019.