Many Economic Trends Inconsistent with Political Dissatisfaction
This article appeared in Sunday Business Post on 3rd July 2014
This week a new leader of the Labour Party will be elected and next week a re-shuffle of the Cabinet will be announced. These two developments spring from the disastrous election results for the government parties in the two May elections and the ongoing decline in the popularity of the government. I recently spent a couple of months doing some door-to-door election canvassing and so it comes as no surprise to me whatsoever that the government is under so much pressure, at least based on the feedback I was getting on the doorstep.
At one level this is not too difficult to understand. After all, this government has basically carried on with the fiscal adjustment programme inherited from the last government and laid down by the Troika. It has introduced a residential property tax, which is something that would traditionally have been regarded as political suicide, and later this year water charges will be introduced. These are two developments destined to make people very angry, and so it is turning out. There is also a strong sense that despite promises about a ‘democratic revolution’, the current political landscape is anything but. This government is making appointments to state boards on the basis of political loyalties rather than ability to do the job, or at least that is the perception. This is something that the last few governments were absolutely lambasted for, but this government appears to have picked up the baton with some aplomb and has if anything carried on in an accelerated fashion from its predecessors.
On the economic front, it is less easy to understand just how unpopular the government has become. The reality is that back in 2011, it inherited an absolute basket case of an economy that was going nowhere fast. Over the past three years people have taken a lot of further pain and the economic environment on the ground has been very tough and challenging. However, there are palpable signs that things are getting gradually better, in the aggregate at least.
The live register yesterday showed a further improvement in the labour market situation. In June the number of people signing on the live register fell by a further 4,400 to reach 386,200. Over the past year it has declined by 35,600 and has declined by 52,100 over the past two years. Granted, the Live Register is not intended to be a measure of unemployment, but it does reflect what is going on in the labour market. More importantly, the decline in the numbers signing on is consistent with clear signs of job creation in many parts of the economy. Just talk to the majority of recruitment consultants at the moment!
On the consumer expenditure side, there is also evidence of an improvement. In the first 5 months of the year, the value of retail sales was 4.8 per cent higher than the same period in 2013, and the volume of sales increased by 7.0 per cent. However, when the motor trade is excluded, the retail sales performance was somewhat less impressive, although stronger than in previous months. Excluding cars the value of sales increased by 1.4 per cent and the volume of sales increased by 3.3 per cent.
The reality is that while consumer spending is strengthening, the auto industry continues to be the key driver of consumer spending. In the first 6 months of the year new car registrations totalled 65,705, which was 23.4 per cent higher than the first half of 2013. This is a positive trend that is having a very beneficial impact on the public finances.
Consumer confidence has been trending upwards over the past couple of years, and in April reached the highest level since January 2007. However, it dipped in May, suggesting that there is still a significant level of fragility in the strained personal sector. May was the month when local and European elections were held and issues such as the Local Property Tax (LPT) and the water service charge became prominent in public discourse. Consumer confidence dipped as a consequence. However, the overall trend in consumer confidence improved during the first half of 2014. The challenge for policy makers is to convert the improvement in confidence into an even more meaningful recovery in consumer spending activity and more importantly an improvement in the political fortunes of the government. .
Finally, the Exchequer returns yesterday provide further confirmation of improved conditions in the economy. In the first half of 2014, an Exchequer deficit of €4.9 billion was recorded, which was €1.65 billion lower than the first half of 2013. Tax revenues were running €221 million ahead of target and €868 million ahead of the first half of last year. Overall gross Government expenditure was running €95 million lower than expected, with current spending accounting for an over-shoot of €10 million and capital spending accounting for an under-shoot of €105 million. Net voted government expenditure was €119 million lower than budgeted for, with the current spend accounting for an under-shoot of €20 million and capital spending accounted for an under-shoot of €99 million. The government is controlling expenditure and tax revenues are strengthening. This is good.
At the end of June, 7 out of the 9 tax headings were running ahead of target. The overall taxation data are consistent with an ongoing improvement in many aspects of the economy. The income tax take is €64 million ahead of profile and is €539 million ahead of last year. This reflects the stronger labour market. The VAT take is €113 million ahead of profile and is €379 million ahead of last year. This reflects stronger consumer spending, but particularly on cars.
In overall terms, the Exchequer data for the first half of the year are reflecting reasonable tax revenue buoyancy on the back of a stronger economy, and continued tight control over expenditure. The Minister for Finance remains well on track to deliver a deficit equivalent to 4.8 per cent of GDP, down from 7.2 per cent in 2013.
If one believes in the old and oft-quoted adage that ‘it is the economy stupid’, then the fortunes of the government should be better and its prospects more positive than they currently appear. One is inclined to think that ‘it is more than the economy stupid’ is a more accurate quotation.