OCTOBER BUDGET MUST BE SHAPED BY EXTERNAL RISKS, NOT LOCAL NEEDS
THIS ARTICLE APPEARED IN THE IRISH EXAMINER SEPT 21st 2019
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.