Winter is coming

Sure as night follows day, and winter follows autumn, the economic cycle will ebb and flow.

Right now, the Irish economy is enjoying something of an Indian summer: strong growth, record employment, rising wages, low inflation and low interest rates. And the good times have a while to run yet.

That’s far from saying that everyone is living on the pig’s back, as anyone facing the sharp end of the health or housing crises can attest.

But, the economy is at cruising speed and unlikely to soar higher. At least not safely.

Maybe not today. Maybe not tomorrow. But winter is coming.

Ireland is highly dependent on trade and, more than most European countries, closely linked to the US and UK economies in terms of destinations for exports and sources of investment.

Turbo-charged by massive and irresponsible tax cuts, the US is probably beyond its cruising speed, but is set to slow next year as the impact of fiscal stimulus fades. Already, this is one of the longest economic expansions in modern American history, even if it did come after one of its deepest recessions. Odds are high and rising that the US experiences an outright recession before their next Presidential election in 2020. On top of an economic slowdown is the risk that increased US trade protectionism weighs further on Irish exports, while their recent tax reforms are at best likely to slow future US FDI inflows to Ireland, and at worst lead to a reversal. It’s an economic maxim that when the US sneezes, the world catches a cold. And Ireland is in the frontline.

The working assumption is that the EU, Ireland and the UK will come to their senses and do a deal to avoid a hard Brexit early in 2019. That’s still probably the most likely outcome, but the odds are lengthening all the time. We shouldn’t forget that the working assumption among most pundits back in 2016 was that the UK would vote to remain in the EU. Ireland’s economy is the most exposed to the Brexit downside, more so even than the UK itself. Even in a best-case, soft Brexit scenario. A hard Brexit would make the pain an order of magnitude worse, and an Irish recession probably inevitable. And it is indigenous enterprise rather than the multinational sector that will bear the brunt.

Why all the doom and gloom?

Central Bank Governor Philip Lane came in for a lot of flak for saying recently that at this stage of the economic cycle, Ireland should be running a budget surplus. Many on the left will have felt that this is simply a voice of the conservative establishment trying to warn the government off investing what is needed to tackle the housing crisis and improve the health service.

In fact, it is common-sense Keynesian economics: a far cry from the calamitous ‘if I have it, I spend it’ approach in the years preceding the crisis. As things stand, the government is aiming for a -0.1% budget deficit in 2019, having pushed back by a year to 2020 the target date for balancing the books. In the world of forecasting economic growth and budgets, a tenth of a percent is negligible, a rounding error. So, calling for a surplus is just semantics and signaling.

There was a strong Keynesian economic argument for a slower budget adjustment than that Ireland endured as a ward of the Troika. That was because the economy was on the floor and in desperate need of investment. By the same Keynesian logic, however, now is the time to be, if not running a surplus, at least minimizing the deficit so that the debt burden falls. This means that we will have a bigger buffer to spend, invest and support the economy when the next recession hits.

The point is this: there is nothing inherently left wing about running a budget deficit, no more than there is anything left wing about printing money to finance it as in Weimar Germany or Bolivarian Venezuela. It matters how and when governments spend and invest, and how it is financed.

None of this is to say that Budget 2019 shouldn’t include vastly increased investment in social housing, for example, or a meaningful down-payment on implementing Sláintecare. These are political choices well within the means and ken of our government, with just an ounce of imagination and clarity of purpose.

So-called ‘fiscal space’ is nothing but a mental straight-jacket. For starters, an extra billion euro a year could be found by ending the special subsidy VAT rate for the hospitality sector (€527m), equalizing excise on petrol and diesel (€328m) and hiking the carbon tax by €5 to €25 a ton (€125m). That’s enough to build an extra 5,000 social houses every year on top of what the government is already planning. Enough to put a serious dent in the housing crisis while at the same time acquiring assets that will generate revenues into the future.

An Taoiseach has said he doesn’t want to go back to ‘boom and bust’, unconsciously echoing the hubris of then UK Prime Minister Gordon Brown on the eve of the global financial crisis. Varadkar can no more hold back the economic tide than could Brown. People are right to say that now is not the time to increase the budget deficit. But that shouldn’t be used as a mealy-mouthed excuse to avoid the investment our society needs.