FG economic plan: Do the numbers add up?

Fine Gael’s “long-term economic plan” is predicated on the delivery of steadfast growth in each of the next five years. That’ s ambitious at the best of times, all the more so as pressures build in the world economy.

In the short-term, however, the plan is pretty modest in its scope. That’s for the good.

The objective is gradually to eliminate the universal social charge and create 200,00 new jobs, 10,000 of them through the recruitment of nurses, teachers and gardaí.

As well as attracting 70,000 emgirants home, the plan would boost investment in the health system and deliver “above-inflation” increases to pensioners and carers. Other features include a €4 billion “jobs fund” and €2.5 billion for a “rainy day reserve” to help counter any economic shock.

After years in the doldrums, the attractions in all of this are obvious. But can the plan actually work?

This depends as much on forces outside the State as within it. Ireland’s small, open economy won’t grow much without solid global growth. Still, all the growth in the world won’t spur Ireland if domestic policy misfires.

By nature, long-term plans are subject to events in the here and now. The longer the horizon in a forecast, the less reliable it will be.

From a policy perspective, the most pressing questions centre on what would happen in near-term. That, after all, is the starting point on the route map set out in any long-term plan.

While the opening of the election campaign has centred on mixed messages vis-à-vis the "fiscal space" to be devoted to tax cuts and new spending, the plan for year-one is pretty telling. For all the disquiet around a return to auction politics, the Fine Gael figures are cautious enough.

Take note, first, that its plan is predicated on 4.3 per cent gross domestic product growth in 2016 and 3.6 per cent growth in 2017. Growth about 7 per cent was realised in 2015 so this points to a halving in the rate of growth by 2017, for which the next government’s first budget will be cast in October.

Minister for Finance Michael Noonan made a virtue of saying Fine Gael foresees less growth next year than the Central Bank, which has forecast 4.4 per cent growth.

At the same time, the EU Commission expects 3.5 per cent growth in Ireland next year. Fine Gael may be slightly ahead of the commission but there is no great deviation between it and the Brussels institution, which tends to be highly conversative in its outlook.

The same sense of caution prevails in respect of Fine Gael’s “fiscal space” figures for 2017. While all the campaign talk highlights a total of €10.1 billion becoming available for tax cuts and spending hikes in the next five years, no more than €587 million would be in play in Budget 2017 next October.

That does not leave huge scope on the tax side or on spending. This figure is set only after provision is made upfront for commitments already made in respect of the ageing and rising population (€401 million), Lansdowne Road pay awards (€320 million), EU budget contributions (€92 million) and capital plans (€46 million).

If Fine Gael is returned to office and implements this part of the plan, it might be subjected to political attack for not going further in the next budget, after promising many billions of euro in new initiatives. By the letter of the plan, however, real largesse comes into view only in later years due to the requirements of European budgetary rules. A little more than €1 billion would be available in 2018 and €2.78 billion in 2019; followed by €2.76 billion in 2020 and €2.96 billion in 2021.

The more the years go by, however, the more these estimates become subject to the winds of economic change.

Fine Gael was quick to the political argument that none of this money wouldcome into view if domestic policy went off the rails. Although it is difficult to argue against that, the plan is also subject to international events.

This is recognised in the adoption of a “rainy day reserve.” However, tight budgetary conditions in the first two years of the plan mean that money for the reserve would not become available until much later in the five-year cycle. The problem with that, of course, is that dangers to global growth are already present in the form of the slowdown in China and Brazil and turmoil in financial market.

In summary, there will be no “rainy day reserve “ in place if the global situation worsens appreciably this year or next and curtails Ireland’s growth.

For all that, the Fine Gael plan models a 2 percentage point cut to global growth from an economic shock.

The document suggest Ireland’s GDP would still grow in 2017 by 2 per cent and by 3.2 per cent 2018, with unemployment and the national debt in continued decline, but at lesser rates. This is attributed to “prudent” domestic policies, with Irish conditions worsening considerably “where the shock to global growth is accomipanied by political instability and poor domestic policy choices.” That’s political argument at its root but the message is clear enough.

The net point is this: there are plenty of promises in the plan but the biggest among them and the most variable are backdated. Cake down the line, bread tomorrow.