Week of good news for economy-watchers

John Fitzgerald, ESRI

With the publication on Wednesday of the Government’s accounts for the first six months of the year and the publication yesterday by the CSO of the latest national accounts, this has been a busy week for Irish economy-watchers.

The Central Statistics Office’s press conference was a sell-out, with many prominent journalists present, as well as a flock of economists.

For journalists the objective was to establish what is actually happening in the economy, while fellow nerds wanted to wallow in the complexity that is the national accounts.

In any event, after the CSO’s publication of the latest numbers for gross national product (GNP) and gross domestic product (GDP) we now have a clearer picture of what has happened in the Irish economy over the last year – growth has returned and it has spread across most sectors.

This picture of a growing economy is not very different from the one painted in our Economic and Social Research Institute’s quarterly in April. Last year the economy, measured by GNP, grew by over 3 per cent. (GNP is the most appropriate measure of the welfare of people living in Ireland).

A key feature of this growth has been the rapid increase in employment, growing by more than 2 per cent a year since early in 2013. Thus it is not surprising that the wage bill in 2013 was up over 3 per cent on the previous year.

This rapid growth in employment is occurring earlier in the recovery than it did after the 1980s recession, reflecting, in part, the effects of public policy which has prioritised the protection of employment.

Thus, while the 100,000 people who have found employment since the bottom of the recession in 2012 are significantly better off than before, the rest of the population are probably slightly worse off than two years ago because of higher property taxes, water charges, etc. This is reflected in a general feeling of discontent, revealed in recent public opinion polls.

One of the headline-grabbing features of the newly published national accounts is the substantial retrospective upward adjustment in the level of GDP by 6 per cent to take account of investment in R&D and some illegal activities, such as drug-dealing and prostitution. (The illegal activities are quite small in magnitude and the main change comes from the reclassification of R&D expenditure) .

Accounting adjustment

However, this is only an accounting adjustment: our debts and borrowing remain unchanged as a result of the adjustment, and there has been no change in the underlying welfare of the people.

Where this accounting adjustment does make a difference is that it reduces Government borrowing as a share of GDP by more than 0.2 percentage points. As the Government’s objective for the public finances this year and next year is cast in terms of the borrowing-to-GDP ratio, this accounting change has, at a stroke, made the task of hitting this year’s and next year’s targets slightly easier.

While the publication of the national accounts does not greatly change the picture of what is happening in the economy, the Government’s own accounts for the first half of the year, published on Wednesday, provided a more optimistic picture than we had previously believed.

The across-the-board rise in tax revenue is greater than had been anticipated in the budget, suggesting that, even without any accounting changes, Government borrowing for the year will come in well below the budget forecast.

The rise in social insurance contributions (up nearly 9 per cent year-on-year) is a very clear sign of the continuing strength of the labour market.

While health expenditure is running ahead of expectations, this is more than compensated for by lower expenditure elsewhere, especially lower investment. However, it would be better for growth if health expenditure was brought into line and if investment was also on target.

The progress on the public finances this year is not due to exceptional items; it is the result of a firm adherence to budgetary policy and of stronger-than-expected growth in the economy.

Thus any undershooting of the target deficit for this year will also reduce the expected deficit for next year. While it is still too early to decide, it is looking more likely that the Government will not need to make a €2 billion adjustment in next year’s budget to bring borrowing significantly below 3 per cent of GDP.

Maybe it is time to go on holidays in case some bad news surfaces!