The projections in yesterday’s spring economic statement paint an encouraging picture for the Irish economy over the next five years. The economy is expected to expand 3¼ per cent a year on average until the end of the decade, more than double the projected rate of growth in the rest of the euro area. Employment growth averaging about 40,000 jobs a year is anticipated, dragging the unemployment rate to below 7 per cent by 2020.
Given the momentum currently in the economy, these forecasts seem reasonable. If the period 2001-2014 can best be characterised as seven fat years followed by seven lean years, then the next five years promise something more akin to a steady, balanced diet.
As mentioned in the statement, the revival of the Irish economy owes much of its vigour to the fundamental competitive strength of a range of sectors, including agriculture, agrifood, information and communications technology, medical technology, pharmaceutical and chemical, and tourism. Businesses in these sectors are expanding, gaining market share in the global economy and creating new jobs. They are investing more in new plant and equipment to meet increased demand, evidenced by an expected 15 per cent jump in business investment this year.
The shift from the crisis phase to a period of recovery at the heart of the statement’s optimistic narrative has been helped by positive, albeit often painful, policy actions since 2008, including determined measures to put the public finances in order and to stabilise and restructure the banking system. Minister for Finance Michael Noonan’s confidence that “all the taxpayers’ money invested in AIB, BoI and PTSB will be fully recovered” is reassuring.
Short-term international factors, such as lower global interest rates and oil prices as well as the recent drop in the euro’s exchange rate are also providing important support to confidence and economic activity.
Jobs-rich recovery
An interesting feature of the economic revival, referred to by
Noonan, is the “jobs-rich” nature of the recovery. An underlying explanation for such a recovery can probably be found in the relatively high level of human capital among the unemployed. As John FitzGerald has pointed out, the bulk of those who were unemployed in 2012 had attained an upper secondary or third-level education. This compares with the situation in the early 1990s when the highest attainment was a lower secondary education for most of those who were unemployed. Better- educated and more highly skilled individuals tend to move more rapidly from unemployment to employment. It is surely instructive that sensible long-term decisions taken by policymakers several decades ago to ramp up investment in education have helped the country to emerge from the recent crisis.
Arguably, what is most encouraging about the current state of the economy described in the statement is the extent to which the country is experiencing a virtuous circle of economic growth, job creation and improving public finances. The budget deficit is on track to come in comfortably below 3 per cent of GDP this year, thanks to unexpectedly strong tax receipts driven by rising GDP. Moreover, with growth expected to do the heavy lifting of budgetary adjustment over the next few years, the Government should be in a position to introduce €1-1½ billion of tax cuts and spending increases each year while still meeting its budgetary obligations under the fiscal compact.
Of course a virtuous circle can easily turn vicious. Changes to economic policy over the next few years that unwittingly hamper growth will mean fewer resources available for Government to achieve social objectives. As the Minister rightly put it: “If the wrong policies are pursued, the economy will not grow and the fiscal space will not materialise.”
If a return to normal economic growth is making the task of managing the economy easier, it is at the same time making more difficult the job of managing expectations and satisfying various interest groups. A case in point is the issue of public-sector pay, on which the Government has agreed to enter into talks with the trade unions.
Minister for Public Expenditure Brendan Howlin rightly linked potential pay increases in the public sector with improvements in productivity. The reality is that pay increases in either the public or private sectors that are not accompanied by improvements in productivity will begin to undo the hard-earned gains in competitiveness recorded over the past seven years. It is unfortunate that the debate about pay rates is often couched in terms of unwinding emergency measures and giving workers their money back, as if pay rates in 2007 were in any way sustainable.
Downside risks
Conspicuous by its absence in the statement, perhaps not surprisingly, is any mention of how the Government’s budget strategy might change if growth over the next five years were to disappoint.
Although the Department of Finance’s baseline economic forecasts seems plausible and have been endorsed by the Irish Fiscal Advisory Council, significant downside risks to the outlook remain. For example, the UK may vote to leave the EU; a possible Greek exit from the euro may reignite the financial crisis; and interest rates may rise back towards more normal levels sooner than expected.
In the run-up to the general election, all political parties will be looking at the economic outlook and hoping for the best. It would be helpful for voters to see evidence that they are also preparing for the worst.
Prof Alan Ahearne is head of economics at NUI Galway