Over the course of the past decade, Irish economic policy has been characterised by its dynamism and its willingness to adapt to changes in both the global and domestic environments.
While the broad thrust of policy has been correct, a responsiveness to evolving economic conditions has enhanced the impact of those good policies. Ireland has not, however, uncovered some sort of economic holy grail which will ensure the country's continuing outperformance ad infinitum.
Policies which may have worked wonders in the past may become invalid, ineffectual or even detrimental in the future. Flexibility, an awareness of the dynamic nature of the global and local economy, is the great protector of the progress of recent years.
The past 12 months have seen a remarkable volte-face in economic perceptions. The tech boom is now a burst bubble while the US economy has lost its aura of invincibility. In Ireland's case, the threat of overheating which plagued every economic discourse in 2000, has now been ditched by all but the most recalcitrant souls.
Contrary to widespread fears that the fiscal stimulus unleashed by Budget 2001 would push growth past safe levels, we find that the economy is moving towards an easier, but still impressive pace. Ireland, having enjoyed a modern growth record of over 10 per cent in 2000, is expected to advance by 7.5 per cent this year. Just at the point when the economy, through supposedly reckless budgetary policy, should be imploding, we find that activity is gently moving towards levels that most economists consider to be sustainable.
Some will argue that the Government has been lucky with the simultaneous impact of foot-and-mouth disease and the tech sector slowdown serving to restrain Ireland's run-away growth. Without these adverse external influences, the overheaters of yesteryear suggest that the economy would now be spinning out of control as consumers fell over themselves to spend their ill-gotten gains from lower taxes. The allegation that Mr McCreevy's policies are irresponsible still stands. It's just that the book of evidence has disappeared. This is a neat little theory. It fails however to mount a convincing defence against the brutal beauty of facts. Ireland's economy was on a moderating path prior to the appearance of a recession threat in the US and the outbreak of a foot-and-mouth epidemic in Britain.
After adjusting for price effects, retail sales growth has been moderating since hitting a year-on-year peak of 17.8 per cent in May 2000 and now stands at a rather subdued 1.5 per cent. This panic-inducing headline number is however distorted by the waning millennium effect on new car sales. If we exclude the motor trade from consideration, underlying retail sales growth has fallen from 12.5 per cent in April 2000 to 6.5 per cent in the same month this year. Clearly, the Irish consumer is no longer characterised by irrational exuberance. While the moderation in consumer activity has been reinforced by the negative external shocks of livestock disease and deflating bubbles, it was in place before the announcement of Budget 2001's provisions.
The remarkable economic performance of the past decade was primarily driven by enhanced supply rather than favourable demand-side conditions. In moving increasingly towards an Anglo-Saxon model of small government, ongoing taxation reform and incentivised private enterprise, Ireland has been going through a structural shift or a one-off adjustment in the economy's fundamentals. This shift created the scope for a prolonged period of growth outperformance which was breathtaking in scale. However, having converged in income terms with the world's leading economies, that scope for outperformance is becoming increasingly limited. Ireland's economy has moved beyond the growth spurt phase despite the magnitude of recent tax cuts and is heading steadily towards maturity. With the new Ireland now marking the end of its modern adolescence, the stance of budgetary policy will have to evolve. Government resources, apparently boundless in recent years, will encounter some new constraints as revenue buoyancy eases in line with the moderation of economic growth. With the super-normal growth days now behind us, policymakers will not be able simultaneously to deliver lower taxes, new motorways, higher current spending and healthier national finances. Given the capacity-enhancing effects of lower taxes and higher capital expenditure and the importance of maintaining sound fiscal balances, we should be preparing now for more moderate current spending increases over the years ahead. With little apparent linkage between the amount of day-to-day spending and the quality of public services, all current expenditure should in future be subjected to a line-by-line, value-for-money audit. A flexible policy approach, one that takes account of our evolving economic circumstances and the need for better use of existing public service resources, will help to ensure a smooth transition towards the economy's middle age. Policymakers are about to rediscover the truism that to govern is to choose.
Colin Hunt is head of research at Goodbody Stockbrokers
