Maybe it’s the season: people are starting to fret about an overheated economy. The ESRI has been warning about it for ages and, most recently, the Minister for Finance has declared similar concerns. Apparently, the economy is growing too fast and something needs to be done about it. Cue dark hints about tax rises and suggestions that next year’s budget will have to be as miserly as the last, despite a possible ‘fiscal space’ some three times larger than the one we usually squeeze into.
I suspect differing motives here. Those sensible people running the country's finances will no doubt be alarmed that we are already seeing estimates that Paschal Donohoe will have €3 billion or more to play with next Autumn. With nearly 10 months to go before budget 2019 they know that, unless checked, speculation will only grow and talk of big tax cuts and spending hikes will get completely out of hand. Just normal expectations management, nothing to see here.
But the next budget will be delivered six months or so ahead of Brexit. Yes, it’s that close. And the British really have wasted 2017 negotiating with themselves. Nobody knows what Brexit will bring - another good reason to remind us not to lose the run of our budgetary selves.
What about those fears of an overheated economy? On the face of it, they sound eminently sensible. After all, we know what happened only too recently during our own chapter of the global financial crisis. ‘Never again’ is a sound rule of thumb for anyone charged with running the economy. We have painful memories of what a super-heated economy looks like.
Diseases and symptoms
But we do need to be careful here. There are diseases and symptoms. And babies and bath water. Our most recent financial meltdown was the result of a failure of bank regulation. It didn’t happen because of budgetary mistakes. Yes, things may not have been quite so bad if successive finance ministers had run a tighter ship. But different spending and taxation decisions would not have prevented the Irish banks borrowing all those billions from UK, German and French banks. And then going bust. The banks would still have had to be bailed out on any plausible alternative path for fiscal policy. Yes, the economy overheated - but only because the banks borrowed way too much money to enable way too many houses to be built. Remember the days of too much house building? What a strange country.
What now could cause overheating? Financial crisis can take many forms: markets are always capable of inventing ways we haven’t yet thought of. But most crises have too much debt somewhere in the script. Crisis can come via the balance of payments, exchange rates or bank lending. And so on. But it’s usually about debts not being paid back because somebody has gone bust.
If we make the reasonable assumption that the Central Bank has the banks under control, where could overheating arise? There is no exchange rate to worry about: the euro goes up and down, blissfully unaware of the temperature of the Irish economy. Irish SMEs might like to go on a borrowing binge - chance would be a fine thing - but seem, instead, to be forever credit constrained. We could easily generate another mortgage crisis if the banks were allowed to slip their reins but, again, it's down to the regulator to put manners on the main lenders.
One way we could potentially cause trouble for ourselves is via domestically generated inflation. This, I suspect, is the bogeyman most feared by those firefighters standing ready to spray ice water over our red hot economy. Horror of horrors, they say, a rise in Irish wages could prompt a loss of competitiveness and bring the job creation engine to a juddering halt.
It is often said that Ireland has one of the most flexible labour markets in the world. If that’s true (it is) then it is highly unlikely that a domestically generated bout of wage inflation will prompt financial catastrophe. Higher wages could easily result from higher productivity - not a bad thing one might have thought. And in an era when income inequality concerns are all the rage I would have thought that paying workers a bit more could even be seen as a good thing.
London’s economy
New data released this week revealed that London’s economy is growing at twice the rate of much of the rest of the UK. Nobody ever suggests that London is overheating in a way that requires somebody to slow it down. If fact, I cannot ever remember anyone ever arguing that different regional growth rates in the UK ever required any kind of policy response other than to try and give a boost to the lagging areas.
All monetary unions are a bit like that. In one sense, worrying about Ireland overheating is bit like fretting that Brighton, say, is growing faster than the rest of the UK. So what?
Provided the banks are kept under control - a big if, admittedly- it’s hard to see how we can overheat in a way that needs a policy response. Budgets have to do lots of things. Putting out imaginary fires should not be one of them.
