It’s ten years since the financial crisis, which almost precipitated the collapse of the Irish economy, first began to unfold, paving the way for a “lost decade” of economic growth.
In a new economic outlook however, Goodbody Stockbrokers asserts that such economic woes are now in the past, as Ireland returns to its “previous peak”.
However, as the report notes, while there is much to note about the economic recovery - a return to full employment, domestic spending is back at 2007 levels, strong core domestic demand growth, to name just a few - there are still several clouds on the horizon.
So have we really waved goodbye to the malaise of the boom years? Why are taxpayers funding so much of the recovery and where are the risks ahead?
The tax burden has switched to the so-called squeezed middle
We all know our tax burden has increased, and why we’re taking home less each month from our pay-cheque. What we may not be as clear about however, is just how much our income tax revenues are propping up the economy.
Yes, back at the height of the Celtic Tiger in 2007, income tax revenues accounted for just 28 per cent of the Exchequer’s total tax take- today that figure has rocketed to 40 per cent.
Indeed as the Goodbody analysis points out, tax receipts for 2017, at a forecast €6.7 billion, are 49 per cent higher than they were in 2007. And this is despite 63,000 fewer employees in the workforce today.
As chief economist Dermot O’Leary notes, this figure suggests that “workers have taken the brunt of the fiscal adjustment over the past decade”. But it’s not all workers - some 37 per cent of the workforce actually don’t pay any income tax (down slightly from 42% in 2017) giving. This means that middle income earners are bearing the brunt.
Go a bit further, and you’ll learn that the top three tax categories for 2017 - income, VAT and corporation tax- are set to account for 82 per cent of total tax revenue. So now two of the biggest tax revenue generators are accounted for by households. Back in 2007, capital gains tax and stamp duty - taxes that “richer” households would have paid more of, given that they are levied on a percentage of asset gains or house prices, contributed a combined 15 per cent to the Exhequer. Today they have slumped to just 4 per cent in total, putting the pressure back on middle earners to make up the shortfall.
As such, O’Leary argues that Ireland’s tax base needs to be widened, although this is in reference to the type of taxes that can be charged, as opposed to different sources of the income.
“While politically difficult, the benefits of taxes such as on property and water are that they avoid that volatility, resulting in more stable public finances,” he says.
Earnings stagnation
Still waiting for a pay rise? Well, you’re not alone. Around the world western economies are seeing earnings growth stagnate, with a UK think tank for example, indicating that incomes in the UK will be no higher in 2022 than in 2007, on the back of welfare cuts and weak earnings growth.
Here in Ireland, the picture is not so different.
Back in 2009 average weekly earnings stood at € 732.72, and were largely on a downward trajectory, touching as low as € 677 in 2014 before starting to recover once more. However, some eight years on, average weekly earnings have only just reached that 2009 level again. So, while unemployment continues to fall, it remains a puzzle as to why earnings have not started to rise at substantial rates.
The bail-out costs
It cost us €64 billion, and may have been dwarfed by other bail-outs, such as the US’ Troubled Asset Relief Program (TARP) which injected a staggering $700 billion of taxpayers’ money into the banking sector.
However, when considered as a percentage of GDP, Ireland’s bail out of the banks, which commenced in 2009, was still the costliest among nine countries (the US, UK, Spain, Belgium, Germany, Netherlands, Slovenia and Cyprus) - and was even greater than Greece, based on GDP figures for 2014.
Not only that, but an analysis this morning from The Financial Times shows that while some countries, such as the US are already up on the deal, actually recovering more than the total impact of the bailout since 2007, others, such as Ireland, have still only recovered a small portion of the total costs. Indeed the Government only expects to recover about €30 billion of the total cost of the bail-out.
While the picture has changed somewhat since 2014 - GDP for example has risen further, and the government has recovered more, such as its recent €3 billion sale of a stake in AIB, the overall trend remains the same.
“G overnments such as Ireland and Greece are not likely to recover the full amounts and will be working through the costs, borne in the form of higher public debt, for years to come,” the analysis says.
So the legacy of the bail-out is set to be a feature of the Irish economy for another generation to come.
Government debt is still high
As a follow on from the bail-out costs, Ireland’s national debt remains high “both in an historical and international context” Mr O’Leary says. Indeed on a per capita basis, Ireland’s debt, at $45,941 per person, is the highest of any country in the euro zone – and the third highest in the world. In Greece on the other hand, the burden is just $31,797 per person.
Such a high level of debt poses a risk if the economic recovery was to stall and inch into reverse.
As Mr O’Leary notes, “the low level of starting debt going into the crisis in 2008 meant that Ireland could run significant budget deficits without debt rising to totally unsustainable levels. This would not be the case if another crisis was to arrive. The government, therefore, has little room for manoeuvre over the coming years and will require spending and tax policies to remain prudent”.
The Brexit challenge
It’s hard to consider risks going forward and not consider potentially the greatest one - the risk of a disorderly Brexit in 2019.
As O’Leary notes, it’s “a double-edged sword” for Ireland. On the one hand, Ireland can stand to benefit from increased foreign direct investment (FDI), particularly in sectors such as financial services, as the UK moves to leave the European Union.
However, if the UK goes for the hard Brexit approach, trade will be negatively affected.
“Failure to agree a trade deal will do significant damage to trade between Ireland and the UK, with the highest tariffs likely to be applied to goods that Ireland depends most on the UK as a source of demand, namely the agrifood sector,” Mr O’Leary says.
