herald

Thursday 19 October 2017

We're climbing out of the hole but must avoid old bad habits

The second quarter national accounts, which were published yesterday by the CSO, show that the Irish economy is now growing at a pace last seen during the Celtic Tiger era.

Finance Minister Michael Noonan (below), who only last week had upped the Department of Finance forecast of 2014 GDP growth to 3pc, has increased it yet again, this time to 4.5pc.

In practice even this latest forecast may prove excessively cautious, with many private-sector economists now predicting GDP growth of 5pc or more for this year.

Our accelerating economic growth couldn't have come at a better time for the Government as it prepares the 2015 budget, which will be unveiled by Mr Noonan on October 14.

After more than six years and seven hairshirt budgets, which between them took almost €30bn out of the economy in tax increases and spending cuts, Mr Noonan will be able to introduce a neutral budget in three-and-a-half weeks time rather than imposing another €2.1bn in tax increases and spending cuts, as had been originally planned.

axe

However, and this is a very important point, a neutral budget isn't a giveaway budget.

Yes, things have got better and Mr Noonan can afford to put his budgetary axe away for the time being.

But that doesn't mean he will have the cash to splurge on tax cuts, social welfare increases and restoring public sector pay cuts.

Far from it. While things have undoubtedly got a bit better, the Irish economy has still not fully recovered from the Post-Celtic Tiger bust.

While most of the world's major economies have long since regained the output lost after 2007, this hasn't happened in Ireland, at least not yet.

The latest figures from the CSO show that measured by either GDP, which includes repatriated multinational profits, or GNP, which excludes them, the value of Irish economic output is still almost 10pc less than it was in 2008.

Although the buoyant economy is pushing up tax revenues, with the total take being almost €1bn ahead of target for the first eight months of the year, the Government will still be borrowing €100m every week on our behalf next year.

This means that, while the budget won't include any new tax increases or spending cuts, there will be very little cash available for meaningful tax cuts or other goodies.

And, with a lot of tax increases and charges already factored in, next month's budget won't feel very "neutral".

temptation

The most visible one of these will be water charges, which are due to come into force at the beginning of 2015.

The Government has estimated that these will set the average family back by €238-a-year of after-tax income. Independent estimates put the likely figure much higher.

But we shouldn't be looking a gift horse in the mouth. Yes, the economic recovery has been patchy and unevenly spread but, at a time when most of the other Eurozone economies are stalling, the Irish economic recovery is the real deal.

If we can resist the temptation to revert to our old bad habits then we can finally begin to climb out of the economic hole into which we fell in 2008.

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