Power cautions against fiscal electioneering in Budget 2019
Focus on labour supply and competitiveness rather than pandering to populist pressures
As Budget 2019 approaches, economist Jim Power has cautioned against fiscal electioneering in his latest Economic Outlook entitled ‘The Economic and Financial Parameters for Budget 2019’ for leading insurer and investment provider Friends First.
Mr. Power, a long-standing advocate for further investment in Ireland’s indigenous sector, has highlighted recent research showing clearly that Ireland is over reliant on the performance of a narrow base of firms and economic sectors. Combined with a housing supply crisis, and unacceptably high house price inflation – with prices set to rise by 10% this year and a further 5% in 2019 – Ireland is facing into a crisis of competitiveness. Since the low point of the market in February 2012, house prices have increased by a staggering 92.7% in Dublin and 74.4% in the Rest of Ireland in the period to June 2018.
“Budget 2019 will be delivered against a positive economic backdrop but there are challenges domestically and internationally. Given that Ireland’s level of real debt is still dangerously high – using the CSO’s new measure the debt to GNI* stands at a high level of 111% – it is difficult to see how any form of expansionary fiscal policy can be pursued by the Government. Of the €3.4 billion budget day package available under the Fiscal space, €2.6 billion is already committed leaving a pot of €800m to play for in tax changes and expenditure increases. The key priorities in budget 2019 should be to ensure that not too much stimulus is given to the economy and that competitiveness is the guiding principle,” commented Friends First Chief Economist Jim Power.
Power asserts that the lack of a diversified economic model is a real threat to sustainable growth for Ireland. “We cannot ignore the fact that the top 10% of firms in Ireland account for 87% of value-added in manufacturing and 94% in services; a third of total exports are accounted for by just 5 firms and 39% of corporation tax is paid for by the top 10 companies. Any shock to these firms or sectors would reverberate throughout our economy and undermine the positive growth achieved. In this context, it is essential that policy makers do as much as possible to support the rest of the economy, particularly the indigenous companies that make such a high value-added contribution to the Irish economy”, he continued.
According to Mr. Power, an analysis of the trends in consumer price inflation does not suggest that the Irish economy is currently experiencing signs of overheating. If energy effects and the housing market are excluded, inflationary pressures in the economy remain very muted, and the growth in credit certainly would not suggest overheating. Nevertheless, it is important that too much stimulus is not injected into the economy.
Budgetary measures should focus on improving labour supply and addressing the growing issue of deteriorating competitiveness for the business sector. Pressure to increase Government expenditure should be firmly resisted.
The Brexit scenario continues to unfold in a very unfavourable, if not alarming manner and sterling is under considerable pressure. Budgetary policy should be guided by these realities and not by the temptation to pander to populist pressures.
International challenges: Brexit woes and ‘Turkish fright’
While the global economic outlook remains bright, Power points to a number of dark clouds on the horizon. The UK will be the slowest growing economy in Europe in 2019. Given Ireland’s reliance on this key export market, the risks posed by a hard Brexit are evidenced by the drop of 7.2% in exports to the UK already this year. Emerging market imbalances are also an area of concern, as referenced by the ongoing Turkish and Argentinian difficulties.
Domestic developments: Growth to continue but Consumer Sentiment has Plateaued
The Irish economy has continued to perform strongly in the first eight months of the year despite a softening of the growth in the Eurozone and the UK. Jim Power has increased his GDP forecast for 2018 to 5.5%, up from 5.0%, and believes that Ireland should comfortably see GDP growth of 4.5% in 2019.
Additional notable domestic trends in Jim Power’s Economic Outlook for Friends First are as follows:
- Consumer trends: Consumer confidence has plateaued following a strong recovery over the past 18 months. This is evidenced by consumer resistance to price at retail level. In the period to June 2018, retail sales grew by 3.3% in volume but only 1.9% in value. The retail market is struggling to achieve value growth. Sales of imported used cars are also up by a significant 11.7% compared to the same period in 2017.
- Labour shortages and wage pressures: Employment levels increased in 10 of the 13 sectors so far this year. However, the largest employment sector ‘wholesale and retail’ recorded a reduction in employee numbers of 3,000 as evidenced by the challenges in consumer activity. As the economy overall approaches full employment, wage pressure and labour shortages will become a broader issue and a constraint on economic growth potential.