Macro-Economic Background to Budget 2019
Budget 2019 was the third and possibly the final budget to be presented by Paschal Donohoe in the current Dáil. As was the case with his last two budgets, Budget 2019 did not pose anything like the sorts of challenges and difficulties that his two immediate predecessors faced in framing fiscal policy. The fact is that the Irish economy is in the midst of a strong economic recovery and the public finances are steadily moving into a better place, but there is still a distance to go and there are still many challenges to overcome.
The economic and fiscal background against which Budget 2019 was presented is quite positive. The Irish economy continues to perform strongly. Recent data from the Central Statistics Office (CSO) confirms that in 2017 real Gross Domestic Product (GDP) expanded by 7.2% and real Gross National Product (GNP) expanded by 4.4%.
It has been well documented that the measurement of Irish GDP is complicated by the activities of the multi-national sector, aircraft leasing and the treatment of intangible assets such as Intellectual Property (IP).
In recognition of these difficulties, the CSO has developed an alternative national economic indicator called modified Gross National Income (GNI) or GNI*. This is defined as GNI less the impact of re-domiciled companies and the depreciation attributable to relocated capital assets. In effect, the new indicator seeks to exclude the globalisation effects that disproportionately affect the measurement of the size of the Irish economy. This measure gives a more realistic assessment of what is really happening in the economy.
In 2017, GDP stood at €294 billion. However, modified GNI or GNI* stood at €181 billion or €113 billion less than GDP. These different measures of economic activity complicate interpretation of what is really going on in the economy and more importantly, the prudent and appropriate stance of fiscal policy.
A significant challenge is presented by the fact that the inflated nature of Irish GDP puts an artificially positive slant on the public finance parameters. At the end of 2017, Ireland’s government debt was equivalent to 68.4% of GDP, which is just above the Maastricht Convergence debt target of 60%. However, if a more realistic assessment of Ireland’s real level of economic activity is made, the debt to GNI* ratio stood at a high level of 111%.
The real level of debt is still dangerously high and prudent management of the public finances is essential in order to bring the real level of debt to levels that would reduce the very obvious vulnerability of the Irish economy.