Irish economy has a spring in its step

Ireland’s economic winter of discontent has given way to the green shoots of spring. While the factor 50 isn’t yet flowing in all regions of the country, and the post-2008 bust still casts a long shadow on certain cohorts of the population, there is a sense that summer is coming.

On 28 May, the government launched its spring statement. Making a virtue of the necessity for all EU members to provide Brussels with an annual update on their public finances and economic projections, the usually-dry ‘Stability Programme Update’ was dressed up in political clothing this year to herald the supposed good times ahead.

Politically, the aim is not only to give voters a heads-up on the tax cuts and spending increases that lie in store. It is also designed, on the one hand, to project the sense that the government has a solid plan for the future and, on the other, to hamstring opposition parties by increasing the risks to their credibility if they step outside the broad fiscal framework set out. It also aims to put a ceiling on the demands of public sector trade unions as part of the forthcoming ‘national economic dialogue’ by establishing boundaries.

Economically, there was little ground-breaking in the spring statement: reasonably optimistic – but not outlandish – economic growth estimates out to 2020 and a stocktaking exercise on the state of the public finances, the labour market and the state-owned banks. There was also a technical – yet important – explanation of the results of recent negotiations on the application of EU rules on Ireland’s public finances. Essentially, this boils down to an extra billion or so for the government to play with in October’s budget if they are to comply with the rules. The government has signaled that the total budget package is therefore likely to amount to €600m of spending increases and €600m of tax cuts. No giveaway, but not to be sniffed at with an election on the horizon.

Budgets aren’t written in spring. But setting out the broad brush-strokes at an early stage of the year is a promising, incremental innovation which should facilitate a well-informed engagement with stakeholders over the summer period. While this falls a long way short of the type of participatory budgeting that would give citizens meaningful input into decisions on taxing and spending, it is a step in the right direction and should be considered part of an ongoing effort to open up and improve the budgeting process.

Understandably, there little focus on potential doomsday scenarios in the spring statement, but the sensitivity to any spike in interest rates is made clear. It should be noted that there are some potentially game-changing downside risks on Ireland’s medium-term horizon. The ECB’s recent loosening of monetary policy has further lowered interest rates and weakened the euro – both of which boost the Irish economy – but, eventually, interest rates will start to rise. The high levels of public and private sector debt leave Ireland exposed to even a modest increase. At the same time, a question mark still hovers over the irreversibility of the euro currency so long as closure remains elusive on the ongoing Greek saga.

The Tories’ surprisingly strong victory in the recent UK election adds a further level of uncertainty, with a referendum on EU membership now seemingly certain there by 2017. The UK will secure some concessions, but there is no appetite around Europe for changes so fundamental that they would require changes to the Lisbon Treaty that might trigger further referenda, notably in Ireland. The concessions Cameron negotiates will never be enough to mollify the headbangers on his party’s right, but whether they will be enough to induce British voters to back continued membership is open to question. For Ireland, this means uncertainty in the short-term, with high-risk in the longer term.

For economists, every silver lining has a cloud!

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