Jim Power
UPGRADE TO IRISH ECONOMIC GROWTH FORECASTS
(Just as expectations for global growth are taking a dive)
THE LATEST UPGRADING OF ECONOMIC GROWTH FORECASTS SHOULD NOT AND PROBABLY WILL NOT INFLUENCE THE STANCE OF BUDGET 2022. CAUTION IS OF THE ESSENCE.
In July the Department of Finance updated all of its economic and fiscal forecasts in the Summer Economic Statement. A lot of water has flowed under the bridge in the interim period. The momentum in the Irish economy has undoubtedly accelerated, and there is no better indicator of this fact than the buoyancy of tax revenues.
Consumer spending is also bouncing back strongly. Interestingly, deposits from households stood at €134 billion at end-August 2021, but for the first time since November 2019, withdrawals of household deposits exceeded lodgements by €56 million in August.
This week, just 12 days away from Budget 2022, the Department of Finance updated its economic forecasts. The fiscal forecasts/projections were left unchanged, as they will now be determined by what happens on 12th October, although few changes from those contained in the July publication will be expected.
Table 1 shows the key elements of the latest forecast, while Table 2 shows what was forecast as recently as August. The key change is the dramatic upgrade to GDP growth in 2021, which reflects the buoyancy of the multi-national sector. However, Modified Domestic Demand growth has also been revised upwards, which reflects the improvement in domestic demand, particularly consumer spending. CSO data published earlier this week show that the volume of retail sales in August was 6 per cent higher than last August, and when strong car sales are excluded, the volume of sales expanded by 3.5 per cent. Consumers are in the mood to spend, and they have the accumulated savings to fund that spending.
Of course, this week’s forecasts are just forecasts, and we all should realise the hazards of economic forecasting. The key issue of concern at the moment is the uncertainty coming to the fore at a global level.
The global economy is clearly bouncing back quite strongly as the restrictions are being lifted at differing speeds across the world. Not surprisingly, we are seeing a lot of pent-up demand coming back into the system, and this strong demand is meeting significant supply-side restraints. Commodity prices are rising strongly, with gas, oil and coal prices particularly problematical; shipping costs are soaring; labour shortages are evident and wage costs are rising as a consequence; construction materials are becoming more scarce and more expensive; and global supply chains are generally under significant pressure. As one commodity trader commented this week, we are now possibly living through the great financial crisis for commodity markets. It will be really interesting and somewhat concerning to see how the latest confluence of events actually works out. Those of a certain age will remember 1973 and 1979.
The Minister for Finance has tried to make it clear that the latest economic forecast upgrade will not change the stance of Budget 2022. That appears to be a very sensible strategy given the immense uncertainties out there at the moment.
The Minister for Finance has said that the fiscal parameters set out in the Summer Economic Statement will be adhered to in Budget 2022. This suggests that the package of measures will be limited. There will be little scope for any meaningful tax reductions, apart from some indexation of bands and allowances, and spending will have to be brought back under control. The key issues that should guide Budget 2022 include:
· The economy is recovering, but there is a very pronounced dual economy. The indigenous component of the economy is lagging the very strong multi-national component of the economy. The provision of support to the SME sector in particular is important.
· Covid-related financial supports are being wound down. However, some of the worst affected sectors of the economy now have a significant debt legacy, and will require ongoing support for some time.
· Labour shortages are evident in many sectors of the economy, so policy will need to incentivise labour force participation to the greatest extent possible, and ensure that apprenticeships are expanded. An immediate ending of the PUP scheme would be appropriate.
· The public finances will have to be brought back into balance over the coming years. This will necessitate tight control over Government expenditure and the maximisation of tax revenues. The objective is to eliminate the high level of borrowing that had to be put in place to deal with Covid-19 by 2023. Hence, this will need to be addressed in Budget 2022 and Budget 2023.
· The threat to future Corporation Tax receipts from international tax developments means that the public finances will have to be manged as prudently as possible. There is no guarantee that the current record levels of corporation tax will be sustainable, so it is important to plan for the eventuality of a significant reduction at some point in the future. Basing future expenditure plans on a tax base that may not be sustainable would be a risky strategy. This is what happened in the years leading up to 2008.
· Addressing climate change and ensuring the necessary incentives to change consumer behaviour are in place will be very important. This is particularly relevant for the transport sector. Carbon taxes will be increased in Budget 2022 and support will be given to avoid fuel poverty issues.
As is always the case, Budget 2022 will contain many small measures that will have very limited impact on the majority of citizens. It is important that anti-business measures are avoided in the current environment of post-Covid uncertainty and volatility.