THE INTERACTION OF ECONOMICS AND POLITICS
Political events have profound economic consequences... be careful out there
Many moons ago when I studied economics in college, the subject was described as Political Economy. It has since reverted to plain Economics, which is where I think it still is today. The Political Economy title was very apt, as the more we see, the more we should realise just how much of an impact politics has on economic outcomes. Back in the days when I naively believed that it was possible to forecast the economic future, I conveniently blamed political developments for my failures. I no longer believe it is remotely possible to forecast the future given my increased realisation that economics is a social science driven by often-times irrational human behaviour, rather than a more precise physical science. Politics is key.
Political developments and actions have profound economic and social effects as demonstrated by events such as Brexit; the illegal Russian invasion of Ukraine; the election of Donald Trump and his subsequent approach to international relations; and the increased nationalistic and more authoritarian approach that has taken over China in recent years. I could go on, as the list is infinite, but I hope the message is clear.
On the political front, the coming year promises to be incredibly interesting, particularly in the US and Ireland.
Election season really started in the United States over the past week, with the first Republican Party debate ahead of the presidential election in November 2024. Given the absence of Donald Trump from the debate, the overwhelming support he is receiving from the Republican electorate, and the legal quagmire he is currently facing into, it promises to be a fascinating year ahead. The more expert opinion I listen to, the more confused I become about the status of Trump, given the charges he is now facing at a State level in Georgia. However, the odds would currently seem to favour Trump running against Biden next year, but of course in the world of politics, a lot can change in a week, never mind a year.
Bidenomics probably does not get the attention it deserves, but Biden’s economic agenda since elected is worthy of considerable attention and scrutiny. His place-based industrial strategy and a very high level of intervention is proving to be a very interesting experiment. His attitude towards China on the other hand, it not that different from the Trumpian playbook. In turn, the US economy is still performing quite strongly, with the labour market particularly buoyant. Alas Biden is not getting much credit, or at least that is what polling seems to suggest.
Ireland must have a general election by February 2025. It is anybody’s guess as to when it might occur as it is very often the case that coalition government can get very skittish in the year running up to the scheduled election, as the individual parties try to carve out their own identity, which often gets hidden and confused in a coalition arrangement.
For the incumbent government, the economic news seems to get better and better. This week we got the labour market data relating to the second quarter. It makes for pleasant reading for a government facing an election in the next 18 months. Employment increased by 88,400 or 3.5 per cent over the past year to reach a record high of 2.64 million. The labour force participation rate reached a record high of 74.2 per cent, with the female employment rate at a record high of 70.5 per cent. The long-term unemployment rate (unemployed for at least 12 months) stood at just 1.2 per cent. The basic message is that for anybody willing and able to work, some form of employment is possible.
Despite this stellar labour market performance, the parties of government are not that popular and much of the debate we hear, at least in the social media poisonous bubble, is that Ireland is a dystopian hellhole. The reality is that Ireland is not a dystopian hellhole, at least relative to most other countries around the world. However, the failure of government to address crime and to solve the long-standing housing crisis, despite a lot of verbiage, represent the Achilles heel. The housing plight facing young people is the real issue, but Government seems incapable of addressing a problem that has been obvious for a long time in any meaningful way.
Irish politics promises to be absolutely fascinating over the coming year, and there can be no certainty about the nature of the political mess we might end up with in 2025. We need to remain ever mindful of the very quick impact bad politics can have on economic prosperity.
We need a real examination of Sinn Féin's fiscal policies. Already, the proportion of taxation paid in our society is already overly-concentrated in just two segments: higher wage earners and multinational companies. The Department of Finance Annual Tax Report 2022 raises this fact as a highly significant risk in our taxation system, stating clearly that our economy is heavily dependent for tax revenue on a small base of higher-paid employees and multinational companies. Sinn Féin, if elected to government, intends to compound this problem and to narrow the tax base by imposing more employment taxes, income tax, wealth taxes, property taxes and inheritance taxes on these two highly mobile segments of society. Sinn Féin's economic story is that it can increase taxes on employment, higher earners, wealth and capital, inheritance and property transactions without negatively affecting our open economy, where presently trade and investment flourish, employment booms and tax revenues continue to be impressively high.
Sinn Féin plans to remove tax credits on incomes above €100,000 and introduce a new 3% tax on incomes above €140,000. The party also plans to significantly increase Employers’ PRSI, to reduce the Standard Fund Threshold for private pensions and lower the earnings contributions cap for allowable reliefs, to remove the Special Assignee Relief Programme for multinational employees which is designed to attract and keep investment capital in Ireland. Sinn Féin plans to increase the rates of Capital Gains Tax and Capital Acquisitions Tax and to reduce the threshold for inheritance tax so as to levy more tax on children of deceased parents. Perhaps most damaging of all, the party says it will introduce a new annual Wealth Tax. Sinn Féin says it will also increase Stamp Duty on higher valued residential properties and on all commercial properties.
The party's taxation plans would make Ireland so uncompetitive for higher earning employees of multinational companies, that it would make no sense for higher earning employees to stay here if they have a choice to relocate elsewhere. We cannot expect that enterprise-oriented multinationals and their high earning employees will be willing to operate in a socialist country where the primary objective of economic policy is to make the few pay for the many to an even greater extent than they already do.
The message from Sinn Féin that it can extract ever increasing taxation from the same source is not credible.
Already, compared to all other OECD countries, even those with leftist governments, the Irish tax and welfare systems do most for the ongoing reduction in income inequality. The Irish income tax system has become more progressive over time under successive governments and ranks indisputably as one of the most progressive in the OECD. Further, the Irish Government presently spends more on health and housing than the vast majority of our peers. Ireland's taxation and welfare systems are even more progressive than the much-celebrated Scandinavian countries that leftists champion, but it seems that most voters are unaware, or perhaps disinterested. Instead the online culture of selective distortion, populist narratives, personal frustrations and faux rage has become mainstream.
The mobility of multinational capital, investment, wealth and employment must be properly assessed in the context of Sinn Féin's fiscal plans. The assessment must include detailed analysis of the likely impact on economic growth, on business investment, on employment and crucially, on tax yield available for redistribution, public services and climate change investment.
And of course in Ireland there is the complication of Sinn Féin's primary objective to deliver a unified socialist state. The implications of their likely actions in pursuit of that objective must be contemplated in the wider assessment of consequences.