About Cannot The Economy Afford We Placent Be To Jim Power:

Sun, 03 Nov, 2024 - 13:30

Jim Power

The British budget last week represented a real return to old-fashioned ‘old-Labour’ big government.

Faced with a yawning gap in the public finances and the reality of many promises made during the recent general election campaign, chancellor Rachel Reeves managed to deliver a significant package of tax increases, largely levied on people who would not ever be likely to vote Labour, and significant spending increases directed at people who would always be likely to vote the party.

The tax increases focused on capital gains tax, inheritance tax, national insurance contributions, and the treatment of private equity profits.

The spending was spread across the NHS, housing and many other social interest areas.

Looking at the medium-term economic and fiscal forecasts prepared by the Office for Budget Responsibility following the budget, one would not be filled with optimism about the Labour government’s task of restoring growth and productivity to the British economy, which is the policy imperative.

Keir Starmer’s recent investment conference made this objective very clear, but it will be a big ask as services are crumbling and productivity is in trouble.

Real GDP is projected to grow by 1.1% in 2024, which is an upside surprise this year; 2% in 2025; 1.8% in 2026; and 1.5% in 2027 and 2028.

Such an economic outturn would be pathetic but would be consistent with what has been delivered in recent years.

In a piece in the Financial Times last week, Martin Wolf quoted analysis from the IMF suggesting that if the British economy had maintained the economic growth performance seen between 1990 and 2007, GDP per capita today would be 29% higher than it actually is.

This is a massive loss of economic potential and is the worst performance in the G7.

In addition, despite the significant package of tax increases delivered last week, public debt is projected to hover close to 100% of GDP out to the end of the decade.

There must be a temptation here in Ireland to look with a certain degree of satisfaction and arrogance at the travails of Britain and contrast them with an Irish economy encumbered with fiscal riches and strong economic growth.

However, given what is going on in the world now, complacency could represent the most dangerous risk to the Irish economy.

Dependence on multinationals

We must recognise that much of the economic growth, employment and tax revenue buoyancy in the Irish economy have a dangerous over-dependence on the multinational sector.

In this context, the US presidential election this week is very consequential, with the degree dependent on who emerges as the de facto leader of the Western world.

Both candidates believe in the doctrine of bringing jobs and economic activity back to the US. To varying degrees, both have a liking for trade tariffs, with Donald Trump obviously more in love with the concept.

Trump has spoken about cutting the corporation tax rate to 15% from 21%.

Kamala Harris on the other hand would like to increase it to 28% to fund middle-class tax cuts.

Either way, regardless of who wins in the US, the pressure on Ireland’s FDI model is likely to intensify.

On top of this, the OECD-driven tax agenda and serious infrastructure and housing deficiencies in the Irish economy are not helpful.

It does not take a lot to change the growth trajectory of an economy, as evidenced most clearly by Germany and Britain.

It is essential for Ireland to ensure that this period of exceptional growth and fiscal performance is not whittled away by populist policy gimmicks.

It is likely a general election will be called this week, and it is incumbent on voters to hammer home to aspiring ministers the necessity of long-term strategic thinking.

This was sadly lacking in the October budget.

Ireland has never had so much money with so little to show for it