Why Budget 2017 will not improve bottom lines

By October 7, 2016Budget

The annual budget is an outsized largely, economically irrelevant, political theatre that has little meaning in people’s lives, e.g. a USC cut that adds a few hundred Euro doesn’t improve your lifestyle or savings capacity if, as is the case, it’s being swiped by your landlord, by your motor insurance company or being funnelled to your creditors to pay down the legacy of excessive debt from the Tiger madness.

You will see the huge scale of deleveraging (debt pay down) in the graphic from the Central Bank. It is why middle Ireland is merely acting as an intermediary between pay increases or lower taxes and the banks, still. Debt is just back to 2004 levels but it is still elevated. Although we are no longer the highest in the world our private debt has declined to levels, many economies entered the crisis experiencing. This is why Fine Gael’s slogan about Lets keep the Recovery Going went into the crapper.

Irish Budget 2017 graph

Rents are back to 2008 prices that’s the average. (See here from Daft.ie https://www.daft.ie/report/q1-2016-daft-rental-report.pdf.) In Dublin they are out of control. So think of it this way, taxes have hugely increased since the Lehmann supernova but tenants are now paying rents at the 2008 prices on 2016 net income after massive tax rises. Two years ago, a Dublin city centre office worker I spoke to this week spent €900 pm on rent, today its €1,900 –at the top rate of tax, which kicks in at 1 x average wage, that means she needed to earn about €24 grand more a year to cover the rent increase. Screw the Budget breadcrumbs ought to be the mantra, keep the loot and fix housing. Today a variable rate mortgage is at a margin over the ECB base rate of 3% to 4% pa –that’s more than double the margins before Bank of Scotland entered the dysfunctional Irish home loan market in 1999 meanwhile house prices are racing ahead.

Underneath the cacophony of Budget theatre lies the root cause. The Irish political system is not fit for purpose and punishes long term planning or thinking. It is why the health ‘system’ is a basket case, why for example Kildare folk rush past Naas hospital for Dublin when a child’s sick, why we’ve too many dud hospitals, why the Children’s Hospital is going to cost twice bill and is located in medieval Dublin despite 270 acres off the M50. It’s also why the chronic choking point is housing. This was also pretty obvious but no one wanted to stand up to the austerity mob fixated at demonising developers, builders and property folk generally and that included lashing 80% tax at one point on development land gains but happy, at the same time to siphon off huge taxes on anyone buying a home. It was as plain as the nose on your face that Ireland would choke on its own economic weight as a higher population couldn’t be housed –but no one wanted to raise that, it wasn’t fashionable and it was counter-media cycle. Now it’s fashionable. The same mob leaders that bayed for heads are now screaming for affordable housing. Our political system promotes to national parliament from the local councillor pond terrified of taking long term positions that might gift the competition an advantage in the game of selling the undeliverable (free lunch) to the gullible.

Irish members of national parliament see their first duty as brokers between State agencies and their clients which is why clientelism is the disease. This punishes long term planning, anything that might mean your neighbour can’t be raided to prop you up –these brokers sell the myth that the fellow next door will pay, playing on the axiom that if you wake a Paddy at 4am and want to get him downstairs to the kitchen, you have to whisper that if he doesn’t race down, his neighbour will make a €100. The solution is a switch from multi-seat constituencies which self-perpetuates clientelism, to single seat constituencies plus a list system with an Oath of Allegiance to the State ( National Parliament first, constituency second). Clientelism is why Lowry tops the polls, he’s best at it, why the display of its triumph was two Kerry lads dancing on a Pajero to diddly dee music outside the parliament, applauded by bemused ‘clients’ and why Halligan behaved the way he did. In Germany Halligan would be lobotomized.

The budget ought to be designed by cross parliamentary working groups that sit all year and thrash out long term plans, not one delivered as a big day out for the Minister for Finance, complete with leaks and thousands of hours of speculation on what will be up his sleeve. No other European democracy so politicises the annual Government budgeting process to make it a farce.

Economically, the biggest single threat facing us is whether the attempted exit from vast global money printing over the next few years years, can be done without triggering GFC 2 (Global Financial Crisis) or a break out to high inflation. The new found ‘wealth effect’ that is now loosening purse strings is a deliberate by-product of Central Bank policy and has little to do with Irish government policy. The reason why Irish house prices have bounced, why equities are at all- time highs, is external and the biggest risk to this budget and the next and the one beyond, is external. The best that an Irish Government can do is to cause least harm and light votive candles to the continuance of a global soft landing, a gradual repair of excessive debt from sub-normal economic growth, without triggering a fresh crisis.