In the wake of October’s budget, the Fiscal Advisory Council issued a rather damning verdict on the Government’s conduct of policy. Basically, the council, headed by the economist Seamus Coffey from University College Cork, feel the Government has eased up rather too quickly, with tax reductions accompanied by some substantial increases in public spending, especially on the health service.

Tax revenue has come in ahead of expectations, but the council is not impressed. Much of the unexpected bonus in tax receipts during 2018 came in the form of corporation tax and there are good reasons for fearing that it could be transient.

Unexpected revenue has been chalked off against unplanned expenditure and Coffey and his colleagues think this is dangerous. Government borrowing should have been eliminated by now and the debt mountain should be falling through running a surplus on the annual budget.

Finance minister Paschal Donohoe protests that Coffey and company are being alarmist and that policy is in fact prudent. Virtually every economic commentator, including this one, thinks that Coffey is correct and Donohoe is unconvincing.

As the year draws to a close, it is timely to take a longer-term perspective on Irish economic policy. The good news is that the recovery has gone better than could have been expected.

After the collapse of the bubble in 2008 and the extraordinary disintegration of the banking system, the country was really on the floor when the election was held in February 2011. Ireland was in a bail-out from the IMF and the European institutions having lost the ability to finance itself. Businesses had closed, 300,000 jobs were lost, unemployment reached 15% and the country was effectively insolvent for the first time since independence.

Rising debt

The enormous debt accumulated through heavy deficits and the rescue of bank creditors has continued to rise, since no budget surplus has yet been recorded despite six straight years of solid recovery. Unemployment is finally down to just over 5% and wages are improving ahead of inflation.

The legacy debt mountain is the problem because the European Central Bank has decided to quit buying government bonds. Since 2015, it has bought so many that governments have been able to roll over maturing debt at bargain rates, which has flattered the budget accounts.

Given the problems in Italy and the general slowdown in the European economy, there is now a risk of more expensive borrowing costs. Even if the Irish deficit has finally reached zero, there is a re-financing burden every year as old debts mature.

The biggest risk is that the sovereign bond market in the eurozone could collapse again as it did in 2012, with borrowing costs well beyond what the heavily indebted countries could afford. Should this happen it would be terrific if Ireland could face the markets with a debt level already in decline and a few surplus years delivered. The last several budgets have squandered this opportunity, through needless tax giveaways and a loosening of expenditure control.

Superimposed on the general European slowdown are two specifically Irish threats. Things have gone so well that there is a risk of overheating – economic expansions simply do not last forever, and staff shortages have already begun to emerge.

And there is Brexit. Even the more benign forms of Brexit will impose higher costs on Ireland than on other EU27 members. If the November deal goes through in some form, it will bring relief to those trading cross-border but could eventually result in heavy costs for the much greater volume of east-west trade across the Irish Sea. Only Northern Ireland would remain attached fully to the single market in the deal as envisaged. The big winner from the economic standpoint, if Mrs May’s deal had gone through smoothly, was Northern Ireland more than the Republic.

Outcomes

There are worse outcomes for this country, including the chaos of a no-deal crash-out, and there are better ones, including a second referendum and a reversal of Brexit. Until the issue is resolved, which could take many years, a cloud hangs over the economic outlook.

An interesting consequence of Brexit has been a restoration of Irish confidence in the European Union, interesting given the depredations visited on the country by the European Central Bank just a few short years ago.

European leaders have shown solidarity, not just with the Irish Government but also with the people of Northern Ireland, in their defence of the Good Friday Agreement.

But there will be battles ahead over tax issues and Ireland sits uncomfortably on a windy rock in the North Atlantic between the departing Brits and the belligerence over trade and investment of Donald Trump’s America. This would have been a good time to batten down the hatches.

Beir bua – may I wish you all a prosperous (and prudent) 2019.