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World Bank chief executive officer, Kristalina Georgieva, introduced the organisation’s latest forecasts in Washington last week saying: “At the beginning of 2018, the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead”. Every international organisation reviewing the world economy has been marking down its forecasts recently, and all expect the slowdown to include Europe.
The recovery from the great financial crash has been uneven, and Ireland has done better than most. Recoveries do not last forever but this one is running up against more than its own maturity. Superimposed on the natural swings of the cycle there are some very specific threats. Economic expansion in Germany, Europe’s largest economy, has halted and there are fears about financial stability in the eurozone, especially in Italy, if recession strikes.
The United States has chosen to embark on a trade war with China and there has already been collateral damage in Europe, with threats of further unilateral tariff action by president Trump and his advisers. Stock markets around the world have seen sharp falls through the final quarter of 2018. For Ireland there is an exceptional exposure to the fall-out from Brexit.
Whatever form it takes will be economically damaging to the United Kingdom, but all the economic modelling identifies Ireland as the most exposed of the UK’s trading partners. Small countries have little capacity to influence external events: if there is an international downturn, a Trump-induced trade battle with Europe, another eurozone crisis or a crash-out Brexit, the Irish Government is essentially a spectator. The best that small countries can do is to ensure that they maintain the financial capacity to weather whatever storms blow in from events beyond their control.
Budget balance
Unfortunately, the Irish state is now heavily indebted and in a worst-case scenario there will be little latitude for borrowing through a year or two of hard times. This has been the argument for a tighter budget policy these last few years – had the budget been brought into surplus, which could have been done as far back as 2015 without too much difficulty, the capacity to handle whatever fortune has in store would have been greatly enhanced. Instead, there has been a succession of loose budgets and the numbers just about struggled into balance last year. But the appearance of budget balance could turn out to be illusory very quickly. Government spending came in well ahead of target in 2018 but the overshoot, notably in the Department of Health, was offset by unexpected receipts of corporate tax revenue and Finance Minister Paschal Donohoe was able to match up these unexpected developments and declare a successful outcome.
The independent fiscal council was quick to point out, in diplomatic language of course, that budgetary control has weakened again and that the 2018 outcome owed more to luck than to careful management. None of this would matter too much if a continuation of steady economic growth could be taken for granted: even with heavy debts, budget deficits of zero are fine if the economy yields up steady improvements in tax revenues, since the cover for debt service costs will improve. The latest forecasts for Ireland see the economy slowing a little in 2019 but growth is still expected to be in the range 3% to 4%. If that kind of performance could be sustained into the medium term, there should be little to worry about. The trouble is that things can turn around very quickly and Ireland’s debt overhang, in both the Government accounts and in the household sector, is amongst the highest in the eurozone. Against this background, the Government needs to keep spending, both current and capital, inside the budgeted figures. Currently, it has failed to do so in 2018, especially in the Department of Health. Capital spending also appears to be escalating above the amounts authorised, the most spectacular recent example also coming from the health area, with the doubling of the cost estimate for the National Children’s Hospital.
Spending
The immediate threat to spending control for 2019 is in public service pay. The nurses one-day strike is scheduled for 30 January and the Government has refused to contemplate any pay award additional to the increase that all public servants will receive in the autumn. A report from the Department of Public Expenditure released last year showed total pay, including allowances, at €36,214 on entry, with an average of €54,745 and calculated that nurses are paid about 20% more in Ireland than they are in the UK. Public sympathy will favour the nurses rather than the Government, but the knock-on potential is scary.
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