Make no mistake, we’re already sowing the seeds of the next recession

There is going to be another recession in the future, but how we prepare for it is up to our politicians, writes Aaron McKenna.

IRELAND IS FIRMLY back in the boom territory, with economic growth in the first half of the year sitting at 7% of our GDP and tax revenues exceeding expectations by €3 billion so far.

Whilst we have deep seated hangover problems from years of recession that mean some folks aren’t feeling it directly, there is no objective economic measure, saying anything other than Ireland is in a period of economic boom.

Wild oscillations in economic fortunes, going from a collapsing to a booming economy rather than sticking to the plus or minus two or three GDP percentage points territory we see in other first world economies, are due to the open nature of our economy. When the global economy is on the up, for example, thanks to the use of fracking to help dramatically reduce oil prices, Ireland is on the up.

More companies are expanding and putting jobs in the country, and more corporations make profits that end up getting taxed here.

The effects can be transitory. A market like the UK or Germany or the USA has the size of an internal market, combined with manufacturing and other heavy tangible industries, to feed itself through tough times. In Ireland, when the global breaks get pushed we feel an outsized impact as so much of our economic activity is tied to servicing global rather than domestic markets.

One of the transitory effects is an increase in corporate taxes, which will be up somewhere around €2.5 billion over last year when 31 December rolls around. When the global economy is doing well, corporate profits increase and the tax take on them go up.

Increases in the tax take on this head in particular have contributed to government and opposition party certainty around increasing spending or manifesto promises for the years ahead.

20/11/2013. Christmas Shoppers samboal samboal

Relying on the global economy to do well 

The trouble is that the minute anything happens in the global economy, that tax take will fall. We are using a transitory increase in tax, over which we have no real control, to pay for long term spending commitments such as hiring more public servants. When you hire someone into the public service, you commit to a lifetime job with a pension at the end.

When you get increased corporate tax revenue, there’s no commitment to anything in ten or twenty years time.

The ironic thing in Ireland is that the parties most effusive about increasing government spending are the ones in opposition most opposed to more stable taxes, like property and water taxes that are less likely to totally evaporate in the event of an economic downturn. This is the great conundrum in Irish politics: Voters want increased spending, but they want lower taxes on themselves at the same time.

Politicians get around the problem by pointing at tax revenues, like corporate taxes or VAT, which they are fully aware will evaporate the quickest when trouble hits.

We basically work forward on the assumption of, “Sure, it’ll be grand on the day. Or we’ll just figure it out.” Instead of creating truly sustainable tax and spending bases, we prefer to have to swing in with violent shifts in tax policy that further depresses the economy during a downturn; such as introducing the massively onerous USC at just about the worst possible time in the economic cycle.

4/11/2009 Social Welfare Queues /Photocall Ireland /Photocall Ireland

Another depressing thought is the idea that Irish politicians might actually think to themselves,

“Sure, the IMF wasn’t that bad was it?”

We are not going through a frame by frame replay of the Celtic Tiger years, as government spending and house prices and wages and all the rest of it aren’t increasing by anywhere near the levels seen at the time. We are heading towards an election year with a spring in our step and pretty much all parties talking out of both sides of their mouths about securing recovery whilst looking after Important Voter Cohort X.

Make no mistake, there will be another recession

There is going to be another recession in the future. It will hopefully be a relatively small one, tied to some burp in the global economic cycle. The impact this recession and ones following it have on our public services, our ageing population and capacity to deliver on the promises of election years will depend on how we choose to structure the recovery we are in now.

We could, for example, choose to take unexpected increases from volatile tax sources and put the money into debt reduction with associated long term interest payment savings, or build a national reserve fund; or invest in infrastructure projects with once off costs and relatively low residual maintenance thereafter.

Hiring a garda or a teacher or a nurse from these transitory funds, no matter how much those people are needed, will mean as sure as night follows day that we will need to fund their wages some other painful way in the future; such as introducing emergency income levies.

It was not too difficult after the 2008 crash to identify what had gone wrong. Government spending had been doubling every couple of years. Low Euro interest rates had helped fuel massive increases in lending and a house price boom. Wages got out of control and we became uncompetitive.

When the next recession rolls around and we’re having to bring back USC or the property tax everyone seems to want to abolish, and we’re instituting another recruitment freeze in the public sector and closing A&E departments; it won’t be too difficult to identify what we did wrong in the 2015-20xx period that amplified the pain of the downturn.

Making promises to voters

As voters, we need to take a hard look at our actual priorities. There is too much of “tax cuts and spending increases!” Political parties from the left to the right don’t make these promises as part of some great joke being played on the Irish people. They make these contradictory promises because they’re the ones that win votes.

If we want increased spending, we need to keep the likes of the property and water tax; and probably increase our reliance on them. If we want tax cuts, we can’t demand the government build thousands more new houses than already planned and a few new hospitals and put a garda on every street corner.

We’ve played this game before. We should know better. The economic boom is great news, and it will deliver dividends to the people who suffered the recession. It cannot deliver all the dividends that everyone wants and still leave us in a sound financial position the next time something goes wrong in the economy.

Aaron McKenna is a businessman on columnist for You can follow him on Twitter here

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