Originally posted on Business Post 09 July 2022.
Glowing reports from the IMF won’t mean much to those struggling with rent, fuel and food costs.
It feels as if the country has just done some kind of economic Leaving Cert, with end of term reports published last week. First there was the Summer Economic Statement, then the Central Bank quarterly update, and finally on Thursday a good conduct report from the International Monetary Fund. Subject to the usual terms, conditions and hedging that we tend to find in economic assessments, the portrait which all three of these reports painted of the Irish economy is surprisingly positive.
The Summer Economic Statement projects that there will be a modest budget surplus in 2022 with significant money available to help on the social welfare and tax front to take the sting out of inflation. The Central Bank is of the view that the inflation spike will be most pronounced in 2022, and that once we are through this current calendar year, inflation may revert to something more tolerable.
Both the IMF and the Central Bank conclude that the employment outlook is perhaps as strong as it has ever been, with less unemployment, more vacancies available and much greater female participation in the labour force.
This time three years ago, the predictions from all these bodies were not as positive. The commentary in the 2019 Summer Economic Statement and the Central Bank’s quarterly forecast in July 2019 was dominated by Brexit fears. The IMF chimed in with Brexit concerns as well, adding the escalation of global protectionism, and having to adapt to ongoing international tax changes for good measure
Since then, of course, we did have Brexit which was orderly or disorderly, depending on your political (not commercial) point of view, a crushing pandemic, and a Russian invasion of Ukraine disrupting commodity supplies worldwide.
You would never seek it out, but one outcome of the pandemic is that it was like an experimental laboratory for the economy. Decisions were stress-tested in a way that would otherwise never have been possible. Depending on how you count them, more business supports and social welfare benefits were paid out by government in the two years of the pandemic than might usually be the case over five years.
The outcome of this “experiment” has been that these payments seem to have been more in the nature of an investment than in the nature of largesse.
The pandemic has also proven that our tax base is very resilient. We have discovered that the exchequer is predominantly funded by the corporate sector paying corporation tax, high-income earners paying income tax – about 80 per cent of all income tax and USC comes from the top 20 per cent of earners – and consumer activity in the form of Vat.
According to the June exchequer figures, over 85 per cent of all of our tax revenues come from these three sources. Whatever else is done in the September budget, these sources have to be managed and preserved as no package of social welfare benefits and tax reliefs can be delivered without them.
This resilience is further underlined by the fact that it is Irish business that acts as the collector of taxes for PAYE and Vat. During the pandemic, a sensible process of tax debt “warehousing” was introduced which allowed business to defer paying PAYE and Vat to Revenue. However, it is surprising how little tax debt was deferred in this way.
Totals did vary over the ebb and flow of the lockdowns, but broadly speaking, there was deferral only to the tune of 5 per cent of the total tax yield. That's a confident performance by Irish businesses in a pandemic crisis.
This sense of business confidence is reflected by surveys such as the Bank of Ireland’s Economic Pulse, suggesting that business sentiment is currently higher than consumer sentiment, but vastly more so than in April 2020, when we all stared into the abyss of the Covid-19 pandemic. There will be some who will argue that all this confidence and positive sentiment is misplaced and that we underestimate the interest rate and inflationary challenges of the coming months, but nevertheless, that confidence is there and is already having a bearing.
It may yet be bolstered further. The indifference, bordering on hooliganism, shown by the current British administration to the political and economic status of Northern Ireland and Ireland’s position within the EU could soon be remedied. It certainly can’t get much worse.
The problem now for the government is to translate this economic capacity and success into consumer sentiment. Glowing reports from the IMF won’t cheer anyone who is struggling with fuel, grocery or accommodation costs, nor for that matter the employer who can’t get staff because prospective employees can’t find a place to rent. And while inflation is expected to ease over the next ten months or so, it won’t over the next ten weeks between now and budget time.
The economic exams may have been passed with flying colours. The budget will be a different matter entirely. There could even need to be some economic mistakes made by over-spending or undertaxing on the next Budget Day to make the public aware of these past successes.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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