One step forward, one step backward, one step sideways

Michael Taft: The ESRI’s Summer Quarterly Economic Quarterly is full of data for just about every perspective on the economy – from the optimist to the pessimistic and all attitudes in between:

While data on retail sales, consumer confidence and exports all point to signs that a recovery is already underway, the numbers from the Live Register, income tax returns and the most recent estimates of quarterly GNP would suggest that the economy is still contracting.

Here’s the statistic that screams out to me: the ESRI has revised downwards their GNP growth projections (i.e. the domestic economy) for both this year and next year. Three months ago, the ESRI projected GNP growth this year to be 0 percent; now they’re saying it will decline by -0.5 percent; three months ago they projected GNP to grow in 2011 by 2.7 percent; now it’s 2.2 percent.

This is what other forecasters have been doing – revising downwards our domestic economy even as our export-driven GDP is growing. Three months ago, the ESRI was estimating that GNP growth would outstrip GDP growth over the next two years: 2.7 compared 2 percent.

Now the situation is completely reversed. While they have revised upwards GDP growth upwards by half over this year and next, they have cut GNP growth by nearly half. From outstripping GDP growth, the domestic economy is now lagging considerably.

But even these downward revisions may prove to be optimistic:

‘ . . . the short-term prospects for the Irish economy continue to be precarious . . . the forecasts . . . are critically based on the assumption that difficulties in international financial markets will be resolved swiftly.’

Those are heavy dice to roll – banking on a swift resolution.

While the ESRI report will produce a considerable debate over the next few days, let’s canvas a few issues here:

Employment: No good news here. If anything, the ESRI are marginally more pessimistic revising downwards employment levels in 2011. In short, there will be no jobs growth next year – compared to the Government’s target of 20,000 new jobs. This will result in an unemployment rate of 13 percent next year; again, slightly up on Government projections. Thanks goodness for all that emigration – which is now estimated to rise to 120,000 over this year and next. If it weren’t for emigration, the unemployment rate would be close to 17 percent.

Deficit: a lot of the attention will be paid to the ESRI’s decision to include the bank bail-out money in the annual deficit. In truth, given the EU’s ruling on the Anglo-Irish bail-out, they had no choice. As a result, the deficit will balloon this year to nearly -20 percent. The Government will, with some justification, point to the underlying deficit; that is, the deficit minus the bail-out money.

On this reading, the deficit is projected to come it at -11.6 percent, which is consistent with Government forecasts. However, there is one difference. The ESRI is anticipating a considerable increase in tax revenue compared to what the Government estimates. The tax revenue projections for 2010 are:

• Government: €31.1 billion
• ESRI: €32.6 billion

The ESRI is expecting tax revenue to exceed Government estimates by over 4 percent. The problem is that the half-yearly Exchequer returns show tax revenue to be -1.6 percent below Government targets. The ESRI is hoping for a big turnaround in the second half of this year, through marginally higher consumer spending and GDP growth. However, with job numbers and aggregate wages in decline, with the revision downwards in GNP growth, this remains to be seen.

If tax revenue figures end up closer to the Government’s estimates, then the deficit will easily exceed -12 percent. This is not what was supposed to happen.

Investment: The ESRI makes a curious and unexplained assertion.

‘We argue that public funds would be better used in re-skilling and up-skilling people who are unemployed as opposed to using spending on infrastructure as a form of employment creation. It appears to us that public funds would be better used in re-skilling and up-skilling people . . . As argued by Morgenroth, public capital projects should be undertaken on the basis that they have a long-run return to the whole economy and not because they create short-term employment. This is because of a relatively high cost per job created via public investment.’

This is an incredible statement by any measurement. ‘We argue’: no, they don’t. They assert because ‘it appears’. The ESRI puts investment and retraining in opposition when, in fact, they are complementary. Morgenroth’s argument cannot be taken as an argument against investment; in fact, it is a cogent argument for well-thought out initiatives that will deliver increased productivity, higher economic activity and, as it happens, more jobs.

Take IBEC’s proposal for a Next Generation broadband network capable of 90 percent coverage in the country: does anyone doubt the long-term boost to the economy. This would have enormous supply-side benefits which will continue to contribute to growth, employment and higher incomes in the long-term. And in the short-term, it would increase employment and growth as well – IBEC estimates that two-thirds of the €2.2 billion cost of this project would be spent on civil engineering works. Good for the short-term, good for the long-term. This is an investment stimulus strategy that focuses on those projects we would need to complete in any event, regardless of the recession.

The ESRI’s ‘argument’ against infrastructural investment amounts to a 76 word assertion. No data, no model, no facts. I could say this is not good enough; but, in truth, this is the way the debate has been conducted.

* * *

The ESRI report points to a two-tier economy a modern, multi-national sector which is neither tax-rich, because we don’t tax them, nor job-rich since it is capital intensive; a low-growth, high debt (debt is hurtling towards a worrying 100 percent of GDP), high unemployment medium-term.

Some will call this a recovery. There are better words.

Posted in: Economics • Economics • Fiscal policy • Fiscal policy

Tagged with: jobs • esri • Deflation • debt