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The Government needs to cut spending now – but it will not

One of the most essential, but least well-understood aspects of macroeconomics is that economics is counterintuitive. This is because macroeconomics, unlike accountancy, is more concerned with the collective than the individual.

The rule of thumb that dominates economics – again, as opposed to accountancy – is that what is good for the individual is not always good for the collective. When things are going really well and demand is very strong, like now, the Government should, counterintuitively, act to dampen it.

When demand is strong and people and companies are spending, the State should save and build up a surplus. Because, as night follows day, there will be a downturn, when people stop spending.

In short, the State should do the reverse of Charlie McCreevy’s sage approach as minister for finance: “When I have it I spend it; when I don’t, I don’t.” If the State fuels things by cutting taxes or spending money when demand is already high, it will exacerbate the boom in inflation. Conversely, in a downturn when the State’s tax coffers run dry, if it then cuts spending and raises taxes when demand is already feeble, it amplifies the downturn with deflation.

The position the State takes at various iterations of the economic cycle is, therefore, one of the least well appreciated but, again, most significant policy stances to be taken by any administration.

John Maynard Keynes described this necessary counterintuitive, countercyclical bias of the Government the “automatic stabilisers” which, like stabilisers on a child’s bike, give balance to the entire enterprise.

The ebb and flow of the economic cycle is not some mechanical, hydraulic fixity determined by hard-and-fast economic rules. The cycle itself is nothing more than an expression of human nature.

Optimism is contagious

When things are motoring and prices are rising, it is normal human nature to become giddy, because the person beside us is getting giddy and optimistic about the future. Such optimism is contagious. This is what economists call consumer confidence.

And, in the same way as a sports team derives collective confidence from the performance of its individuals, an economy derives confidence from the efforts and circumstance of its individuals.

So normally, when prices are rising, they continue to rise, buoyed up by the confidence that rising prices generate.

In contrast to microeconomics, which suggest that as prices rise demand falls, we more often than not experience the opposite. When prices rise, they are rising because people are spending and the very rise in prices generates yet more price rises, buoyed up by collective effervescence.

Upswings are self-reinforcing.

Similarly, if a company is gaining market share, the natural tendency is to borrow to garner yet more market share. If people are borrowing to finance ideas today, they are taking money – not yet earned – from the future to front-load demand today, based on natural human exuberance.

This in a nutshell is what is happening right now in Ireland.

Unemployment is low, incomes are rising and recent success in the marketplace – no matter what business you are in – breathes a disregard towards the possibility of failure. Thus, the economy takes off.

Collective phenomenon

This individual effort or good fortune becomes a collective phenomenon quite easily. Tax revenues rise significantly because spending and incomes are rising. When you are spending you are buying stuff from me which translates into my income, driving up my spending power, coaxing me to buy stuff from you, adding to your income, and upwards we go.

It is at this stage that the Government, flushed with buoyant tax revenue, should begin to stop spending as there is more than enough spending already going on in the economy. Anything it spends now will simply add to demand and largely go into rising prices, rather than rising employment or production.

The economy is getting close to full capacity, so the more we spend now the more likely we are to experience rising prices or profiteering.

Tipping point

A tipping point emerges where what is good for the individual is not good for the collective. At this point, your spending, although it feels good for you, causes the rest of us to suffer because the general level of inflation rises. This pushes up wages demands, and everyone’s cost of living rises.

At this moment, the State should cut spending. It doesn’t need to supplement incomes because incomes are already rising. In short, the economy is overheating.

Armed with these economic observations about the economic cycle, let’s examine what the Government’s Fiscal Council uttered this week in a report.

The report admonishes the State for depending too much on multinational tax revenue. It contends that that some €3 billion to €6 billion of the €10.4 billion in corporate tax receipts received in 2018 could be considered excess (in other words, beyond what would be projected based on the economy’s underlying performance and based on historical/international norms). And it stresses that debt levels remain high – about the fifth highest in the OECD.

Future downturn

As a result, the Fiscal Council argues that the State should start cutting expenditure now to prepare for any future downturn. What are the chances of that? You decide. I’d put it at about 0 per cent.

However, there’s a reasonable chance that multinational tax revenue will remain healthy, immigration will continue and there will be no massive shock to the system.

The implication of this is that the next election will be fought against the backdrop of tax cuts, spending increases and manna from heaven. The next government or the one after that will be the one that will have to retrench, as the cycle slows and pay the electoral price for it.

In politics that’s a lifetime away.

Young workers feel anxious about the future – and rightly so

The 2019 Sign of the Times survey by Behaviour & Attitudes provides a useful snapshot of an economy where the majority of people think things are going well, younger people still feel they will be better off than their parents, but where the housing market and childcare costs divide the generations, leaving younger adults stressed and the older generation much more chilled.

The survey reveals a society where only 14 per cent say they are struggling financially, with 37 per cent saying they are living comfortably.

As this column argued last week, although it is unfashionable to say so, the country is now a reasonably content, reasonably tolerant society, generating lots of jobs and embracing immigrants and diversity like never before.

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Expansion of the middle class is Ireland’s biggest feat

When it comes to celebrating the Republic – 70 years old this weekend – the most significant socio-economic achievement of the State has been the gradual but relentless expansion of the Irish middle class. It might be deeply unfashionable to champion the growth of the civic bourgeoisie, but the expansion of the middle class is a profoundly positive accolade.

In contrast to many western countries that are seeing their middle classes shrink, the data tell us something we know already when we compare our lives with our parents’ lives and their parents’ lives: Ireland’s bourgeoisie is in rude health.

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Dublin’s too-high crane count is disturbing

I am one of those odd creatures who likes to sit on a train in the opposite direction to which the train is travelling, preferring to see the world going by me, as opposed to coming towards me. You get to see more of the panorama of a train journey that way.

This week, as the train pulled out of Connolly for Belfast, I took in the capital’s inner city and the docks from my elevated position above the traffic. Scanning the city, framed by the Dublin mountains on the horizon, you see many cranes on the skyline.

The crane count published last week is reminiscent of 2007. It reveals that there are 117 cranes in the Dublin skyline – a near-record figure.

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Unless Ireland makes housing cheaper we will miss Brexit bounce

Britain in 2019 doesn’t feel quite like Yugoslavia did 30 years ago, but then again Yugoslavia didn’t feel like Yugoslavia until it became the former Yugoslavia. Brexit is pointing to the end of the UK.

The surface unity of the May-Corbyn truce is nothing but a marriage of convenience forged in desperate circumstances.

Long-term, we face something bigger than the UK leaving the EU: we face the potential Balkanisation of the United Kingdom.

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How Irish pubs measure the global economic mood

In his hilarious and award-winning novel Absurdistan, the American writer Gary Shteyngart tells the story of Misha Vainburg, son of the 1,238th richest man in Russia who flees Russia for the imaginary country of Absurdistan.

Absurdistan is a post-socialist, cowboy-capitalist, ethnically divided oil kingdom somewhere on the shores of the Caspian Sea. The capital, Svani City, is an uproarious metropolis, desperately trying to mimic a western urban entrepot.

And what defines western in these people’s eyes? Naturally, a McDonald’s, the twin Hyatt and Radisson hotel offering, a Banana Republic, a Gap and of course, a “Molly Malone’s” Irish pub.

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Europe is glued to energy-rich Russia

As the train screeches to a halt, the young man, in his slim-fit Tom Ford suit, alights energetically. This is Revolution Square station, deep beneath Moscow’s congested boulevards.

Built in 1938, the station is one of the gems of the Moscow metro system, itself one of the finest pieces of public transport infrastructure in the world. Stalin understood symbols. The metro system served as a reminder of the splendour of the Soviet Union. In the war, these places were air-raid shelters. In 1941 and 1942, a hundred war babies a month were being delivered down here as war raged overhead. What else are you going to do?

Today, the metro carries seven million passengers a day, close to half the population of this enormous city of 15 million citizens. Trains arrive off-peak every two minutes and at rush hour every 30 seconds.

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Ireland’s Dunnes-loving, cheese-eating unsqueezed middle

I’ve hit Peak Brexit. I can’t stomach watching the nightly political blood-sport that is BBC’s Newsnight anymore.

I can’t listen to self-important Tory politicians, who have somehow risen above their natural station in the Territorial Army Cadets, droning on about being trapped; or Labour politicians for that matter, spouting equally infantile, neo-Marxist drivel.

That’s it. I’m done.

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The fall of the Berlin Wall led to the rise of Ireland

There’s something exciting and substantial about Berlin. The city exudes history. Bismarck and Hitler are here, but also Karl Marx, Rosa Luxemburg and Angela Merkel. Political decisions taken here often have a far-reaching impact.

In terms of ramifications, who would’ve thought that one of the standout beneficiaries of the fall of the Berlin Wall would be Ireland?

This year marks the 30th anniversary of the fall of the Berlin Wall, the seminal geo-political event of my generation. No one, least of all the CIA, expected it.

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