THE IRISH PEOPLE alone are expected to sigh aloud every time a global medicine comes ‘off patent’ thereby making that medicine cheaper for a sick person to use.
As a nation we appear more interested in what’s known as the ‘patent cliff’ than we are in healing the sick. That’s because over-priced medicines are a central part of our ‘export miracle’.
Their price reflects the use of intelligent tax planning by multinational corporations. We allow these firms to register high pharmaceutical prices, high profits and low profits taxes. Output per employee in Irish chemical plants is so high that it is absurd.
Deep inside economists know that Ireland export statistics are of little or no use. For decades our export totals have been pumped up by ludicrous ‘success’ stories. We’ve recorded quite improbable sales of erectile dysfunction tablets, cola concentrate and internet advertising space to name but a few of our star performers.
So why do we get worried when part of the tax planning edifice begins to collapse, as is happening with the ‘patent cliff’?
And if our export numbers are so unreliable then maybe some of our other measures of prosperity are of less value than we thought.
The government’s latest six-year forecast says that Ireland is about to enter a long wave of substantial economic growth.
The outlook is predicated on a ‘baseline’ forecast of growth that averages 3.5% per year from 2017 onwards, following growth of about 2.4% a year between 2014 and 2016.
The numbers make for welcome reading after six years of decline. But are they correct?
The ordinary citizen is understandably cautious. This is not the first time we have been told that we are ‘about to turn the corner’ only to see our hopes dashed.
Yet confidence is growing. On Thursday the CSO lifted spirits, reporting that GDP in the third quarter of 2013 was 1.5% up on the second quarter. This followed bullish predictions from both IBEC and the ESRI that we will see growth of circa 2.75% in 2014.
Underpinning this optimism is one incontrovertible fact. There are 58,000 more people at work today than there were a year ago. That’s a hefty increase of 3% in the numbers at work. These are real people in real jobs that pay real wages.
If we can create an extra one thousand new jobs (net) each week in 2013 then Kenny and Gilmore may be right when they claim that a further 238,000 jobs can be created in the medium term, taking the rate of unemployment down to below 8%.
But there’s a problem. Rather, there is a series of problems. And unless the problems are resolved, then it is hard to buy into the official version.
Consider the following key issues:
- Consumer spending is flat as a pancake. Even Thursday’s CSO numbers showed ‘personal expenditure’ down again. Retail sales are on the floor, 2% lower in value terms than they were a year ago.
- Demand is so poor that we are suffering from effective deflation. The government is pushing up prices by raising college fees, by increasing health insurance costs and by imposing more tax on alcohol. Yet the rate of inflation is a derisory 0.3% and falling.
- Our exporters are selling into a relatively good market in Britain but the opposite is the case in the Eurozone where activity has contracted by an average 0.4% in 2013.
- Irish households are not convinced that good times have arrived. The affluent households are saving large amounts and paying off old debts. Household debt peaked at €204bn in 2008 and has been falling sharply since. The savings ratio remains above 10%. Other poorer households have hit a wall and 13% of mortgages are over 90 days in arrears.
- The government is draining the economy of cash. Marginal income is being taxed at 52%, or even 55% and there are new taxes on property and water.
- The banks have ignored all of the government’s instructions to provide credit to small firms and appear more or less indifferent to the public interest.
So where is the growth going to come from? Ideally the government needs three things: a big bounce back in building and construction, a surge in exports and a mood swing in the domestic economy that unleashes a wave of spending by Irish consumers.
Building has always been able to absorb huge amounts of low-skilled labour, and quickly. It’s becoming obvious that the Greater Dublin area has run short of houses and apartments already. But would-be builders cannot get access to development finance and would-be house buyers can’t get mortgage loans.
At its peak the output of new housing was worth circa €18bn a year gross. We won’t be going back there in a hurry but we could sustain building activity at about a third of this level. This alone would give a big boost to jobs and growth.
The government controls the supply of credit right now, it controls the planning system and it knows the scale of the housing problem. So why can’t it act in the public interest and crank up the building sector?
In relation to the very necessary mood swing recent good news is helping. But the government’s scorched earth tax policy is choking off demand at every turn. And it has failed completely to honour its promises on upward only rents.
Is the government running the economy for ordinary people and for business or is it pandering to risk-averse property owners?
The goody-two-shoes approach to economic policy won’t get us very far. This should be blindingly obvious to Kenny and Gilmore after last week’s blunt admission by EC chiefs that they never ever intended to help Ireland in relation to bank bailout costs as they promised they would in June 2012.