Dáil Éireann Debate, Thursday - 26 September 2019
7. Deputy Thomas P. Broughan asked the Minister for Finance if he has carried out an appraisal of an analysis by the Irish Fiscal Advisory Council (details supplied) of possible overheating in the economy here; and if he will make a statement on the matter. [38989/19]
View answerThe outcome of Brexit will be a major consideration in framing the budget.
I ask the Minister specifically about page 17 of the report of the Irish Fiscal Advisory Council, IFAC, where the council lays out elements of the economy it feels may be overheating. Most people do not recognise this. They see an economy that is slowing and a growth rate that has halved. What is the view of the Minister's Department on this matter?
I have set out on a number of occasions my view that the economy is closing in on full employment and might be on the verge of overheating in the future. I have also tempered this view with the fact that an adverse shock to the economy such as a disorderly Brexit would rapidly change this assessment. This was reflected in the question the Deputy has just put to me. He acknowledged that there are signs of change as we get closer to seeing what Brexit will bring for all of us.
Our economy is in good condition. This is, perhaps, most evident in the fact that the unemployment rate is now just above 5%. More broadly, other indicators associated with overheating such as credit growth, the balance of payments, and consumer price inflation, are not suggestive of a trend towards overheating.
That being said, IFAC's heat map illustrating potential imbalances is a useful tool. However, before any of us can diagnose overheating in the economy, we need to be much clearer on the deflationary and growth-slowing effects Brexit may yet bring about.
The ESRI report published yesterday points to the danger of recession in the event of any kind of disorderly Brexit. This seems incongruous with IFAC's report. I still support the council's criticism of the Minister's medium-term management of the economy. It was vociferous in that regard last year. We see factors such as the delivery of housing, where we still do not have one quarter of the output we had in the period from 2003 to 2008; the allied horrendous problem of homelessness; the astonishing waiting lists for healthcare, where up to 1 million of our citizens are waiting; the significant deficits in public transport infrastructure; and the external environment. The Committee on Budgetary Oversight is publishing its report to the Minister and Government today. One of the issues it addresses is the global economic slowdown and the fact that Germany seems to be on the verge of recession and so on. IFAC's views are misplaced in this regard.
As I understand it, the section of the report in question refers to potential imbalances in the economy that could lead to overheating. As I have told the Deputy, if the economy was to overheat - a case he is not making - measures would have to be considered with regard to credit and spending within the economy to slow down such overheating. I am strongly of the view that we need to be clear on the effects Brexit will have on our economy before we get to any such point. The Deputy referenced the quarterly report of the ESRI published last night or this morning. Its growth forecasts are broadly in line with the forecasts I published for a no-deal scenario. It is indicating that, in the event of a no-deal Brexit, our economy's annual growth rate will probably be 1%. In the latest set of figures I published - I have updated the figures throughout the year - we indicated that the growth rate will be approximately 0.7%. I have been open with the House in publishing my own analysis on the effects of a no-deal Brexit. The ESRI figures are similar to that analysis in some respects.
The IFAC report mentioned issues such as the high levels of non-residential construction, inflationary pressures, a tightening labour market, and so on. It does not, however, seem to show an output gap close to zero. In fact, the areas of the economy in that we may need a stimulus - which may be significant depending on the outcome of Brexit - remain blue on the council's heat map. The external factors are significant. Depending on how Brexit evolves, we may be more integrated with European economies. The figures set out in today's report of the Committee on Budgetary Oversight illustrate the somewhat dismal prospect that those economies may be stuttering along or verging on recession. Even on the basis of the Minister's figures, it seems our own growth is destined to be even lower in 2020, even if Brexit does not occur.
We have said that if there were to be a deal, the growth rate in our economy would be approximately 3%. The ability to sustain a growth rate of 3% over a number of years could make a significant difference to our country and to our citizens and would help to address many of the issues the Deputy has raised. Growth has moderated during the lifetime of this Dáil. It was at a very high level as we exited the bailout programme and continued at such a level for a while. A more moderate rate of growth that can be sustained for longer is what is best for us. If a no-deal Brexit was to be avoided, if the economy was to grow at a rate of between 2.5% and 3.5% a year, and if normal, sensible decisions were made about how we manage credit and spending, this Government and future Governments would be able to make a big difference in respect of many of the issues the Deputy raised.
