Cowen plays politics with the economy
By Jody Corcoran
Sunday October 21 2007
The Government’s intention to abandon many of its General Election promises, including a cut in the top rate of income tax, lies exposed today as entirely unjustified.
Minister for Finance Brian Cowen is now open to the accusation that he has become a “doom and gloom” merchant following the publication of new expert analysis which finds “no rationale whatever” for the pessimistic economic growth outlook offered by him last week.
The Government’s General Election promises were predicated on sustained economic growth.
Last week, Mr Cowen dramatically revised his growth predictions in a downbeat outlook which gave rise to reports that the Celtic Tiger was dead.
It seems nothing could be further from the truth.
New expert opinion, published on Friday, has seriously questioned Mr Cowen’s analysis, with a leading firm of economists baldly stating that a “tough Budget is hardly justified” in December.
Suspicions are now growing that Mr Cowen may have played down expectations as part of a cynical strategy to help Fianna Fail win the 2012 General Election with himself as the new Fianna Fail leader.
It is difficult to explain the gulf between the growth predictions of Mr Cowen and those of NCB, one of Ireland’s leading independent securities firms.
The Minister for Finance is predicting a growth rate of 3.5 per cent in the run-up to the election; NCB says it will actually be 5.5 per cent.
Although the numbers in Mr Cowen’s outlook were supposed to be based only on the cost of maintaining current services levels, they actually contained substantial unallocated or contingency provisions.
For 2008, these come to over €2.5bn, for 2009 it is nearly €4bn and it rises to over €5bn in 2010.
These allowances are four to five times what would, in the past, have been pencilled in.
Two years before the next election, therefore, Mr Cowen may have a €5bn war chest which many suspect Fianna Fail will use then to try and win a fourth successive term.
The Minister for Finance and the Taoiseach, Bertie Ahern, have repeatedly lashed out of “doomsayer” economists, such as celebrity experts David McWilliams and RTE’s George Lee, for effectively predicting the end of the Celtic Tiger.
This summer, Mr Ahern showed his exasperation when he said he “did not know why people who moaned and complained about the economy did not commit suicide”; he also accused such economists of knowing “nothing about nothing”.
He subsequently apologised for the suicide remark, although he and Mr Cowen have spared no opportunity, either before or since, to criticise the many economists who have been predicting the boom years are at an end.
As experts argue that Mr Cowen, in his Pre-Budget Outlook last week, may have significantly overstated the economic downturn, his motivation is being questioned.
The Department of Finance is normally downbeat in advance of budgets, to dampen the expectations of ministers and the public. But it is now being asked if the gloomy outlook painted by Mr Cowen last week was politically inspired.
The Minister for Finance argues that his assessment of a gloomy economic forecast is based on a downturn in the construction industry, rising oil prices and the euro/dollar exchange rate.
But cynics are questioning whether this assessment was, in fact, part aimed at helping him secure the leadership of Fianna Fail when Mr Ahern stands down before the next General Election, and to help Fianna Fail win that election.
This is hotly denied by the Minister.
However, Mr Cowen, regarded as the “anointed one”, must hope his stewardship of the economy throughout the somewhat overly hyped difficult times ahead will guarantee him the succession. But he runs the risk that a cynical electorate may be in no mood to forgive the heir apparent if he reneges on, or postpones, Government promises when there was no pressing need to.
Yesterday, a spokesman for the Minister denied any political motive. He said the unallocated provision in the figures this week was a “technical provision”, and that full details of all expenditure, including that provision, would be set out on Budget day.
He added that the published figures would be revised again in the Budget when “we see what happens” in the final quarter of the year.
Mr Cowen’s argument is that tax receipts will be about 2 per cent below the 2007 Budget day target.
The shortfall is largely accounted for by lower than expected receipts for stamp duty, capital gains tax and VAT, reflecting the change in the residential property market.
Anecdotal evidence suggests that house sales have stagnated; one leading estate agent told the Sunday Independent last week that “fluidity” in the market has returned to the levels of 1988.
Another interest rate cut in the US is expected by December at the latest, with a rate cut in the UK anticipated in November.
The European Central Bank will probably wait to see what happens in the new year, but the chances of a cut here, too, are rising.
Mr Cowen, however, remains opposed to any reform of stamp duty, which would give much needed impetus to the residential property market here.
Immediately after Mr Cowen’s downbeat assessment last week, Fine Gael finance spokesman Richard Bruton said the Minister for Finance should “implement real stamp duty reforms to ease the tax burden on growing families and recognise that this is the right time to introduce a fair and properly structured reform of this inequitable tax.”
But in reply to a series of questions from the Sunday Independent last week, Mr Cowen seems not for turning on this issue.
Although, intriguingly, he did say: "Speculation and uncertainty about stamp duty has a negative effect on the housing market.
“It is my long-held view that, as Minister for Finance, it is neither appropriate nor responsible for me to speculate or discuss what I will or will not do in regard to stamp duty. The market reacts to whatever the Minister for Finance says, and I do not want to do anything that would disrupt the market.”
Mr Cowen’s outlook, published on Thursday, contained some significant downward revisions in the Department of Finance’s economic forecasts compared with those published last December in the 2007 Budget.
GDP growth this year is now put at 4.75 per cent rather than 5.3 per cent; for 2008, it is forecast at 3.25 per cent instead of 4.6 per cent, while growth in 2009 is projected to be 3.5 per cent rather than 4.1 per cent.
Mr Cowen forecasts a 4 per cent growth rate for 2010, a forecast not previously published for that year.
On Friday, NCB said: “In our view all of the revisions are in the wrong direction.”
It said: “The GDP forecast for this year compares with a 6.7 per cent growth rate actually achieved in the first half of the year, and implies an implausibly sharp slowing down in the second half, the evidence for which is entirely lacking in the data available for the period since mid-year.”
NCB predicts growth in 2008 will be slower than for this year, only because of the absence of SSIA spending.
But beyond 2008, NCB says Mr Cowen “offers no rationale whatever for the downgrading of its growth expectations”.
It states: “On our estimates, the current sustainable trend rate of GDP growth in Ireland is around 5.5 per cent and growth in 2009 and 2010 should revert to that pace after the temporary – and largely accounting-based – slowing in 2008.”
In fact, Mr Cowen did offer a reason to support his gloomy prediction.
He claimed lower output in the new residential housing market was expected to affect overall growth rate in the near-term.
He also pointed to the combination of higher interest rates, the current level of oil prices and the appreciation of the euro-dollar exchange rate.
But his analysis, particularly in relation to new residential housing market – the only factor over which he has control – has been questioned by two other leading economists, Davy and Goodbodys.
In a week when most other markets managed decent gains, the ISEQ ended the week nearly 30 per cent off its pre-summer high and is just 6 per cent off the low point reached in mid-September; CRH fell by 10 per cent last week, when European building stocks were down less than 2 per cent, and Irish banks were off 8 per cent when European banks were off 2 per cent.
These concerns mainly focus on the emerging downturn in housing output in Ireland and the consequences for the construction industry as a whole as well as the broader economy.
But the importance of the sector needs to be put in context; construction output accounts for about 12 per cent of GNP, and new housing output accounts for about 6.5 per cent of GNP.
Davy is forecasting 55,000 completions next year, but still sees GNP growth of nearly 3 per cent; Goodbodys is predicting 60,000 completions.
Last year, the growth in new housing output slowed to 3.3 per cent, yet GNP growth was still a very strong 6.5 per cent.
According to Davy, this implies the rest of the economy expanded by 6.7 per cent, the quickest rate of expansion since 2000.
Even with some weakness in new housing activity, therefore, the economy is in very buoyant condition.
