Boom & Bust is over? Don’t bet the house on it
Brendan Howlin said today that he believes Ireland has broken the ‘boom and bust’ cycle in economics. Forgive me for not holding my breath. It reminded me of when politicians said that, despite all the evidence from housing booms all over the world, Ireland was different and would have a ‘soft landing’. We are not really that different from everybody else. More to the point our politicians are just as vulnerable to the cardinal sin of believing their own hype.
You see we have been here before. From ’73 to ’86, successive governments made a mess of things and compounded an international crisis. The main factor was ‘borrowing’. Heed that word. It was the buzz word in Irish political circles for over 30 years. Eventually, things began to change. After ’87 borrowing was brought under control. This was followed by tax cuts and that made sense. If you are able to reduce your borrowing and pay your bills then you can afford to cut taxes to create a stimulus. A proper stimulus, not like the 1977 botched attempt.
Fianna Fail bred a generation of politicians for whom borrowing was the litmus test of everything. In fact in 1994 there were many of them who were worried about what FG and labour might do in government. They believed that all the good work on borrowing would be lost. They were wrong. FG and Labour showed that they too knew the importance of never returning to high borrowing. The economy continued to grow and thrive. FF returned to power and though spending was increasing it was doing so at a time when borrowing was still falling.
Here is the problem. In 2002/2003 there were a lot of calls for Ireland to improve its services and infrastructure. These calls argued that it was necessary and given that Ireland had such low borrowing figures it could now borrow for capital purposes and help fuel the economy. To FF this was heresy. They did not listen to these calls. Now you might be starting to get an insight into the FF mind at the time. They saw themselves as being the responsible voice against borrowing to fund things. FF believed that the only thing required to be a good government was to not have to borrow large amounts and to not be FG/Labour.
A property boom fed the economy like a goose laying golden eggs. The government saw astonishing surpluses of cash year on year. These surpluses were used to drive spending and meet demands. To FF this was sensible economics. They were not going mad borrowing like in the ’70s and ’80s. They were raising money and paying for stuff. This obsession with borrowing made them blind to the fact that there are other parts to a balanced economy. It was also an obsession that kept leading them to compare what they were doing with what FG/Labour might have done in the past. This made them foolishly scoff at criticism.
We all know what happened. We reduced taxes every year and increased spending like no tomorrow. However, it was spending based on unsustainable income. Eventually the cash would stop and what then? Where were we going to get the money from to keep going?
The point of all this is that borrowing has been replaced by a new buzz word ‘property’. Now we have a government that believes the only thing necessary for good government is to control property and not be FF. Replacing stamp duty with a household charge is not an answer. The income from it will still fluctuate with house prices and governments and local authorities will increase it and decrease it to get revenue or gain popularity depending on what the books look like.
We can already see how talk of changes to levels of property tax is gaining popularity. Income tax remains our best source but while we decreased it dramatically in the last 25 years we are still determined to decrease it more. Why? because its popular. We will tell ourselves it’s all affordable because now we are not having a property boom. We are doing things right.
House prices will go up. Politicians will say that they are ‘monitoring’ the situation. Revenue will increase and politicians will be rushing to spend it. Right now we are already ignoring international advice about our budgets and looking to ‘ease the burden’. We are doing this while blissfully ignoring the fact that our borrowing problem is now back with a bang.
So no, I don’t believe that cyclical economics is over. At the height of the boom FF politicians were convinced they were doing the right thing. They would never even consider halting the cash cow because that would mean job losses, cuts in services, and lots of annoyed voters. Niall Dowd (@zylon9) on twitter is a man I disagree with on pretty much everything in the world. This morning he did point out however, that no politician would ever stop a boom as to do so would be political suicide. He is correct in that.
Cyclical economics is not gone away. We are merely at the start of a new cycle. There is time enough for this crop of politicians to have departed the scene by the time we get to the next peak never mind the next crash. A decade ago we were told the boom got boomier. Today the gloom is less gloomier. That’s about the height of it.