In this NERI blog, NERI Co-director Dr. Tom McDonnell summarises the main points of his latest NERI Report Series No. 25 - 'Full employment now, but enormous challenges ahead'.
Employment growth has been very strong over the last year. We are at record employment, a record rate of female employment, and record hours worked. The economy is now close to full capacity if, perhaps not, overheating.
Even so, economists at the NERI note that the post-Covid tail-wind to demand has now petered out. Household savings have normalised from their Covid-era high. The outlook for the next year or so is therefore more muted. In particular, the tightening of monetary policy and weak consumer and business confidence will dampen consumption and investment.
Nevertheless, modified domestic demand should grow by close to 2.5% next year, while employment should increase by close to 1.5%. The unemployment rate should remain very close to 4% and to full employment. But this analysis is predicated on:
A) No further tightening of monetary policy
B) Modestly stimulatory fiscal policy
C) A return to real wage growth as price inflation tapers down, and
D) That growth in real disposable household income supports domestic demand via higher consumption
However, the Irish economy and society more generally are facing a series of enormous challenges over the medium-to-long term. These challenges include but are not limited to:
1) Ageing demographics and slowing growth
2) De-globalisation and changes internationally to industrial policy and to FDI patterns
3) Disruption from climate change, from climate action and from biodiversity loss
4) Technological disruption from automation and from new general purpose technologies such as Artificial Intelligence
These changes will alter consumption patterns, economic tasks, and labour market opportunities and returns. Policymakers need to take a strategic approach to these challenges, including through reforms to labour market policy, industrial policy, and education and skills policy. Just transition principles will need to underpin our response to each of these challenges.
Budget 2024 represents an opportunity to plan for these mega-challenges. An expansionary budget makes little sense at this time and would be pro-cyclical. Particular caution is warranted around regressive tax cuts. The immediate focus should be on ensuring income adequacy for vulnerable households – we need to reverse the surge in deprivation seen over the last year. However, universal and/or once-off supports are unnecessary and in many cases likely to be badly targeted.
We need to move away from year-to-year tactical and political budgets to a process of multi-annual budgeting focused on long-term strategic economic and societal goals. The windfall corporation tax receipts should be saved into a series of funds to:
A) Help offset future ageing costs
B) Ensure capital investment is maintained and protected over the economic cycle in order to address our many infrastructure deficits and in particular to invest in the green transition, and to
C) Ensure sufficient and consistent funds are available to support public investment in housing in order to address the chronic market failure in that sector
Finally, monetary policy should take care not to push the European economy into a recession and the ECB should now pause the cycle of monetary tightening before it is too late.
The following media articles were put up today regarding the NERI Report Series No 25 'Full employment now, but enormous challenges ahead'.
RTE - https://www.rte.ie/news/business/2023/1006/1409217-neri-expansionary-budget-makes-little-economic-sense/
Irish Independent - https://www.independent.ie/business/irish/budget-tax-plan-makes-no-economic-sense-says-nevin-economic-research-institute/a1883404905.html
Irish Examiner - https://www.irishexaminer.com/business/economy/arid-41241511.html
Irish Times - https://www.irishtimes.com/your-money/2023/10/06/neri-warns-against-budget-tax-cuts-in-face-of-long-term-spending-mega-challenges/