October budget must be shaped by external risks, not local needs

At the annual Ploughing Championships this week, considerable dissatisfaction was expressed about the plight of farmers and many of them suggested that the Government was not doing enough to help them in a

difficult year.

It is, indeed, a difficult year for farmers and could become considerably more difficult over the coming months. However, this is due to weather and is certainly not the fault of the Government.

It was a very long and difficult winter; many farmers ran out of fodder. This was then followed by a very dry summer, particularly in the south-east.

Silage yields are likely to be down and if a smaller silage harvest is combined with a very low level of fodder stocks, carried over from last year, it could be a challenging winter.

Another bad winter will be enormously difficult for farmers and could cause serious financial difficulties for those who have invested heavily in dairy expansion, for example.

Then, of course, there is the added dimension of Brexit. We still have little idea as to how this will unfold, and while the suggestions are that a compromise deal will be achieved, the agricultural sector is — by a country mile — the most exposed part of the economy, in the event of anything other than a very soft Brexit.

Not surprisingly, the view of many farmers is that Minister Donohoe should open the purse-strings and help them through their difficult times.

The problem, of course, is that every other interest group across the economy will be looking for more money, with the overruns on the health side of particular concern.

It is blindingly obvious that Minister Donohoe will find it a real challenge to balance the insatiable demands for more resources with the reality that those resources are extremely limited.

The external risks to the Irish economy will have to be the guiding principle for the minister, in framing Budget 2019, rather than sectoral interest groups.

The IMF issued a pretty stark warning this week about the impact of a ‘no deal’ scenario for the UK economy.

However, it also stated that all the likely Brexit scenarios will have costs for the UK economy.

As the single-most-important export market for indigenous Irish exporters, the risks to the real Irish economy are very clear and very stark.

Last weekend, Nouriel Roubini, who is a professor at NYU’s Stern School of Business, and a guy who proved very prescient a decade ago, issued some pretty stark warnings about the real risks to the global economy.

He cited a number of risk factors, including the unsustainable nature of US fiscal policy; an overheated US economy and the consequent upside for US interest rates; rising inflation and interest rates in other economies; Donald Trump’s trade dispute with China; fragile emerging markets; the debt dynamics in the eurozone and the still incomplete monetary union; and the vulnerability of frothy equity markets.

His key point is that in the event of these risk factors feeding through to economic difficulties, policymakers will not have much ammunition in their arsenals to tackle the problems, unlike a decade ago, when sharp interest rate cuts, quantitative easing, and fiscal expansion were all possibilities.

There is limited scope for any of these policy options today.

He concludes that “when it comes, the next crisis and recession could be even more severe and prolonged than the last”.