Thursday, 18 March 2010

Ireland still off course on deflationary path to nowhere

Slí Eile: The assessment by the European Commission makes for chilling reading.
It states:
… Despite five consolidation packages adopted since mid-2008, these developments have also produced a dramatic deterioration in the Irish public finances, with the general government balance moving from a surplus position in 2007 to a double-digit deficit ratio in 2009 and government debt exceeding the 60% of GDP reference value in 2009.
The statement goes to confirm the need to reach a Government deficit of less than 3% of GDP by 2014. The Irish authorities are urged to press ahead with measures to raise taxes or cut spending or both. Either way, it is a position of continuing deflation as GDP – and with it tax receipts – are in freefall. Yes, freefall. The real value of GNP in the third quarter of 2009 declined by 15% in real terms compared to the total for the same quarter in 2008 (Deflation can be as great a danger as our surging deficit). With public spending set to rise or hold its own simply due to demographics or social welfare payments arising from increased unemployment Irish macro-economic and fiscal policy is not in a pretty place.
The Commission give an important clue about what we might expect in the next budget (which could be any time between June 2010 and December – I would guess closer to the June end unless there is a general election in the meantime). It states:
With a view to improving the long-term sustainability of public finances, reforming the pension system is another important challenge.
There you have it. Pensioners survived the 2010 Budget relatively intact (OK the Christmas bonus went). Next time it is their turn. Nothing is ruled out including:
  • Further cuts in nominal public sector pay
  • Further cuts in social welfare payments and tightening of rules
  • Further cuts in capital spending and cancellation or postponement of major projects
  • Further cuts in programme spending with implications for health care, education, research, local services
  • Further ‘levies’ and service charges (water etc)
And yet, all of this may not be enough to placate the market gods. Moreover, all existing projections assume (naively):
  • (explicitly) significant early turn round in the world economy(i.e. no double-dip)
  • (implicitly) no major recapitalisations of our glorious banks
  • (implicitly) emigration as a safety value to contain social discontent (and the high fiscal costs of unemployment and associated social costs)
  • (implicitly) widespread social acceptance of this purgatory as a necessary evil to bring us to a better place.
The latter assumption will only hold true as long as most people take the view ‘I don’t agree with it; I don’t like it; but what can we do?; there is no alternative.
But, when people begin to realise that the strategy – if it could be called that – is not working and is not delivering jobs, remission of debt but is, instead, piling up debt and permanent loss of human skills and dignity – then there will be serious trouble and serious questioning of all that we assumed and relied on up to now.
At some point, someone, somewhere in high authority is going to say ‘this isn’t working’ – the deficit is stuck at such and such a percentage well above the 3% target set of the EU and agreed by the Government, here. Moreover, there will be political realities to address including noisy people on the streets. Large surplus & capital-lending countries will find it near impossible to back down.
I can’t see any chance whatsoever of Government, Unions and EU commission agreeing on an approach to reducing pension liability – which is what the coded quotation, above, is about.
In common with the Dublin consensus, Brussels sees the achievement of competitiveness as the key to recovery. This will be made up of cuts in wages, cuts in public spending (and therefore services) and investment in skills, R&D and new infrastructure (the sugar on the pill).
I am not clear on what is meant by the following sentence: ‘a modest package of stimulus measures to support economic activity of 0.7% of GDP in line with the European Economic Recovery Programme (EERP).’
However, it is clear that given the overall deflationary stance of fiscal policy since late 2008 talk of a stimulus is not in accord with what is going on. Rather, some redirection of spending within the overall total may be viewed as a stimulus. But, I would like to see more transparency around that claim.
The commission estimate that the (negative) impact on GDP arising from fiscal adjustment was 3.25% in 2009 and 2.5% in 2010 (page 7)
The Commission points to lack of appropriate data on many aspects of the consolidation programme. In particular, they go on to point out that the revenue and expenditure projections in the outer years are of an indicative nature and the consolidation efforts in these years are not underpinned by broad measures.

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