Nat O'Connor: It seems to me that there is some confusion in the way in which international factors on Ireland's deficit are presented to the general public in the media. In particular, the 'requirement' that Ireland's deficit is reduced to three per cent of GDP by 2014 seems to be confused with the issue of whether it may be too expensive for us to borrow from the bond markets early next year. The financial institutions that lend money to countries (i.e. the 'bond markets') do not care whether Ireland reaches three per cent of GDP by 2014, provided we can show evidence of an ability to repay our borrowings. But in terms of providing this evidence, the deadline for satisfying these lenders may well be early 2011, not end-2014.
Those who are offering to lend money to Ireland at the moment (at high rates of nearly eight per cent) are taking a chance on making big money on these loans; balanced against a heightened risk that this or the next Irish Government will decide not to pay back the loan - or only pay back a portion of it. However, they are not crazy. They would not lend to Ireland (except at extortionate, short-term rates) if they thought that it was highly likely that we would default on the loans. So, we are still in a position where some of these large - and coldly calculating - financial institutions think that they can make money. (That is, they are confident that we will pay back the loans, or at least enough years of interest, to make it worth their while taking the risk). Unfortunately, not enough of them are interested in lending to Ireland, hence we would have to borrow at nearly eight per cent from the small pool of risk-takers who are willing to lend.
However, the institutions that might consider lending to Ireland at lower rates are not necessarily the same financial institutions that would lend at higher rates. Some institutions make more conservative lending decisions, while others go for more risky investments. This is an oversimplification, perhaps, as most will have balanced portfolios, but it hopefully illustrates the point that not all participants in the international bond markets are clones.
The more conservative institutions operating in the bond markets want to see more evidence of ability to pay. That is, they want evidence that Ireland has moved into a period of economic growth that can be sustained. And they want evidence that tax revenue is stable. And they certainly want to see public expenditure reduced over time to what the state can afford, based on its revenue. However, as long as there is evidence that the state is on a sustainable path, it doesn't matter whether it is 2014, 2016 or 2020. All that matters is that Ireland is on a stable growth trajectory and can show that it will be able to pay back the money.
Meanwhile, there is another part of the bond market that Ireland must also satisfy. That is those institutions that have already - in better times - lent money to Ireland. (Much of our borrowing is at 3 or 4 per cent interest). Like the conservative financial institutions that will not currently lend to Ireland, those who have already lent to us very urgently want to see evidence of ability to pay! They want to see a credible growth plan, because they are not even benefitting from especially high interest rates on what have become risky loans. Some of these institutions may be the same ones that might lend more money to Ireland in future, but only if presented with evidence of growth.
Finally, there is the EU dimension to all of this. The EU Stability and Growth Pact is a political agreement made between all Eurozone countries. Our Government have pledged to return our deficit to 3 per cent by 2014. This is a political decision. It was perhaps a necessary decision in order to persuade the European Central Bank to assist Ireland by buying some of our bonds, and accepting the IOUs we gave our banks to cash in. But it is only one of the many political compromises we make in Europe all of the time. Much EU business is done by consensus within the Council of Ministers. There is certainly scope for Ireland to gain compromise on this target, with the support of other Eurozone countries who are also in danger of missing the target.
However - and this is where the more immediate bond market question gets mixed up with the EU 2014 question - if we think that our economic strategies are not going to deliver growth, and therefore the international bond markets will not lend to us at a reasonable rate, we have to remain on reasonably good terms with the ECB, so that they will buy our bonds and, ultimately, bail us out with the EU-IMF fund, if the worst comes to pass.
Ironically, the effort to satisfy the EU by aiming for a deficit of 3 per cent by 2014 - in case we need EU help - is likely to make it more likely that we will need to avail of emergency assistance! That is because our sequence of severely contractionary budgets (and a further €6 billion in cuts and taxes planned for December) is shrinking the economy, cutting or even killing growth, and making it less likely that the more risk-averse parts of the bond market will lend to us.
How do we get out of this bind? The answer is simply that we need to deal with 2011 before we deal with 2014. The issue in 2011 is whether Ireland has a credible growth strategy, which will persuade more international lenders to lend us money at a more reasonable rate. The only way that this can be achieved is by a smart combination of tax changes, expenditure changes and measures to foster growth and jobs.
Crucially, Budget 2011 is effectively Ireland's last chance to change direction. The Government has the option of spending sufficient money from the national pensions reserve fund (NPRF) to offset some - or maybe even all - of the contractionary effects of increased taxation and reduced expenditure in 2011. We do still need to lower the deficit by a combination of tax and spending changes. But we also need to boost jobs, boost aggregate demand, and boost economic growth.
At this stage, a number of commentators have made the same observation and a range of bodies have put forward credible options for boosting growth in the economy. Without getting into the pros and cons of the different approaches - and there are profound differences - there are many options that Government could take:
- TASC proposes a €3 billion Economic Recovery Fund in 2011 including a credit guarantee scheme for small businesses and rollout of next generation broadband (which would be labour intensive);
-ICTU calls for a minimum investment of €2 billion per annum, over three years, to be spent on a new water and waste network, retrofitting energy inefficient buildings, educational buildings and broadband (with options to bring in private finance, as well as using NPRF money);
- Fine Gael propose a major state-led investment of €18 billion through their NewERA proposals, funded through selling state assets;
- Labour wants to create a Strategic Investment Bank to invest €2 billion (initially) in SMEs and raise finance for infrastructure;
- Sinn Féin proposes a 3.5 year stimulus, using €7 billion from the NPRF (€2 billion in 2011) to invest in a revised National Development Plan, including remediating the water network, extending and rolling out broadband. Also a 'cash stimulus' through welfare, which would boost aggregate demand in local areas;
- IBEC have stated that only growth will solve the fiscal crisis. They call for limiting cuts to capital investment, reviews to ensure all new government policy and legislative initiatives support employment, a radical overhaul of the public employment service, an ambitious national internship programme and the continued PRSI reduction for employing people who are long-term employed;
- ISME "warns of Government complacency on jobs". They claim that businesses are "handicapped by a reduction in consumer demand exacerbated by exorbitant costs, late payments and a difficulty in accessing bank credit";
There is a broad and growing consensus on the economy. That consensus is on the need to change direction, and focus on jobs and growth.
And this is recognised internationally. Paul Krugman notes the 'experiment' (and here also) that Ireland's austerity resulted in a worse result than Spain's attempts at stimulus. Joseph Stiglitz has claimed that Europe "made a wrong bet with austerity". In particular, Ireland’s struggle to revitalize its economy after the country’s worst recession on record shows the risks of focusing on deficits. "The belief that markets will get new confidence has been shown wrong" by Ireland’s austerity drive, Stiglitz said.
If the Government continues to monomaniacally focus on cuts and taxes, and refuse to present a credible growth strategy, it will bring us much closer to requiring an EU-IMF bailout, allow further collapse in the economy and cause unnecessary hardship for many people.