Monday, 31 January 2011

Off to a dismal start

Michael Taft: Even before the election has been officially announced, the debate has gotten off to a fairly dismal start. Yesterday, Labour’s Eamon Gilmore made the simple proposition that the target date for Maastricht compliance should be postponed until 2016. The reaction from Fianna Fail and Fine Gael has been extreme. You’d think Labour was proposing the end of capitalism as we know it.

Let’s get a grip on the real world. The IMF released an analysis of the Government’s four-year plan last December and assessed its potential to repair public finances. They found that by 2014, the deficit would be -5.1 percent of GDP (the Government is aiming for -2.8 percent). By 2015, it won’t be a whole lot better. The rate of deficit reduction slows to -4.8 percent. If this rate holds in subsequent years, Maastricht compliance won’t be achieved even by the end of the decade.

This shouldn’t be too surprising. The ESRI signalled that under a low-growth scenario, the deficit would still be below the Maastricht guideline by the end of decade.

So all Labour is acknowledging is what everyone knows (though only a few will say so publicly).

Why is this happening? Because the weight of the austerity programme is crushing growth. The IMF projects average annual growth up to 2014 to be 2.1 percent compared to the Government’s 2.8 percent. This lower growth projection will result in stubbornly high unemployment – estimated to be 11 percent in 2015 by the IMF. This burden, along with sluggish income growth, undermines the targets in the Government’s four-year plan.

John McHale refers to this in a thoughtful article in the Sunday Business Post. He posits three conditions to achieving debt stabilisation and regaining market confidence. First, a credible deficit-reduction plan; second, assurance that there are no additional losses on our banks’ balance sheets, and third, that nominal GDP growth ‘evolve broadly in line envisioned in recent IMF, ESRI and government forecasts’.

Regarding the first, we don’t have such a plan (austerity, as we have seen in the past two years, only deflates income and growth, but not debt); regarding the second – the markets continue to be wary and only the most stringent tests will assure them. Regarding the third point, however, we have a problem as the IMF, ESRI and government forecasts are telling us different things. Here are the latest nominal growth projections over the next two years:

Government: 6.8 percent
ESRI: 4.2 percent
IMF: 4.0 percent
EU: 4.0 percent

The IMF and EU project that nominal GDP growth will be 40 percent less than what the Government is hoping for. The ESRI’s projection isn’t a whole lot better.

But when it comes to GNP – the driver of most tax revenue and, therefore, the key to deficit reduction - the gap between the forecasts widen considerably.

Government: 5.6 percent
EU: 1.2 percent
ESRI: 0.8 percent
IMF: 0.5 percent

Now we can see why both the EU and IMF projections show the Government’s four-year plan will fail. Anaemic growth and high unemployment is a sure-fire recipe for high deficits and rising debt.

So when Labour calls for the Maastricht target deadline be postponed until 2016, all they are doing is taking a realistic account of the actually existing economy. Indeed, under current policy that deadline won’t be reached even by then.

If the argument centres on deadlines then it will be a dismal debate. Instead, what we need is a debate over a substantial and sustained investment drive (the only means to create sustainable growth that will translate into deficit-reduction) and alternatives to austerity measures.

That debate has yet to start in earnest.


Anonymous said...

The Labour rethink on timing is welcome, having criticised Sinn Fein for exactly the same timetable.

But means are also important, deficit-reduction achieved by growth, not savage cuts.

A rethink on that aspect of LP policy would be even more welcome and would pave the way for a thorough realignment of Irish politics.

Mack said...

I'm confused by this.

So the 2014 deadline won't be met.

Labour suggest a new deadline of 2016. That may be more realistic than the current one under the current plan.

But Labour presumably want more gentle fiscal consolidation.

Will their plan lead to meeting the Maastrict criteria by 2016? Or will it actually push the date out further still?

If it's the former, then why bother to publicly state they want to push the date further out? Why not just argue they have an alternative route to meeting the criteria by 2014?

If it's the later, aren't we in a big of enough debt hole as things are (with debt-to-GNP at 110% or so and rapidly growing)?

Michael Taft said...

Mack - certainly further clarification and projections will be necessary to prevent confusion. Does stretching out the target date to 2016 merely stretch out the €9 billion adjustment over that period (i.e. an extra €1 billion in 2015 and 2016?). Or are they shifting ground (which would be welcomed), to argue that the remainder of the deficit can be reduced through investment, growth, etc. without the need of the entire €15 billion package. I'm not sure if that has been clarified.

The concern I would have is that the IMF projects that the deficit will be reduced to only 4.8 percent by 2015 under the Government's 4-year plan; but they admit that projection has a number of risks. Is Labour saying that they can go reduce the deficit to 3 percent by 2016 under the same programme - with an additional year? If the programme can't succeed by 2015, why would it succeed by 2016? Clearly, there must be another string to the bow. Hopefully, the conclusion will be cleared up by Labour well before election date.