Michael Taft: It is frustrating that so much debate about the economy is informed by denial (the insanity of the speculative boom was denied for years and then we heard the chants: ‘soft landing, soft landing’). It is further frustrating that Government Ministers and so many commentators refuse to engage in an open and honest dialogue about the problems that lie ahead (we will return to the markets, all is well). This despite the fact that independent forecasters are lining up with depressing projections: low growth, missed targets, high debts – and, yes, the growing prospect of a second bail-out, 'ludicrous’ as that might sound.
Let’s take a tour of what some of these forecasters – NCB, Goodbody and Davy - are estimating, bearing in mind they are only projections based on the current situation.
NCB and Goodbody (not available yet on-line) are a good place to start as they stretch out their projections to 2015 (click graphic to enlarge).
Both the forecasters are projecting growth rates at substantially less than the Government. This will entail lower tax revenue and higher unemployment costs – so much so that they are projecting that the Government will miss the Maastricht target by 2015 – miss it by a substantial amount.
Further, they are projecting debt levels to be higher than the Government’s estimate. Overall debt levels haven’t got as much attention as they should – despite Richard Tol’s warning about a decade of austerity. The debate is obsessed about meeting the EU-IMF programme targets and the Maastricht target of -3 percent. However, higher debt levels undermine debt sustainability and increase interest payment costs – key indicators that international markets examine when considering whether to lend to a government (and at what rate).
Taking our eye of this ball could be costly. For instance, the Government revised growth projections downwards three times since taking office (yes, three times). They ramped up the level austerity over what Fianna Fail had planned. And all with a view to hitting the 2015 Maastricht target. And, yet, they had to revise upwards their projections for overall debt levels – three times. And that’s with the benefit of the €3.6 billion mistake, interest rate cuts from the EU-IMF lending facility, and less bank capitalisation than previously projected.
The difference in debt projections is not just a number on the page. It could amount to substantially increased interest payments – between €300 and €400 million a year by 2015 and growing, using the NCB projections. And even when (when?) the Maastricht target is hit, we will be looking into years of further austerity to reduce these high debt levels.
Davy projects only up to 2013 – but these are no less grim for that. For 2012 and 2013 combined Davy projects:
• GDP growth at 2.0 percent (the Government: 3.7 percent)
• GNP growth at 0.4 percent (the Government: 2.4 percent)
Davy estimates the Government will miss its deficit target – in both 2012 and 2013 as a result of lower growth. This will lead to debt rising to 122 percent of GDP – in line with the other forecasters.
And to make things more unnerving, Davy admits there is a ‘significant risk’ that GDP growth will undershoot even their pessimistic projections – with all the consequences that would have for our debt levels.
Of course, this may not happen. These forecasters may have got it wrong. Maybe the Government has a handle on the situation and has contingency plans for a fall in external demand (though, I suspect, their plan – if they have one – would mean further measures to depress domestic demand further; and down the recessionary rabbit-hole we go).
But to call this scenario ‘ludicrous’ is hardly a response to instil confidence. A better strategy would be to assess whether the current strategy is working, is likely to work. And, if not, start debating an alternative approach – and invite people into an open and honest discussion.
That is the best way to restore confidence in the Irish economy.