Tuesday, 17 January 2012

If we don't talk about it, nothing bad will happen

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.


Martin O'Dea said...

In truth Michael, I am amazed at your resilience and other regular PE bloggers, when I see something patently wrong, if I can't fix it, normally, I get frustrated, spike my blood pressure, I assume, and run away. But you have continuously made these arguements here for three years now, have given the statistics to support your arguments and we have witnessed the excruciatingly slow turning of general opinion and commentators from where positions of anything other than severe austerity, was 'ludicrous, 'not serious', and 'treasonous' to eventually being accepted as right in theory but not applicable in the financial position we are in, what with the truckias, and the indeath edness, the empty atm machines and hospital life supports having the electricity turned off.

The harsh reality for our politicians is that they still govern us. They need to take a breath from trying to appease their masters (2008 perhaps this would be risky etc. but the country is drifting backwards there are real tragedies occurring right now, and just because you say we are getting there etc this does not stop a young family emigrating with 400k of debt and a justified detestation for their country) and move from this appeasement to speaking with authority, 'this is what we are going to do' - would be a great start, rather than premising everything on what we can't do.

If the control is that certain from Europe, and clear in what it is doing and what can't be done, why was I listening to a member of Angela Merkel's party on Pat Kenny this morning (obviously briefed strongly as a European and German rep on Irish airwaves trying to keep Irish on board) lay out all the usual fallacies about market and debt repayments etc, in what seems a perfectly reasonable manner to those who remain with eyes closed to everyday occurrences and who assume that continuing on current path is tough but ok - - but in the middle of this someone mentions extending repayments over perhaps half a century and encouraging inflation to offset debt etc. The response was - well, yes, this might be considered for some of the debt!!

Hold everything I thought - you can't talk like this about these subjects, surely. This translates to:

We might do that, in fairness to us we are looking at that - I mean we are not completely unreasonable you know; now we won't do it for all the debts because the logic expires beyond a certain point - well no it doesn't - but we need to show that while we are reasonable we can't just give you everything you are talking about, here...
OR 'off the cuff ya i guess we could keep sna's, schools and hospitals open, hope in disadvantaged communities, security in workplaces, societal detachment and criminal activity reduced, we could ya but we will have to see on that one'.

These are ridiculous conversations to be even listening to - not to mind Pat returning to Pascal Donohoe with 'now isn't that great phew, here what the greman guy might allow us', and Pascal responding with 'as per my programming let me begin with: well let me first say that the government is more righter here again and I will return to what you are talking about after - what were we talking about - oh ya, debt delay well of course as you know the government invented this originally on a night of a full moon......

Martin O'Dea said...

These things they talk about happen to be in the region of maybe 3 billion a year. Does it really need discussing that you do whatever it takes - there is no place for these ridiculous conversations. Financial economies merely enable real economies by allowing a bridging of a temporal anamoly between investment and return. real political leadership tells the markets what WILL happen, and markets invest in that type of leadership. If Europe rights itself with elections in France and Germany and improved relations among smaller nations and the wider e.u. then great but Irish politicians cannot wait to see - they must lead now - and the truth is Irish politicians now, can do nothing else.

Everything screams a new party in Ireland. It is imperative that people are given a real option that will look at not continuing payments to banks full stop, and finding ways (public and private and hybrids) to bring the massive tech based potentials of the 21st century to fruition. There is a freer, longer lived, healthier, better nourished, more entertained, engaged and connected life awaiting but people must come together and pull us out of the hole we are digging. Tasc and p.e. would seem a good starting point for recruitment, as with many of the concerned social fora that are springing up. Persons who would enter politics for no more than two terms bar leadership, people who would engage in debates completely freely and would forget the childish ego of the party being right for the 'bizzare' notion of sitting with others and collectively looking for continuous improvement. In fact, continuous improvement should be a plank, there shouldn't be a right or a wrong way to do things, but there should always be a better way. The party should align itself to the wonderful engagement that is possible nowadays and with the strongly informed population that is its constituency. The politics should be participatory, should probably look to strengthen the local civic role and also the concentration on national policy at higher levels, it should take policy from networks of discussions and contributions, it should advocate the drastic overhaul of the parliamentary system and the whip system within that. I would say to people here that it is always a little bit nervy for individuals to put themselves forward into stable political systems as the ego is challenged, but at a time where the majority of politicians are doing something you feel is damaging your country then it is incumbent on you to act. It would thrill me greatly and engender hope for the first time in a long time to see Tasc convening with such a topic in mind, I appreciate that Tasc's own raison d'etre is most likely against this but and applaud the role it is performing, but a spin-off is in the scheme of things - a necessary occurrence.