Wednesday 23 August 2017

Brendan Keenan: Roadmap to recovery has checkpoints at every turn

Brendan Keenan

Brendan Keenan

DESPITE themselves, the guys from the main Greek TV channel could not help but be a little pleased that someone else has joined them in the rescue boat. They were also able to explain what a very uncomfortable boat it can be.

This is easily forgotten. The numbers in the four-year plan are like nothing we've ever seen before, but the document itself is reassuringly familiar.

Just like a Budget document, it sets out the context and then goes through the details of tax rises and spending allocations.

However, this familiarity is an illusion. The plan is not a national Budget. It is a programme which will be presented to the EU Commission and the IMF for approval, so that they will agree to provide the money needed to keep the country running.

There is some reason to think that IMF approval, if it comes, will be a bit grudging. It might have preferred the original Department of Finance intention to get three-quarters of the correction from spending cuts and one-quarter from tax rises.

Now it is two-thirds, one third. But Europe is determined that we stop this low-tax country nonsense. And nonsense it is, unless large chunks of the public service were closed down.

Even with the swingeing tax increases, the savings targets had to be ambitious.

The amount of money spent on public services will fall by €6bn over the period.

Neither Ray MacSharry, or Margaret Thatcher, or just about anybody in an advanced economy has managed to actually cut public spending -- as distinct from keeping it below inflation or the rate of economic growth.

Both the EU and IMF may have doubts about the amount of this saving which is due to come from reduction in staff numbers.

It is close to €1bn, and the experience of the HSE redundancy scheme suggests it could be difficult to achieve.

The Greeks can tell us what will happen if it is not achieved. Deep in the 160 pages of the plan is the explanation that, once approved, the programme will be subject to quarterly assessment by the European Stability Fund (EFSF) and IMF.

Every three months. Any slippage in the tax revenues or the spending cuts will require immediate corrective action, and little sympathy will be shown.

The Greeks had hoped their good progress might have persuaded their fiscal monitors to relax the targets for the next three months.

Not a bit of it. Indeed, Austria suggested the next tranche of money be withheld, because Athens should have done better. This is the hostile world in which the next Irish government will have to operate for at least three years.

This will be a new and unpleasant political experienced. Normal Budget targets can be missed, and often are. These ones cannot be missed.

The next government will not only have little economic freedom; it may have to tighten the screws again, depending on what happens to growth.

Not so long ago, the growth forecasts in the plan would have been regarded as deeply pessimistic.

Now they will be viewed as optimistic. While next year sees only the feeblest of green shoots, with 1.25pc growth, the Department of Finance expects this to rise to an average 2.7pc after that.

For that to be true, consumers need to be sufficiently reassured that they know what is going to hit them, that they reduce their current high savings.

The forecasts of a 1.5pc annual growth in personal spending also seem modest, but must be set against declining disposable income from higher taxes and mortgage rates.The rescue fund buys time. With no need to borrow on the markets, the Government can wait to see if things do look better by 2012.

If they don't, its first big crisis could be when it is told to impose more austerity to keep on the chosen path.

In present circumstances, 2012 is the far distant future. All kinds of things are going to happen between now and then; some of them probably unimaginable.

The most important is a resolution of the banking crisis, and its associated costs.

Things seem to be moving fast in that area, although it is not clear in what direction.

Central Bank governor Patrick Honohan seemed dubious about the costs of stuffing the banks with another €8bn or so of capital, to protect them against even theoretical losses.

Well he might be dubious, if those costs are meant to land on an Irish State which will have to borrow a further €50bn before the public finances stabilise.

As Marie Dinon, eurozone economist with Ernst & Young, put it -- Europe will in the end have to choose between defaults in more than one country, or burden sharing.

"One possible approach would be a scheme in which peripheral government debt would be swapped for new bonds guaranteed by the Eurozone as a whole," she said.

Without some such action debt problems in some countries could engulf other economies and eventually the eurozone as a whole.

In one sense, Ireland can leave them to it in Berlin, Frankfurt and Paris. If a thing cannot go on for ever, it will probably stop -- and the general debt problem will be resolved in the end, whether in an orderly or disorderly fashion.

The need to provide sufficient tax revenues on a basis of fairness and effectiveness, to fund an efficient public service, will remain.

It cannot be defaulted upon. That is what the plan is for.

The argument is not whether there should be such a plan, but whether it meets those objectives.

Irish Independent

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