How can we really afford to carry on like this?
The new ramped-up bank bailout cost plus our giant budget deficit could sink us all, suggests Roisin Burke
Published 03/10/2010 | 05:00
FOUR years' worth of 'hairshirt' Budgets? That could be the least of what it will take to pay our circa €50bn bank bailout debt and horror deficit.
"We don't have four difficult Budgets ahead of us -- it's going to be seven or eight," predicts economist Jim Power.
What's more, Power and other economists forecast that budget cuts north of €5bn could be on the cards for several years to come.
Central Bank governor Patrick Honohan said paying the bank bailout bill was "painful but manageable" without IMF/EU bailout money, but after this week's revelation of added bank rescue liability it could be agonisingly painful.
The figures that would make this bailout possible without excruciating pain just don't stack up.
"The cost of the bank bailout is about €40bn, once you take out the €10bn that is invested in the banks that we are told we will get back," says Power. "The borrowing rate Ireland is being charged for 10-year bonds is 6.7 per cent, possibly slightly less. That means servicing the interest and capital on that €40bn could cost €6.68bn a year for the next 10 years," he says.
That stark €6.68bn figure is more than double the proposed €3bn budget cut figure, which this week's revelations make look laughably optimistic. "It could be more like €5bn," suggests Power.
"It is going to be quite drastic," National University of Ireland Galway economist John McHale forecasts. "It will take more than a €3bn budget cut."
A €6.68bn annual bank debt bill means it will cost more to service our bank debt than we spend on building roads, schools and hospitals and other capital expenditure, for which €6.4bn is earmarked this year.
The extra €1.5bn a year that Minister for Finance Brian Lenihan said this week the bank debt will cost is double what we've set aside to spend on building schools this year (€700m) and treble the hospital build spend (€510m). It's more than we'll spend on roads (€1.34bn) or public transport (€640m).
Ireland would need stellar growth to help hit the 3 per cent deficit reduction target the Government has promised the EU it will achieve by 2014. But the slasher austerity of the November Budget is expected to further stymie growth. "Growth is going to be very depressed -- tax take will be weak and that means pressure on spending. Hairshirts are going to be in fashion around here for some time," Power says.
This makes the Government promise to the EU to get our yawning €24.6bn national deficit down from 32 per cent of GDP to 3 per cent by 2014 look seriously dicey.
"I don't think they'll meet that target by 2014, not at all," Power says. "The only reason this target has been set is because that's what the Government has told the EU it will do.
"Even without factoring in our bank borrowing, servicing debt is costing 11-12 per cent of GDP. It's 32 per cent when you include the bank debt."
It will take 10 years to pay off our bank bailout, Mr Lenihan said on Thursday.
If the public has baulked at the prospect of harsh cuts this year, how will they feel about almost a decade's worth of circa €5bn annual budget cuts? That's what it may take to pay the debt, get the deficit down and keep the show on the road.
"The Anglo figures alone are scary, with €1.6bn in [annual] interest costs," says McHale, "but the bigger issue is the budget deficit itself. While I think servicing the debt is viable, clearly the markets have doubts, and a substantial probability of default has been built into the cost of our bond debt.
"Paying the debt is dependent on doing really difficult things on the fiscal side."
Political instability of the kind we have seen as the Dail reopened this week doesn't help. "The big question is whether the political capacity to push the cuts required through is there," says McHale. "There will have to be some limited degree of cooperation between parties; whether that can happen is the question.
Added to that is the worry of civil unrest. "People are going to see the pain laid out ahead of them over years. Political strategy should be to show that this very large pain is being shared fairly."
Affording the bank rescue and deficit debt burden has been predicated on growth returning to the economy. That came to a shuddering halt in this last quarter.
"Without reasonable rates of growth the figures just don't add up," University College Dublin economist Karl Whelehan said on RTE's Prime Time programme on Thursday.
The pain of the forthcoming Budget will be much more widely spread this time, McHale says, further testing public endurance.
"Most people got away lightly in the last Budget. Last time, it affected targeted groups like public-sector workers and social welfare recipients," says Mr McHale.
Slasher Budget, the Sequel, is likely to attack all before it. "It will have to put a lot on the table -- no sacred cows. Property tax, income tax, pension reforms and retirement age. Third level fees, in some form."
Labour Party Finance spokeswoman Joan Burton suspects that the Government has locked itself into a "behind closed doors" deal with Brussels that will herald drastic austerity measures for years. "My intuition is that it has already done the broad parameters of a deal. I think they have signed up and given headline figures, but they don't want to show their hand, obviously."
Again, this could hammer the chance for desperately needed growth, Burton fears. "Without growth, how are we going to pull this off? We need growth to break out and meet our repayments schedule. We have had nine quarters of no growth in the last two years.
"Unless there's some confidence coming from consumers and they can afford to spend something, we'll just spiral."
Investment bank Societe Generale estimates at €80bn our total borrowing needs for the next five years, to both pay down our deficit and pay off the bond holders. Its chief European economist, James Nixon, doesn't fancy our chances of affording this for much longer.
"The current consolidation plans are . . . too timid and rely too heavily on an anticipated recovery in nominal GDP growth," he said in a note last week.
Nixon points to a recent IMF article that concludes that Ireland's fiscal consolidation would take seven years instead of the four envisioned under the EU's Stability and Growth Pact.
Cutting the deficit will be a serious enough problem to deliver us into the lap of the IMF, he predicts. "We therefore fear that Ireland's fiscal troubles will prove persistent and be a continued source of market scrutiny," he says. "In our view, unless Ireland significantly accelerates its fiscal consolidation, its debt dynamics will ultimately become unsustainable."
The challenge of affording this means that an IMF/EU bailout beckons, Nixon thinks. "The logic of Ireland's debt dynamics probably dictates that ultimately, however reluctantly, Ireland will be forced to seek additional funding from the EFSF."
Crunch time on our ability to carry on and afford our debt could come when we try to return to tap the markets early next year; whether they lend to us will decide our fate, in terms of IMF rescue. "It won't totally be up to us," Whelehan warned.