Brendan Keenan

Friday 25 July 2014

Brendan Keenan: Bonding with bailout buddies

Maybe we could all could learn a lot about how best to deal with deficits from the other troika territories

Published 04/11/2012|05:00

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PORTUGAL, they say, is England's oldest ally. Presumably, they both had a common enemy in Spain. That would have put us on the other side, but we ought to be allies now.

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Several euro countries are in trouble but only three -- the Portuguese, the Greeks and ourselves, are being financed from official money funded by other governments and the IMF. That should create a bond.

Yet the three "bailout" countries seem to pay very little attention to each other's woes and progress, or lack of it, in overcoming them. There is certainly no sign of a common approach.

Of course, no one wants to be Greece -- not even, one suspects, Greece itself. Better to claim you are a "special case".

We can learn a lot from the experience of others, not least about ourselves. Portugal last week passed a 2013 budget that would increase income tax by a third for middle earners.

Wow. But the way Portugal got to this extraordinary action has uncomfortable parallels with events in Ireland.

There are some differences. Part of the difficulty lies in a Supreme Court intervention in the austerity programme which overturned cuts to public sector pay and pensions.

I suppose it could happen here, but before the unions go galloping down the Liffey quays, the judgement was based on public sector workers having borne an unfair share of the cuts.

The unions would say the same is true here, but I'm not sure the evidence stacks up. In Portugal, total labour costs have fallen 5 per cent, but "negotiated" private sector earnings -- very like increments -- have continued to rise.

Another difference from Ireland is that, while spending is on target, tax revenues are behind. It is partly the weakness in tax collection, which Ireland eradicated in the Nineties, but it is also that the switch from the domestic economy to exports has cut into revenues.

The Irish Department of Finance has been pretty good at estimating the effects of falling domestic demand on tax revenues. But that means the underlying increase in taxation, which will show up when the domestic economy is growing normally, is a lot bigger than it looks at present.

Those hidden extra taxes are the "structural" change in the tax system. One of the surprising things in the latest IMF report on Portugal is how much attention it gives to structural deficits, excluding the effects of recession -- a vital topic which gets barely a mention in this country.

The curious thing is that, on all such measures, Portugal is ahead of us. Curious because, as the Financial Times' Lisbon correspondent said last week, the Portuguese envy Ireland's "success". There is certainly no comparative success when it comes to deficit reduction.

A further 4 per cent of GDP adjustment should see Portugal achieve a healthy underlying (structural) surplus in 2014, as well as meeting EU rules. Ireland needs another 6 per cent of GDP to get into a similar position by 2017.

Such was the mess in the Irish public finances that the adjustment needed was second only to Greece, but the planned austerity is leisurely by Mediterranean standards.

One wonders what would have happened had the Irish Government targeted the structural hole, instead of burbling about stimuli while running up debt of €10bn to cover this shortfall.

One wonders if it will even have the wit to take credit for the gap finally being closed next year -- as it is meant to be under the plan -- and also why the Portuguese report seems to be able to have a more cogent discussion of the public finances. Perhaps the Irish motto, "whatever you say, say nothing", has infected even the troika.

The only rational explanation for the praise for Ireland would seem to be that it has met its targets. Revenue shortfalls in Portugal mean the 2012 objectives will be missed by about 1.5 per cent of GDP.

For the moment, Lisbon seems to have thrown in the towel on spending cuts, especially to social welfare, and sent for the taxman instead. There will also be an increase in the long-established property tax and 2013 targets also depend on finishing €5bn sales of state assets, including airports.

Is Ireland the next Portugal? Next month's Budget will be an acid test of whether the Coalition can stick with the hard grind of spending cuts and new sources of revenue, or sinks back on the easy option of increases in existing taxes.

As you may have noticed, that debate is already gathering steam. And as far as debt relief is concerned, we both have a common enemy in Spain.

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