Brendan Keenan: Rapidly shifting sands undermine Budget plans
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IT'S shaping up to be a hot autumn -- for the Government in general and the Finance Minister in particular. Those who can't stand the heat had better start looking for the kitchen door.
Yesterday, the Central Bank tweaked up the temperature. It said nothing that has not been said before, but the words of a central bank always carry extra clout. And the clock is ticking.
It began ticking with last December's Budget. After one early Budget and one emergency one, Finance Minister Brian Lenihan produced a road map as to how Ireland would get out of its public finance crisis by 2014.
It is, in truth, the kind of road map one gets from a basic satnav: it shows you where to go but is short on detail of street names. Various important folk, including the EU Commission and the IMF, have urged the Government to fill in more detail as to how the journey will be made.
The Central Bank has now joined that call, as has the ESRI (Economic & Social Research Institute). So far, the only detail is last week's capital programme, which cuts €1bn off this year's spending. That still leaves €2bn to be found from tax rises and cuts in day-to-day current spending -- most of it, we are told, from spending cuts.
All the deficit reductions in following years -- €2bn, €1.5bn and €1bn -- are to be from current spending and tax rises.
Not surprisingly, analysts, and those who lend to Ireland or rate its credit standing, would like to know how such extraordinary sums are to be found. They are also aware that countries like Greece, Portugal, Spain and Italy have more slack to play than Ireland in terms of uncollected taxes and gross public-sector inefficiencies.
Ireland cleaned up its tax collection after the 1980s crisis, and its public sector is only a bit more than averagely inefficient.
Most of the €20bn annual deficit will have to be closed the hard way.
Equally unsurprising is the fact that the Government is not keen to provide the detail. Apart from the fact that government departments haggle for their spending allocations on an annual basis; announcing spending cuts well in advance only gives more time for those affected to try to reverse them. It would be even worse with tax increases.
But the problem has become more urgent, with a clear consensus that the Department of Finance's medium-term growth forecasts are too optimistic. One should not blame them too much for that -- last autumn, when the forecasts were prepared, was aeons ago in present economic conditions.
Nevertheless, the medium term is becoming the short term. The department may originally have been too pessimistic about this year, but a better 2010 makes its forecast of further 3.3pc growth next year look even less likely.
Yesterday, the Central Bank put next year's growth in output (GDP) at 2.8pc. The last ESRI forecast was similar. When the Department of Finance publishes its pre-Budget forecasts in a couple of months, it can hardly stick with the 3.3pc figure.
That will imply some reduction in the €32.8bn tax revenue it has pencilled in for next year and, therefore, some increase in the 10pc of GDP deficit. At a difference of half a per cent of GDP between the two forecasts, the shortfall could be of the order of €300m.
That, however, is not the end of the story. It takes us only to 2012. From then on, the Budget plans are based on average growth of 3.7pc a year. The Central Bank does not look beyond one year, but a recent medium-term scenario from the ESRI suggested that, while this is still possible, it would require a lot of things to go right.
If even a few go awry, average growth of 3pc looks more likely. Outside forecasters, including the IMF, are as low as 2.2pc (although the ESRI thinks they use a flawed model).
The question for the department, and the Government, is whether they should reduce their medium-term forecasts. And if they do, do they apply even more tax rises and spending cuts to the economy to try to keep to their targets?
Those targets are a bit artificial, in that they are based on the borrowing limit of 3pc of GDP allowed under euro rules.
This magic number is due to be achieved in 2014. But the rapid rise in Ireland's national debt means it may no longer be just a political aspiration. Any bigger deficit means the national debt will continue to grow as a share of the economy.
Yet many influential voices would be raised against inflicting more restraint on the economy. The trade unions and opposition parties would have the support of several economists in opposing such a policy.
The Central Bank, like the ESRI, the ECB and most international organisations, argue that, if it has to be done, it has to be done. They say the consequences of any slippage in higher interest rates would outweigh the benefit of not deflating the economy even further.
It's a difficult call, but decision time looms.
- Brendan Keenan
Irish Independent
