Brendan Keenan: Running faster to stand still -- welcome to the debt trap
Brian Lenihan painted a decidedly bleak portrait of the country's finances at the launch of yesterday's Pre-Budget Outlook
Friday November 13 2009
RUNNING on a treadmill may not be the most original description, but it does seem closest to the experience of the kind of debt trap in which the Irish economy is impaled.
The Department of Finance Pre-Budget Outlook cleverly takes this approach, as well as saying all the usual things about the need to cut spending and narrow the deficit.
More telling, though, is its point that, after the huge pain of a €4bn correction in the Budget, the public finances will be no better off.
It also stresses what would happen if the Government did nothing. Paradoxically, this is what conservative analysts, such as the EU Commission and the European Central Bank, would normally recommend in such cases.
It is called "letting the automatic stabilisers work". Government borrowing goes up as the social welfare bill rises, which makes up for some of the lost demand. Government lets that take its course until recovery comes.
The less conservative approach -- popularly known as 'Keynesian', after the great British economist -- says governments should do more than sit on their hands. They should increase borrowing by more than its automatic rise and spend some of the money on capital projects and job creation.
Both these ideas have swirled around the Irish debate. But the budgetary situation is so awful that the Keynes brigade has had to retire to safer ground. They have not entirely given up the argument, though.
Fine Gael and Labour seem to have accepted that the Government will have to make the €4bn adjustment. But they combine this with plans to create jobs, subsidise jobs and offer more elaborate training. It is not entirely clear if they would offset some of the €4bn cut with borrowing for these worthy purposes. The Government hopes to smoke them out on that.
The trade unions have urged the Government to ease up on the €4bn, even if that means it takes longer to get borrowing down to manageable levels. But their main campaign is to have as little as possible of the adjustment from public sector pay cuts. That would mean higher taxes -- over €1bn higher if pay is left alone, and more if social welfare cuts is also excluded.
Mr Lenihan has set his face against increases in tax rates, but the tax burden may still increase in the Budget, depending on what he does with tax credits and the entry point to the top rate of tax.
In any event, as the Outlook says, new taxes will have to be found in the end.
"Adjusting spending alone is not the answer," it says, noting the conclusion of the Commission on Taxation that the tax base needs to be broader and more stable. The politicians have run from the idea of a property tax this year, but they will not be able to hide from it forever, and will have to find some other new taxes as well.
For now, Mr Lenihan's strongest argument is the treadmill. Even if the Budget goes through as planned, the situation will not improve. The government deficit next year will be almost €20bn -- the same as it is estimated to be this year.
A big fall in capital spending means that actual borrowing will be €6bn less. That is helpful on debt costs, but perhaps not to the economy's long-term future.
However, the fact is that half the €4bn is needed to pay the extra interest on all that borrowing, and the other half to offset the natural rise in government spending -- mainly from social welfare.
None of it reduces actual government spending, so everyone in the public sector will be expected to do more with less. The pre-Budget estimates show just a 1pc rise in health spending of €15.6bn, and a slight fall in the €8.6bn education budget.
Further reductions on Budget day are likely to come in the form of pay cuts, while some of the €1.8bn rise in social welfare spending will be reduced by changes to child benefit and perhaps some more specific benefits.
Public sector workers are therefore unlikely to be in the mood to deliver more for less. On past form, we can expect some of them to gum up the works deliberately in protest. Expect many more stories about failing services next year.
Everyone can wriggle and squirm but the harsh truth is that the country cannot get out of the debt trap until there is some reasonable growth in the economy. But neither can it do nothing.
If it did, the national debt would be 100pc of output (GDP) by the end of next year. Almost no one believes that lenders could be found to supply that kind of money to Ireland, given its banking and employment problems.
The Outlook forecasts -- or at least assumes -- good growth from 2011, rising to 4.5pc in the following two years. If it is right -- which is by no means impossible -- then some more palatable choices could be on offer in those years.
It is a long way away, though. The Government may need some signs of recovery by this time next year to have any chance of getting through a similar correction in 2010 as planned.
Beyond that, comes the task of persuading people that even recovery does not mean the glory days are coming back, and we must learn to conduct our affairs like any other mature European economy. For now, though, just keep running.
bkeenan@independent.ie
- Brendan Keenan
Irish Independent
