Saturday 27 December 2014

Brendan Keenan: Targets are sacrosanct but they look reachable

Published 05/10/2011 | 05:00

Michael Noonan in Luxembourg for a meeting of EU finance ministers this week

THE Department of Finance has a reputation as a party-pooper. One can assume, though, that it will try its best not to poop the little party which shows signs of coming to life in the economy.

It is all to do with the unexpectedly good performance in the first six months of the year. That was driven by exports, rather than activity at home, but growth is growth when it appears in market headlines or the IMF targets.

Those targets are what matter most to the department and Minister Michael Noonan. They also matter to his colleagues, and the rest of us, because of the impact on the tax rises and spending cuts in the December Budget.

All these targets are set as a percentage of the economy's output of goods and services -- its gross domestic product (GDP). The more that output grows, the less actual adjustment in tax and spending is needed to meet the target.

At present, the official forecast is for the economy to grow by 0.8pc this year.

The Central Bank had a similar forecast, but yesterday increased that to one per cent. It is a tiny change but, if the department follows suit in its next economic forecast, it could be enough to allow the Government beat this year's deficit target of 10pc of GDP.

The public finances are broadly on target, according to Exchequer returns for the first nine months of the year. If that remains the case, Mr Noonan might be able to declare a 2011 deficit in single figures, which would be an important psychological boost.

Psychological boosts are about the best we can hope for right now. The Exchequer returns showed that VAT revenues were €300m below expectations for the year so far. That is not exactly a surprise, given the poor figures for retail spending, but it does show the basic weakness in the economy.

Personal spending makes up around half of GDP. We will not see a return to strong growth until consumers are willing and able to spend more. Any good news on growth and the public finances could be self-reinforcing, if they persuade people to save a bit less -- thereby giving more help to growth and the public finances.

It would happen in small steps, but optimistic scenarios were beginning to emerge. The Exchequer returns point to a €300m saving on debt interest this year -- some of it due to the deep cuts in the rate charged on the bailout loans.

Adding this to the prospect of a happier mood among consumers led some economists to see the possibility of Irish government borrowing back inside eurozone limits by 2014, and a possible tentative return to the debt markets in 2013.

But in today's globalised economy, no country is an island. The endless eurozone crisis, where even government leaders are talking of catastrophe, threatens to frighten citizens even more, and damage European markets for Irish exports.

Things took another dangerous turn yesterday with the problems of the Franco-Belgian bank Dexia. It has already been bailed out once but, in a move which will be horribly familiar to an Irish audience, the two governments agreed to guarantee €130bn of the bank's borrowings.

The banking losses which Europe's leaders tried to avoid by getting taxpayers to cover them are resurfacing in a more dangerous form, based on the belief that Greek taxpayers, and perhaps some others, cannot carry the burden.

No one knows how this will pan out. The Central Bank had a stab at it, reducing its 2012 forecast for the Irish economy from just over 2pc to 1.8pc. A better 2011, but a worse 2012. At this stage, with the Budget just weeks away, it is next year which matters.

In April, the Government still hoped that an improving global economy would see Irish growth hit 2.5pc next year. That particular hope has gone and it is unlikely that the updated forecast from Finance will be much better than the Central Bank's.

This is why Mr Noonan has been warning that the €3.6bn correction planned for the Budget may not be enough. On the other hand, if he does beat the targets for this year, it might just be enough.

It is a difference of "only" a couple of hundred million. The employers' body IBEC last week urged Mr Noonan to leave the original figure alone, on the grounds that the gloom created by a tougher Budget would outweigh the money saved.

IT is a strange state of affairs when €3.6bn in taxes and spending cuts can be regarded as some kind of good news, but that is the state of affairs. Trade unions, along with some economists, want a smaller adjustment, but yesterday the government position was spelt out succinctly by Public Expenditure and Reform Minister Brendan Howlin.

The targets are sacrosanct, he said, which means a 2012 deficit of 8.6pc of GDP. On the April forecasts, that would allow the Government to borrow €17bn next year. If the forecasts are reduced to something like 2pc, the borrowing will have to be less.

"We don't know how much money will be needed yet," Mr Howlin said. It won't be long before he, and we, find out.

Irish Independent

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