Thursday 25 April 2019

Can Brown pull off his hide-the-debt trick?

Ireland and Britain are in similar economic straits but the political solutions are very different -- only time will tell which bet has paid off

Brendan Keenan

Brendan Keenan

THERE may be a few envious eyes cast across the sea by the embattled Government parties. No, not thoughts of emigration -- though they may figure -- but wistful looks as Gordon Brown unveils his massive Keynesian stimulus to unfreeze the British economy.

No struggling with deficits over there, it seems. No raiding the pensioners, or making the teachers teach more kids. Certainly, no sign of furious protest marches.

Instead, Mr Brown says the time to invest is when things are down. Of course, Mr Brown also thought the time to invest was when things were good. He has been investing furiously since not long after he came into office as Chancellor of the Exchequer. This past spending and borrowing -- to give much of it its proper title -- makes the actual new stimulus hard to measure.

Like his namesake, the fictional detective Father Brown, the British prime minister may know that the best place to hide a pebble is on a beach. The best place to hide a big hole in the public finances is by making it part of an even bigger hole -- one created, say, as one borrows to stimulate the economy.

Despite the separation of their currencies, and the application of "golden rules" in one, and the EU Stability and Growth Pact in the other, Britain and Ireland seem once again to have become entwined and arrived at much the same position in different ways. Chancellor Alistair Darling's deficits look to be in a six to eight per cent of GDP range, similar to those of Mr Lenihan's. Their future intentions, though, differ widely.

Some observers think the stimulus package could take the UK deficit to an extraordinary 10 per cent of GDP. Mr Brown can be expected to say that all of this huge borrowing is "investment", to deal with a once-in-a-lifetime situation and keep the economy moving. As in Ireland, though, nearly a third of it will be to cover an underlying gap between public spending and tax revenues, even when the economy is at trend growth.

Mr Lenihan is taking the other road. His plan is to get the deficit down from eight per cent of GDP to three per cent in three years. No stimulus there, by golly. To the extent that it is done through higher taxes or lower social welfare and other payments, it will deflate the economy.

If he succeeds, he would be close to attaining the Stability Pact's golden rule of balancing the budget when the economy is growing at trend -- let's say 3.5 per cent a year.

There is little chance, though, that this will be attained. But should Mr Lenihan even try?

The British and the Irish have rather different attitudes to government borrowing. They seem to have got over their rescue by the International Monetary Fund (IMF) in the 1970s rather better than we have got over our fiscal collapse in the 1980s. Or perhaps it is just the difference in time. Irish ministers and civil servants are still haunted by those events, although there are obvious signs that the general public -- the youngest in Europe, after all -- does not share those dire memories.

So, while Mr Brown attempts to reflate, and goes up in the polls, Mr Cowen tries to deflate and gets hammered. To endure such a fate, he has to be convinced that keeping the lid on borrowing is the right policy. To survive, he has to convince others.

I have expressed the view that, provided spending growth and the underlying tax base are at sustainable levels, one should not worry too much about borrowing in downturns, or even recessions. But they are not in that happy state as yet. They will not be until much of the public sector is re-organised and new taxes (as distinct from higher taxes) are introduced.

But even if they were, the current situation is so severe that it would still be hard to argue that borrowing should just be allowed to find its own level. We cannot borrow our way out of the collapse of a construction bubble, or a credit contraction in the banking system. On the other hand, while we have to have a public plan to get the deficit back below three per cent of GDP, actually trying to do so over three years would be folly, given what the three years are likely to contain.

Ireland also learnt all those years ago that small countries can use up their creditworthiness very quickly. It is already shaky enough now and it would probably take much less to spook our international lenders than it did in 1979.

Britain is a very different case, in both size and status. But everyone has noticed the global shift of risk from banks to governments. Loading extra borrowing on top of that, in an economy whose central problem is too much debt, seems a dangerous game.

Also in Business