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EU's plans for downturn will give austerity a bad name

AS we all know, it is the small print you have to watch for. Although the print was not literally small, it was the tiniest of lines in the last bailout report from the EU Commission which raised the biggest issues.

Before we get onto that, with a referendum looming, it is surely worth looking at the nature of the Commission report itself. The referendum will be -- or should be -- about outside surveillance, and outside power over budgetary policy. At least the voters know all about that.

The bailout is fiscal union on speed. The surveillance is intense and continuous. The sanction is the ultimate one -- a refusal to lend the next several billions needed to pay welfare and benefits, as well as public sector wages.

To tell the honest truth, I am rather enjoying the surveillance bit. The quarterly reports from the commission and the IMF give a comprehensive, detailed analysis of the state of the public finances and the banking system, of a kind which were never available from the institutions of Irish government.

The reports are, of course, politically-charged documents and should not be taken as entirely independent analysis (if you can find such a thing), but they are still very useful to the journalist, interested citizen or public representative.

It is a depressing thought that one has to look, first to a bailout and then to a fiscal union, for proper data and institutions to monitor the public finances, such as medium-term budgeting or an independent fiscal council.

Not only were such appurtenances not on the horizon before the bailout -- despite years of talking about them -- it is abundantly clear that the political and administrative system is doing its best to marginalise them now. Its heart is not in it.

There is a gruesome precedent for this. The EU requires good benefit analysis of projects which apply for structural funds, and assessment of the results. Ireland (unlike Greece) became a poster child back in the 1990s as well, for the competent way in which it did this work. But as the structural funds were phased out, so too was the work.

The politicians did not want this pesky stuff interfering with their right to spend public money where and how they pleased. Until the Irish political system is radically reformed -- and there is no sign whatever of that -- it cannot be trusted to manage the country's money properly.

This may provide an undertone in the referendum campaign. There is some reason to think that a slice of the electorate also felt that, like some awful local GAA derby, we behave properly without tough referees. But the big noise in the campaign seems destined to come from the issue that caused the biggest fuss about the Commission report -- austerity.

It was only a sideline in the report. If economic conditions turned out significantly worse than forecast, it said, further corrective measures might be necessary. Otherwise, the present budgetary policies were bang on track.

But the complainants were right. This is not as innocuous as it might look. Economic conditions could well be worse than forecast. One cannot be happy about the assumption that, whatever happens to GDP from year to year, targets set as a percentage of GDP must be maintained.

This sort of thing gives austerity a bad name. The purpose of the programme should be to create a tax system and a level of public spending which will be sustainable once the process has been completed and the annual deflationary cutbacks cease.

One cannot be sure exactly what that point is, but one can be sure we are still a long way short of it. So the process must continue, despite its depressing effect on the economy.

It is, however, another matter to tighten the screw further because global conditions are affecting the sales of foodstuffs, or Lipitor has come off patent and reduced the value of exports. That is self-defeating folly.

It is easy to see why it would happen. A "structural" approach, which ignores cyclical ups and downs, could see the EU and IMF having to provide more money than is planned in the programme. Naturally, they do not wish to do that. They may not be entirely in a position to do so. But that does not make the policy right.

The sparkiest argument was actually about this structural question. The sparks came from SIPTU president Jack O'Connor, who launched a blistering attack on the ESRI for comments in its quarterly review.

Mr O'Connor played the man as well as the ball, calling for any subsidies to the ESRI to be withdrawn, to "facilitate its decent burial". This seems a pity.

There are valid arguments as to the speed at which a self-financing country should be rebuilt, but it is no good pretending that there are policies which can avoid a large fall in disposable income and a consequent rise in unemployment.

Mr O'Connor may not be saying that, although his statement that it is "arrant nonsense to dismiss alternatives to the immiseration of working people and the poor", is open to that interpretation.

He is certainly entitled to argue that working people and the poor are carrying an unfair share of the burden. He also has a case that more than €5bn could theoretically be found to create an investment fund to provide jobs. A well-chosen, efficiently delivered capital programme would be more convincing than the Government's 100,000 jobs from the better application of existing policies.

Domestic demand

Yet even such a fund, and its "thousands of jobs", would not change the broad necessities of fiscal policy. The ESRI's argument was more subtle than the flying sparks would suggest. It was that a recovery in domestic demand must come, not from more borrowed money, but from more efficiency.

This year, after interest costs and the expected €3bn payment to Anglo, the troika will put €6bn into our pockets, which is about €1,500 for every person in the country. It may not be divided among every person in the country in the best way, but there is no escaping that this huge support to our living standards from borrowed money has to decline further.

The ESRI argues that the only way to limit the effect on domestic demand is if prices also fall to reduce the drop in purchasing power. This is not happening, at least where domestic prices are concerned.

Instead, they continue to rise, even as disposable incomes fall. It is not clear why this is so. Discovering why would seem to be more productive than hunting for ways to keep us all as well off as we are. They will not be found.

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