IT looks as if the Greek crisis has been kicked to touch for now and there will be no significant short-term implications for Ireland. There could be some long-term opportunities, depending on the way things pan out, and some speculation on this matter is offered later. But we are into July, the Dail and the political/media class will head for the beaches in a few weeks and the crisis will be put on hold until late September.
The current plan appears to be a spending review, to be completed while the politicians are away, leading to a December Budget and more fiscal measures along the lines of the Memorandum of Understanding with the EU/IMF. It is already clear that a critical component of that deal, namely Ireland's re-entry to the bond market on sustainable terms by late 2012 or early 2013, is unlikely. So something's got to give.
There are only two things that can be done to make the Irish fiscal position sustainable without sovereign default, which is to be avoided if at all possible. The first is a sharing of the costs of bailing out those who lent to bust Irish banks, something which is currently seen by our European 'partners' as the exclusive responsibility of a bust Irish Exchequer.
The second is the reduction, as quickly as possible, of Ireland's budget deficit. Both add to a prospective debt burden which is too large in the opinion of the markets to which Ireland must return fairly soon.
Doing something coherent about sharing the costs of bailing out those who lent to our bust banks requires an outbreak of common sense in Europe, of which there has been little evidence in the response to the entirely predictable Greek crisis. But the containment of the escalating debt can also be assisted if the budget deficit can be brought down quickly and the pace of deficit reduction is entirely within our own control. Government needs to cut spending and to increase revenue, quickly and by large amounts.
Instead of action, or at least declarations of intent to act, the Government has been ruling out important options to achieve this. The Taoiseach has ruled out increases in income tax and left himself very little wriggle room with promises to do nothing about income tax bands and allowances.
There has just been a selective reduction in the lower VAT rate while an increase in the top rate has already been pencilled in as part of the EU/IMF deal. So on both income tax and VAT, the Government has already played its cards, it would appear. There are tax options outside these two but they are limited. Removing the remaining tax breaks and loopholes in the income tax code is an overdue reform but not a likely source of major revenue.
Excise duties on cigarettes, drink and auto fuel cannot realistically be increased much beyond the rates in Northern Ireland and there is little headroom remaining. Having made an issue of corporation tax with Europe, the Government can hardly seek extra revenue from this particular source and the other tax categories are not promising. Rates of capital gains tax, for example, could be increased again -- but who expects buoyant capital gains in the next few years?
If there can be no measures to increase the yield from income tax, if the VAT policy is already set and with the potential from excise duties constrained, there is little scope to raise Government tax revenue in December. Stealth-tax gimmicks, like the recent dip into the assets of funded pension schemes, have limited revenue potential.
This ill-advised measure appears to have been opposed by civil servants, according to documents released under the Freedom of Information Act. It can be filed under Bonzer Wheezes from the Fertile Backrooms of Fine Gael.
Government spending is dominated by social welfare transfers, including pensions and unemployment pay, and by public service pay and pensions. These cost more than all other expenditure headings combined.
The Government has been busily tying its hands in both of these areas. There has been a categorical commitment not to cut rates of payment in the social welfare system and the Croke Park agreement on public service pay, inherited from the last government, rules out any further cuts in pay rates.
This restrictive agreement, widely seen as a victory for the public service unions, has been embraced by Fine Gael and Labour. Back in the good old days when incoming governments tore up manifesto commitments and blamed the last administration, none of this would have happened.
The Government has devoted its first 100 days to reaffirming pre-election commitments that should never have been made in the first place and which could readily have been dodged through the straightforward expedient of blaming Fianna Fail. Ministers will regret this lack of cynicism as events unfold.
In seeking to navigate the elimination of a huge budget deficit, the key strategic decision is to rule nothing out. All tax and spending options should be left open. As important options are ruled out, the burden of adjustment shifts to the dwindling set of politically acceptable alternatives.
But the adjustment needed is so large that this reduced set cannot carry the burden. Government spending needs to be cut and revenue needs to be increased. Drawing red lines around major headings of either revenue or expenditure, never mind both, is not a credible point of departure.
Government capital spending has already been reduced and the leftover list of Celtic Tiger 'nice-to-have' projects got a further pruning during the week when Arts Minister Jimmy Deenihan announced the abandonment of plans to spend the astonishing sum of €290m on relocating the Abbey Theatre. Another project costing almost as much to extend the National Concert Hall has already been binned.
Deenihan is to be commended for both of these decisions. How serious consideration could ever have been given to the expenditure of €290m on a single theatre is a mystery. Croke Park cost less. The new Public Accounts Committee could do useful work in examining the genesis of this extraordinary proposal, a Bertie Bowl for the carriage trade.
Deenihan's colleague, Transport Minister Leo Varadkar, has also inherited some leftover capital schemes, including three costly rail projects in Dublin. These are an underground rail tunnel to the airport (we are already paying for an under-utilised road tunnel); an underground East-West rail link across the city centre; and a city-centre tram link.
All three have astronomical price tags and poor chances of attracting private sector finance.
Curiously, Varadkar has indicated that two of the three will not go ahead, but is unable to identify which one is to survive. In the current circumstances and bearing in mind that public transport demand in Dublin has been falling, he should go for the hat-trick.
On German insistence, the latest deal for Greece is to involve a private sector component, which means, or ought to mean, that banks and other investors holding Greek bonds write down their value, which would mean debt relief for Greece. The details will take some weeks to emerge but the French banks and government have come up with a proposal which, on the face of it, would see banks relieved of a large part of their exposure, courtesy of the European (not just French) taxpayers. There is resistance to these complex proposals and some cynics have even detected an attempt at a stroke by French politicians on behalf of French banks exposed to Greece. Perish the thought.
This will take some time to play out and the deal will be as complex as possible, the better to conceal the true shifting of exposure to the inevitable Greek losses. But it is potentially useful to Ireland that a sharing of exposure between private sector creditors and European institutions is being contemplated.
The Irish Exchequer has guaranteed a lot of bonds issued by bust banks and if a precedent of burden-sharing with Europe is set in the new deal for Greece, no doubt Michael Noonan would be willing to join the scheme in due course.
Colm McCarthy lectures in economics at UCD. He headed an expert group examining State assets and chaired the Special Group on Public Service Numbers and Expenditure Programmes, aka An Bord Snip Nua. He is also the author of the report into the semi-state sector from the Review Group on State Assets and Liabilities.