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Brendan Keenan: Government must stick to targets despite hardship

THINGS have come to a pretty pass when Professor John FitzGerald of the Economic and Social Research Institute (ESRI) says it's complicated.

Yet that is his description of trying to unravel the state of the national debt, never mind its future path.

In Ireland's case these complications have been multiplied by the huge sums applied to rescuing the banks.

Today's ESRI report on the national debt, and where it might be heading, identifies three different kinds of liability on the State from the bank rescues.

"It is complicated to unravel these different sets of liabilities and avoid double counting," the report says.

It is also difficult to know what the final cost will be, since that depends both on the performance of the banks and the value of loans taken over by NAMA.

Estimates for bank costs have already fallen from the original €46bn, and the report says "there is a reasonable prospect" that NAMA will not incur significant losses.

Wading through these complications, and with conservative assumptions on interest rates and reasonably optimistic ones on growth, the report concludes that the national debt can be held to levels which avoid a second bailout and/or a forced default on Irish loans.

This is a question of more than just academic interest. It is clear that many people are living in fear of some kind of catastrophe, where they will awake one morning to find their currency abolished, their life savings devalued, and the Government seizing what is left.

Such fears have already emptied the Irish banks of a large chunk of their deposits from ordinary customers. We are unlikely to make much progress in restoring confidence unless such fears are allayed. The ESRI report argues that the panic is greatly overdone.

It comes as financial markets also show signs of being a lot less worried about an Irish bankruptcy.

The report gives two reasons for this change in perception. As well as lower bank rescue costs, the reduction in the repayment terms for the bailout loans could save the public finances up to €15bn over the long term.

The ESRI projections show the country coming close to the limits in terms of the debt which taxpayers can carry, but not to levels which would require a forced default and all the uncertainties that would follow.

With Ireland's trade figures indicating it is one of the more competitive economies in the eurozone, there is nothing in these projections to suggest it would have to leave the euro. There is, though, a stark illustration of how tough the next few years will be, even if the country remains solvent.

The report sees the national debt peaking at around 112pc of GDP -- which means 14 months' entire production of goods and services.

"This is much lower than what had been assumed in official figures earlier this year," the ESRI says.

That's good to hear, but international analysis suggests that economies struggle once debt approaches 100pc of GDP. It will be a heavy burden to carry, although theoretically not an impossible one. The burden was heavier in 1987, but strong economic growth soon lightened it. That may not happen this time.

Achieving even these figures requires the austerity programme to continue as planned. A succession of budgets have already made a €20bn correction to spending and taxation. But there is another €10bn to go and, as Labour leader Eamon Gilmore warned yesterday, that may prove more painful than the previous €20bn. The "easy" stuff has gone.

The trade unions have joined forces with quite a few economists in saying this €10bn should be spread out further, and the national debt allowed to rise by more, to avoid squeezing the economy still harder.

The ESRI makes no bones about the fact that it will be squeezed. The correction "will serve to delay recovery in domestic demand within the economy and will further reduce employment", it says, but the institute believes it is a price worth paying.

It thinks that any slackening could push the national debt to levels which are not sustainable.

"Provided the target reduction is achieved . . . the debt will be on a sustainable path even if the assumptions about interest rates or growth proved to be a bit too optimistic."

Ultimately, it is a policy choice as to whether one aims for a surplus by 2015, as planned, or leaves it to later, even if that increases the risk of default.

But there is no doubt that government policy is to stick to the target, and that is the only policy which matters. If they are going to go for it, it would be nice to think it is at least possible.

The ESRI says Europe has a role to play in making it more possible. To avoid a second bailout -- something very much in the eurozone's interest -- Ireland needs to start borrowing on the market again next year, or by 2013 at the latest.

'This will require an end to the continuing sense of crisis in the eurozone economy," the report says. But it thinks the most effective action could be to scrap the German idea that any future bailout would involve some kind of default, even where the country in question was meeting its budget targets.

Such a provision in the rules would almost guarantee market access for Ireland in 2013, and avoid the need for a second bailout, the ESRI says. That gives Europe two years to acquire leadership and sense. We shall have to see.

Irish Independent