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Brendan Keenan: Inert economy leaves us in debt trap

A DOOR never closes, but another opens, they say. Could that be what they mean when they talk of "re-opening" the Croke Park agreement?

Doors are certainly slamming shut all over the place. The prospects for growth next year have dimmed to the point of vanishing. As emergency stimulus packages run out -- especially in the USA -- it becomes clear that major economies are still not ready to generate self-sustaining growth.

That is the problem with stimulus packages -- you have to be prepared to keep stimulating until the recovery comes. There are plenty of economists and business leaders who make a convincing case that this is what should be done. But governments tend to lose their nerve about all that borrowing.

That was certainly the case in Britain, where David Cameron apparently feared that the debt markets could suddenly turn on the UK, as they have on Ireland.

The Americans have more firepower, because lenders have to have dollars -- the world's reserve currency. But President Obama is accused of being too cautious in using this advantage. Whatever the causes, Ireland, somehow, must try to live with the consequences of another poor year of growth. Those consequences are serious.

There is a reason why markets and others measure debt and deficits, not in cash, but a percentage of the economy's output. Our €20bn gap between government revenue and government spending would mean little in Britain -- at about 2 per cent of output (GDP) -- but means everything at 12 per cent of Irish GDP.

If GDP is not increasing -- still worse, if it is falling -- then it becomes difficult or impossible to reduce the ratio. The latest estimates suggest that Irish GDP will fall again this year, with a small increase in volume wiped out by a fall of more than one per cent in prices.

Two forecasts last week predicted only modest growth in 2011. One of the forecasters, Brian Devine in NCB Stockbrokers, wisely pointed out that this is not a good time to be a forecaster.

Essentially, they work on a model of the economy. When an economy has been wrenched apart as this one has, the model may no longer be accurate, but it will be some time before a new one can be developed.

So the latest forecasts might be too pessimistic. Equally, they might be too optimistic. It is on this rock that the Government's €15bn budget correction looks like foundering, even before it is properly launched.

The ESRI's model of the economy, based on past trends, showed that a Budget correction on this scale could do huge damage. It is the classic "debt trap," where the effort to reduce the deficit is largely negated by the effects on growth.

The door to the financial markets appeared to slam shut on Thursday, when lenders to the Government demanded 7 per cent for 10-year money. The Government is not borrowing at the moment, so that makes no difference. But it will have to resume borrowing early next year. Even after recovery, the economy will not generate 7 per cent a year to cover such a cost.

Unless something unexpectedly good happens over the next four months, it may become necessary to seek cheaper loans from the new EU rescue fund and the International Monetary Fund (IMF). Helpfully, the man in charge of the EU fund, Klaus Regling said last week that the going rate would be 5 per cent.

He also expected that no one, apart from Greece, would need the funds. Mr Regling knows Ireland, having carried out a report on the causes of the banking crisis. But unless he knows something the rest of us don't, it is hard to see at present how his expectation can be met.

This is where the door of the Croke Park agreement creaks open, like the entrance to some malevolent castle. I took the view that something like the agreement was necessary, because neither the public services nor the public finances would survive a continuation of existing structures and behaviour.

All the cuts to date were designed merely to hold day-to-day public spending at €55bn a year, while the economy grew and reduced the deficit. But the economy is not growing, and seems unlikely to do anything much over the next two years.

It is not at all clear, then, that the €55bn figure can be maintained. The appalling vista of a cut in actual spending looms. The public sector (managers, staff and unions) had a brief window to deliver reductions in numbers, redeployment and better services at lower cost in the way they thought best.

Instead, we got the old inertia, feather-bedding, bureaucratic fiddling and primeval industrial relations practices. They must now face the consequences of their failure, and so must we. There will be mighty laments as the axe falls, but the biggest victims will be those who need good public services, and are going to get worse ones.

Sunday Independent