Sunday 15 September 2019

Seamus Coffey: Referendum campaigners have failed to connect with voters ... and the scaremongering hasn’t helped

Fianna Fail leader Micheal Martin at the launch of the Fianna Fail campaign for a YES vote in the EU fiscal treaty referendum. Photo: Tom Burke
Fianna Fail leader Micheal Martin at the launch of the Fianna Fail campaign for a YES vote in the EU fiscal treaty referendum. Photo: Tom Burke

THE campaign for the referendum on The Treaty on Stability, Coordination and Governance has been ongoing for nearly two weeks now but neither side has managed to make a telling connection to the electorate.

The ‘Yes’ campaign has focused on the politics of the Treaty by casting doubts over whether Ireland will have access to extra funding after 2013 and their statements are full of vague references to stability, jobs and investment.

The ‘No’ campaign has focused on the economics of the Treaty by suggesting that the budgetary rules in the Treaty will lead to extra austerity after 2015 and their statements are full of references to savage cuts, increased taxes and debt repayments.

The budgetary rules in the Treaty are contained in a short 1,400-word section known as The Fiscal Compact. The two rules are that governments should run a structural deficit of no more than 1pc of GDP, with a slightly lower limit for high-debt countries, and that these high-debt countries should need to bring their government debt ratio down to the 60pc of GDP threshold at an agreed rate. We will focus on this debt brake rule.

It is important to note that none of these rules are new and already form part of The Stability and Growth Pact. Rejecting the Treaty will not abrogate Ireland’s requirement to adhere to the rules. There can be no cost of extra austerity of a Yes vote because the requirement to bring the deficit down does not come from the Treaty.

In reality, the Treaty will change very little as we are already bound by the rules in The Stability and Growth Pact, and even in the absence of the rules the scope for discretionary fiscal policy in Ireland is going to be extremely limited for the medium term given the precarious state of the public finances. We cannot vote away the need to reduce the government deficit.

The requirement for governments to keep their debt below a level equal to 60pc of GDP was originally included in the Maastricht Treaty signed in 1992. The provisions in that Treaty meant it was expected that high-debt countries would reduce their debt ratios through a combination of low deficits and nominal GDP growth.

The requirements of the ‘1/20th’ rule which came into force last year merely places on a formal footing an expectation that was introduced 20 years ago. Under the rule high-debt countries must reduce 1/20th of the difference between their current debt ratio and the 60pc of GDP reference value.

This rule makes no reference to forced debt repayments. Just like in the Maastricht criteria the expectation is that low deficits and nominal growth will bring the ratio down, but the rule gives a numerical benchmark for the required rate of reduction. If the rate of reduction is less than the benchmark, a country will enter an Excessive Deficit Procedure to see what measures can be introduced to bring the reduction in the debt ratio in line with the rule but there will be no forced repayments.

Due to our deficits exceeding the 3pc of GDP limit in 2008 Ireland is already in an Excessive Deficit Procedure. The budgetary measures we are introducing are designed to bring the deficit down to 3pc of GDP by 2015 and we are currently adhering to a timetable agreed in 2010.

For 2010 and 2011 the target deficits were 12.5pc and 10.6pc of GDP respectively. Both of these were achieved, and for 2012 the deficit target is 8.6pc of GDP. The current projection is that we will again meet the target with a deficit of 8.3pc of GDP projected for 2012. If this improvement can be maintained we can leave the Excessive Deficit Procedure in 2015 with a deficit below the 3pc of GDP threshold.

To achieve this it is planned that there will be a further €8.6 billion of expenditure cuts and tax increases spread over the next three budgets. The ‘No’ campaign has focused on the post-2015 period and claimed that adhering to the debt brake rule will force further cuts of up to €5 billion a year. This is not true.

When a country leaves the Excessive Deficit Procedure, they will enter a three-year transition period before the debt brake rule applies. Ireland will be in this three-year phase from 2016 to 2018 so it will actually be 2019 before the debt brake applies to us. Even if the rule did not exist we would need to bring the debt ratio down as a country cannot persist in having a debt ratio above 100pc of GDP.

The requirements of the debt brake rule are actually relatively modest and it is likely that we will try to bring the ratio down at a rate faster than that required by the rule. Consider a country with a high debt ratio of 100pc of GDP. This is 40pc points above the reference value, so the following year 1/20th of that gap must be closed. That means the debt ratio must be reduced to 98pc of GDP.

As the reduction is in a ratio it can be achieved with a reduction in the numerator (the debt) or an increase in the denominator (GDP). In this case the required reduction can be achieved with a balanced budget if nominal GDP growth is just 2pc. There would be no need to reduce the amount of the debt by making capital repayments if nominal growth is just 2pc.

If nominal growth is 4pc per annum, which could be achieved through a combination of 2pc inflation and 2pc real growth, then the country would satisfy the debt brake rule by running a deficit of 2pc of GDP. The debt ratio comes down even though the country is borrowing more. If these relatively benign conditions are not satisfied the country will enter a procedure where steps must be introduced to bring the country back ‘on track’. Government debt is rolled over when it matures and rarely paid down.

Performance against the rule is assessed as an average over three years, and the rule also makes substantial allowances for the impact of the economic cycle and severe or exceptional events. The rule is not a straitjacket.

Ireland will actually be close to satisfying the requirements of the debt brake rule when we leave the Excessive Deficit Procedure. By then, the plan is to have the deficit under 3pc of GDP and most projections are for nominal growth of around 4pc per annum around the same time.

In fact, using IMF projections released a few weeks ago it can be shown that Ireland will actually by in compliance with the debt brake rule in 2015. This is four years before the rule is even applied to us. The IMF projection is based on no further fiscal adjustment after the end of the current plan in 2015.

The ‘No’ campaign are are very wide of the mark when they suggest that something that has been around since 1992 can be avoided by rejecting the referendum. They make an even greater error when they suggest that adhering to the rule will cost us €5 billion per annum. It will not. The rule is a debt brake which aims to decelerate the accumulation of debt, not put it into reverse.

Ireland faces some severe economic difficulties but forced debt repayments because of the debt brake will not be one of them. As stated, we will likely try to be bring the ratio down at a rate faster than that required by the rule. Suggestions of €5 billion of ‘savage cuts’ as a result of the rule is little more than scaremongering.

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