ECONOMICS:Public sector pay must be cut in order to turn our budgetary position towards balance
IN AN interview with The Irish Times, reported last Saturday, Brian Cowen said: "Certainly, it is a challenge to us now given how quickly the turnaround had come. That is the big difference now, compared to the 1980s when we had a steady decline over a period of years, to the point where people's room for manoeuvre was absolutely nil. It just had to be dealt with." So we can take from this statement that there is no difference between where we are now and the 1980s crisis, except the speed with which the crisis has been reached. This is the most explicit admission yet of the gravity of the situation and is welcome for that.
In the 1980s we borrowed more each year until we reached the point where our national debt was well in excess of the country's annual income. The cost of borrowing rose dramatically and fewer and fewer institutions would lend to us at all, because of the growing risk that we would be unable to repay. Our room for manoeuvre became nil because lending became unavailable to us.
Cowen said the turnaround came quickly this time but that is no comfort to international lenders. Our general government debt has risen from less than 25 per cent of the country's income in 2007 to over 41 per cent at the end of 2008. Official estimates are that it will increase further to almost 50 per cent of income in the next two years. But this could be conservative. The official forecast for our borrowing needs for 2008 was €5 billion but the outcome was €13 billion.
What is different now, compared to the 1980s, is that we are in the middle of the most acute global shortage of credit that has ever been seen in the economy of the developed world. The US and European countries are expected to try to borrow €2,000 billion between them this year to fund the fiscal stimulus programmes they have undertaken. So lenders will hold the high ground in the international capital markets. Why should they lend to Ireland, given the plethora of alternatives open to them? Our debt may be low compared to other countries but it appears to be rocketing out of control.
It already costs us more than 1.5 per cent a year in excess of that in Germany to borrow for 10 years. Such a yield gap is a negative, in the current climate, since it indicates the market's perception that we are a high-risk borrower. Indeed it could be taken to suggest there is a risk we would be pushed out of the euro, because of our debt problem, before a 10-year loan would be repaid. Most lenders are unlikely to be tempted by yield alone, since it was the search for yield and the downplaying of risks that underlay the bankruptcies of many investors in the past year or so. The risks of lending to Ireland are clear and the yields are not sufficiently high to compensate. More importantly, no convincing policy action has been taken to address our problems.
Last week the National Treasury Management Agency, the body responsible for organising our borrowings and managing the national debt, highlighted the problems for Ireland borrowing in such an environment. A Financial Times article detailing the borrowing needs of the US and Europe this year was circulated at the agency's press conference. Putting Ireland's borrowing need this year at possibly as much as €25 billion, the agency's chief executive said: "We've never been faced with a borrowing of this size before." A German bond issue (government borrowing) in November proved difficult to sell and this week Germany's efforts to borrow €6 billion for 10 years failed when the market offered only to lend €5.2 billion. Germany has the most liquid and highest credit rating of all euro bond markets.
In the interview mentioned above, Cowen said it could take up to five years for the public finances to recover. It won't, if we are approaching the point where there is nil room for manoeuvre. International lenders could force a quick rebalancing of our budget by not advancing us the money to go on as we are now. That was what happened in the 1980s.
In the interview Cowen said: "We have to roll up our sleeves and just try and be as competitive as others in other markets." But competitiveness is not the core of this crisis. It is the government finances. What we have to do is simple. It is up to Cowen to roll up his sleeves and cut public sector pay to turn our budgetary position towards balance. When that is done we will get on the same virtuous circle we boarded after the harsh measures of the late 1980s, when the economy grew, tax revenue was boosted and international lenders found us creditworthy again.
