ANALYSIS:Europe's reasons for giving us an extra year to rein in deficit are very different from unions', writes PAT McARDLE
AT FIRST sight, yesterday’s European Commission decision to extend the deadline for the correction of our excessive budget deficit by a year to 2014 appears to play to the unions’ hand in the current negotiations. Only last week, the Irish Congress of Trade Unions proposed to spread the effort over an additional four years to 2017 but were roundly dismissed. So, now that the principle has been accepted, are we merely debating the number of additional years?
Not quite, it would appear.
Ireland is but a small part of the commission exercise which yesterday determined that excessive deficits existed in no less than eight euro zone countries. In six cases, the commission recommended that the council set a deadline of 2013 to reduce the deficits below 3 per cent of GDP; the other two, Belgium and Italy, had smallish deficits but high debt ratios so they got a 2012 deadline.
Of more interest to us is the assessment of whether effective action had been taken in response to the April commission recommendations to Greece, Spain, France, Ireland and the UK. All except Greece got a pass mark. Better still, the four performing countries each got a one-year extension to the correction period, ie to 2013 for France and Spain; 2014 for Ireland and to fiscal year 2014/15 for the UK. It is clear that our extension is part of a much bigger exercise. The UK has a comparable fiscal deficit. Both Ireland and the UK have been given a maximum five-year period. It seems unlikely that this could be extended even if the Government wished and they show no such inclination.
The Government is clearly focused on the 2010 budget. The message last evening was one of no change, ie the deficit will be stabilised around 12 per cent of GDP via €4 billion of cuts. Given the difficulty they are having with the 2010 budget, it is not surprising there is little focus on the subsequent years at this stage.
The possibility to extend the deadline is contained in the legislation. Article 5 of the Regulation which was adopted in 2005 provides that where effective action has been taken and there have been “unexpected adverse economic events with major unfavourable consequences for government finances” the deadline can be extended by one year. There is no provision for additional or longer extensions, though the French, as usual, are trying to bend the rules.
What were the unexpected events? The earlier commission recommendations were based on forecasts compiled in January 2009.
This was before the announcement of the January corrective fiscal measures and, of course, well before the April budget. At that stage, the commission expected GDP to contract by 5 per cent in 2009. Now, they have upped that to 7.5 per cent. Clearly, the downturn has been more severe than expected. This, in turn, has had a negative impact on the public finances, providing the justification for the one-year extension.
The proposal also recognises the fact that the goal posts have shifted.
The commission expects this year’s budget deficit to be 12.5 per cent of GDP. In the absence of cuts, they think it would hit 14.7 per cent in 2010. The starting point is worse. This provides a reason to extend the deadline but does not make the task any easier.
