ANALYSIS:YESTERDAY'S STATEMENTS by the Department of Finance on budget matters revealed relatively little. Among the few nuggets of information was confirmation the total adjustment – cuts and extra taxes – would amount to €6 billion. That was closer to the high end of the spectrum, but given leaks and hints it was hardly a surprise.
This is very much a “frontloading” of the four-year €15 billion cut-and-tax plan. In 2012 and 2013, the tightening will be less painful at €3.5 billion. In 2014, the hairshirt will be loosened further – austerity measures of €2 billion-€2.5 billion will be put in place.
If all goes to plan, the gap between public spending and tax receipts in 2014 will be back to levels deemed acceptable in pre-crisis times, even if the debts racked up since then will not – public debt in mid-decade is expected to stand at 85 per cent of national income, according to yesterday’s figures.
Officials said they were working on an assumption that the ratio of cuts to taxes would be 3:1 next year, although they were quick to add the decision would be taken by politicians. That gives the Government some wriggle room to tweak the plan in the weeks ahead. They added that from 2012, the ratio would shift to 2:1.
The next staging post en route to the December 7th Budget will come at the end of the month, the department said yesterday. Then, the Government’s four-year budgetary consolidation plan will be published.
But hang on, the Government had said repeatedly that that plan would be published by mid-November.
Given how little new data was revealed yesterday, it was difficult to avoid the conclusion that the nine-page document, accompanied by a “technical note”, was more about maintaining some credibility: having flagged the four-year plan for mid-November, producing nothing could have given the appearance deadlines were slipping. Better to publish something and talk it up than admit the plan wasn’t ready.
Among the few new things revealed yesterday were details of the Government’s economic growth forecast for next year. The department said the €6 billion package would reduce GDP growth by 1.5-2 percentage points.
Economic forecasting is not easy at the best of times. Yesterday’s forecasts were prepared at the worst of times. But the stakes could hardly be higher. This is the last chance saloon. Non-credible forecasts now would push the State that much closer to seeking EU-IMF aid.
Thankfully, there is nothing in the Department of Finance’s new economic forecasts that looks unreasonable. Although the numbers lack detail for 2012 and beyond, the rates of economic growth are high enough to give hope that bailout can be avoided and not so high as to look implausibly rosy.
As the chart shows, the new forecasts for growth of Gross Domestic Product (GDP) over the 2011-2014 period are considerably lower than those the Government based its budgetary plans on at the end of last year.
Then, the Government believed that the economy would grow by over 4 per cent a year on average. Now it thinks the rate will average just under 2.7 per cent.
It is for this reason, along with the much larger bank bailout costs, that a bigger budgetary adjustment is needed to give the State any chance of making it through without outside assistance.
As the chart also shows, the Government’s new figures are broadly in line with those produced by the International Monetary Fund the last time it published forecasts for Ireland way back in July. Indeed, the Government’s expectations for the pace of expansion are now marginally lower than the IMF’s over the four years.
There is an important difference, however. The IMF was working on the assumption of a much smaller budgetary adjustment, whereas the Government has factored in the growth-dampening effects of the €6 billion tightening package. One can only assume that the IMF will downgrade its forecasts on the basis of the new measures. It may believe that a point has been reached where there is no longer any way out without assistance.
The bond market increasingly appears to think that. Yields on the 10-year bond reached yet another record high yesterday.
It could all calm down. Nothing is inevitable yet.