ANALYSIS:Congress implies speed of adjustment matters little to investors – a risky proposition
THERE WAS a sense of deja vu at yesterday’s Ictu press conference on the economy.
At the beginning of the year the Government entered into talks with the social partners, and congress, in turn, produced a 10-point plan for national recovery entitled There is a Better, Fairer Way. The talks eventually broke down – no great surprise as, after all, turkeys do not generally vote for Christmas, even if in the 1980s they did so, with spectacular results.
Nine months later, the Government has again invited the unions to talks that are ongoing. Ictu, in turn, brushed down its old document and relaunched a Congress Ten-Point Plan for a Better, Fairer Way.
The essence of the Ictu plan is less pain now in return for more pain later, though that is not how it would see it.
The Government plans to bring the budget deficit down to 3 per cent of GDP by 2013. This would involve €16 billion “cuts”, of which €4 billion would fall in 2010. It is generally forgotten by many and conveniently ignored by others that this is but the first instalment of four years’ pain.
Ictu focuses on 2010 but the essence of its position is that the proposed medicine is so severe that the patient may not recover from it. In this it does have a point.
In fact, if you go back to last autumn, many economists, especially those of the stockbroking fraternity, were calling for fiscal expansion even greater than what Ictu appears to favour.
Those economists changed their tunes in the meantime as they and, it would seem, most others came to believe that the Government has little option but to deliver what it has promised to its domestic constituents and foreign partners.
Like turkeys, politicians are not noted for their espousal of harsh medicine. So what has changed; what has caused the politicians and the economists to go for the tough option?
In fairness to Ictu, it devotes a good bit of attention to this. Following is the relevant quote:
“The point being made by the Hard Jocks, who want to inflict immediate and sudden pain on the Irish economy and society, is that interest payments may run out of control and will eat into taxes. Interest payments will rise substantially and may double, but compared to the levels in the 1980s, they will still be manageable – especially if growth returns earlier – which this longer recovery scenario enables.”
Having not come across the term “Hard Jocks” before, I Googled it but was quickly in an erotic zone and had to desist for fear of a virus!
Anyway, the critical Ictu assumption is that the interest bill will only double.
However, I understand that at the recent social partner briefings the Government stated that in a scenario where the fiscal correction was spread out over an extra four years to 2017, as suggested by Ictu, interest as a percentage of total tax revenue would increase from 5 per cent in 2008 to about 40 per cent by 2017, an eight-fold increase.
Debt service peaked at 35 per cent of tax revenue in 1985.
If this is correct, the Ictu plan is hardly viable.
It is possible that the Ictu has a more optimistic set of medium-term growth forecasts – this could explain some of the difference, but it must be said that the department’s forecasts, as set out in the April 2009 budget, could not be described as pessimistic.
The other point made by Ictu is that at the beginning of the year the “Hard Jocks” were predicting that Ireland would not be able to borrow at all. They dismiss this argument on the basis of the huge cash pile amassed by the Government in the meantime.
There is no doubt that we were virtually unable to borrow last February.
Things did change dramatically afterwards. However, this was after the talks broke down, after the unveiling of the toughest fiscal programme seen outside of a less-developed country and after the announcement of Nama, the most ambitious bank rescue programme yet seen.
We will never know what would have happened in the absence of these announcements, ie there is no economic “counterfactual”.
Implicit in the Ictu position is that the speed of the fiscal adjustment makes little difference to foreign investors and lenders. The problem is that if you go this route you are betting the house on it.
The risk of delay is loss of external confidence and a return to a February-type scenario.
The other difficulty would be to convince our EU partners that a prolonged correction was advisable. Here the Ictu is on stronger ground. A united front by the social partners would demand a hearing but not guarantee a result.