ECONOMIST VIEW: BRIAN DEVINE, NCB Stockbrokers :IN OUR view, all the current Government could do was deliver a four-year plan which was credible in terms of outlining detailed measures to be implemented over the period 2011-2014.
The 140-page National Recovery Plan does illustrate that the fiscal consolidation measures can be achieved and this does restore some credibility in Ireland and its fiscal plans.
We believe the Government did a decent job on this front, but, unfortunately, the issue of the banks still hangs over the economy.
There was relatively little new in the document from the macro viewpoint.
There is to be a €15 billion budgetary correction over four years, broken down into €10 billion in public expenditure measures and €5 billion in tax-revenue raising measures.
The Government’s base case sees the deficit being reduced to 9.1 per cent of GDP in 2011 before reaching 3 per cent in 2014. The primary balance is forecast at 1.9 per cent and the average interest rate at 4.7 per cent.
Debt is seen peaking at 102 per cent in 2013 before falling to 100 per cent in 2014.
Whether or not Ireland actually reaches a deficit to GDP level of 3 per cent by 2014 is highly uncertain given the fact that it depends on reaching a specific average growth rate over the period to 2014 (nominal growth averaging 3.7 per cent).
We think that the growth rate (nominal growth averaging 3.0 per cent) will be less than that implied by the Department of Finance’s forecast. We do not place much credence though in point forecasts and rather like to think in terms of a range of possible outcomes.
In fairness, the Government did provide three cases. In their optimistic case, debt would have peaked at 97 per cent in 2011 before falling to 89 per cent in 2014. In their pessimistic case, more in line with our base case, debt would still be on a rising trajectory at 113 per cent in 2014.
The problem with all these figures is that they do not account for any extra funds required for the banking sector. Depending on exactly how the sector is to be “restructured”, there could be a significant impact on the debt level and future interest costs.
Furthermore, there are no details on the costs of the funds to be drawn down from the European Financial Stability Facility, although presumably they are factored into the interest projections.
From the market perspective, Ireland’s agreement with the EU, regarding loans for the Government and the restructuring of the banks will be the more important milestone.
What is clear though, regardless of who is leading the country or what one thinks we should do with bank bonds, is that Ireland cannot currently borrow on the international markets.
With an underlying (excluding bank issues) fiscal deficit of €18.8 billion, the country needs a loan from Europe. In order to get this loan the country must undergo a significant fiscal consolidation.
If Ireland decides to ignore Europe, then there will be insufficient money to run the hospitals, schools etc.
This is the harsh reality and the reason fiscal consolidation is required. Like it or not the current plan is a detailed plan. Less criticism and more constructive solutions from the Opposition would be a welcome input in advance of the EU/IMF agreement.
Brian Devine is chief economist with NCB Stockbrokers