ANALYSIS:Despite a degree of first-mover advantage from our early austerity measures, Ireland must stick stringently to its tough budget targets, writes PAT McARDLE
WHEN STEPHEN King, chief economist of HSBC, was in Dublin recently, he did not advance the standard Keynesian advice, viz to try to spend our way out of recession. This had been recommended by several commentators including the Opposition and the trade unions. However, we hear less of it as time goes by and the absurdity of the suggestion becomes ever more obvious.
If the hole you are in becomes too big, you have no option but to stop digging. King’s recommendation was to throw away the Keynesian textbooks and restore fiscal balance. That, in effect, is what the Government did in early 2009 and it is now clear that we are lucky it did so.
On the one hand, the example of Greece is a powerful reminder of what can happen when a country loses the confidence of the financial markets. A year ago, a few gleefully suggested that we should renege on debt and, indeed, some still have the temerity to talk of defaulting on senior bank liabilities.
On the other hand, countries like the UK and several euro states tried the fiscal expansion route but saw little return for their money and now have to cut back with added interest. In recent weeks, fiscal austerity programmes have been announced in Greece, Spain, Portugal, Italy and the UK.
Even Germany is slashing spending when the opposite would be of more assistance to its trading partners. The crisis has laid bare the power of the markets and the nasty fate that awaits those who stray from the path of fiscal rectitude.
Against this background, the monthly exchequer returns take on added relevance.
In terms of our international profile, Ireland has had significant first-mover advantages. This has resulted in us being singled out for praise from a variety of sources as the Greek crisis grew inexorably worse. Both the Wall Street Journaland the Financial Timeshave commented favourably on what has been achieved and on the lack of popular protest that accompanied it.
It appears that the people at large have more sense than those who advocate resistance.
However, our comparative advantage has been eroded as others emulate what Ireland has done. As a result, they will soon have budget deficits in the 7-8 per cent range whereas ours will still be in double digits.
There is, therefore, no room for slippage on this year’s budget targets.
Tax revenue in the first quarter was €266 million below target. Simple extrapolation would have pointed to a full-year shortfall of €1 billion or more, which would have been problematic as the Government would have no choice but to introduce yet another emergency budget. Fortunately, things took a turn for the better and, by the end of April, the budget was effectively on target.
Yesterday’s end-May exchequer returns confirm that this is still broadly the case.
There was, however, some renewed deterioration. Income tax had another weak month to leave it €219 million or almost 5 per cent behind target.
Everything else more or less cancelled out with the result that total tax revenue was 1.2 per cent down on what was expected.
It is now likely that tax revenue will undershoot by about €500 million for the year as a whole. This reflects the weak labour market and the likelihood that unemployment will continue to rise.
There is, however, a very good chance that this will be offset by other developments. Spending is holding up well and taxes other than income tax were marginally ahead of target at the end of May. It is possible that this trend will continue, thereby offsetting part of any income tax shortfall.
Even if this does not materialise, there may be savings on spending. While voted current spending was on target at the end of May, both voted capital and debt interest were behind profile by €390 million and €155 million, respectively.
The department said this mainly reflects timing issues but it now seems likely that both will undershoot. May was a difficult month for exchequer financing and, though the National Treasury Management Agency (NTMA) had to pay up, it still managed to come in €20 million below target in the month. Meanwhile, the gap between actual and targeted capital spending is growing ever larger and the “timing factors” explanation less believable.
As ever, the mid-year returns will give us a better feel for how things are going and the department will also issue a statement at that time. For now, we can take some comfort from the likelihood there will be only one budget this year.
Surprisingly, the overall exchequer deficit, €7.9 billion, was well down on last year’s €10.6 billion. The difference is largely attributable to payments to the National Pensions Reserve Fund (NPRF). At end-May 2009, €3 billion had been paid to the NPRF but, due to the frontloading of the 2010 NPRF contribution into 2009 to fund investments in AIB and Bank of Ireland, no NPRF payment is due this year.
That is not to say that large subventions to the banks were not needed – more than €10 billion has gone into Anglo alone. However, the Minister has been quite clever in the way this has been done. He has issued promissory notes which deliver the capital bang upfront but will be drawn down piecemeal over the next 10-15 years. As a result, the exchequer has had to raise only €200 million to capitalise the banks this year.
The amount advanced to the National Asset Management Agency (Nama) was a greater €299 million. Some €49 million of this is the Government’s share in the capital of the Nama Special Purpose Vehicle. The remaining €250 million is an advance, repayable before the end of the year. Nama, too, has been structured to minimise the impact on the exchequer. Though it is likely to pay over €40 billion for the assets bought from the banks, this will not be in the form of cash and so will not have to be funded in the markets.