ANALYSIS: After months of being told our fiscal plan was in hand, we are plunged into the worst-case scenario. Is it the EU? asks DAN O'BRIEN
AS RECENTLY as two weeks ago, the Government’s broad fiscal plan for the period to 2014, as set out in December 2009, was intact. Renewed economic growth and a €7.5 billion combination of spending cuts and tax increases, extending out to mid-decade, would close the gaping hole in the public finances.
Each month over the course of this year, including this month, the Government trumpeted that the exchequer returns were on track because tax revenues were stabilising. The effects of additional bank bailout costs on budgetary targets were downplayed and the one-off nature of the hit stressed. Downward statistical revisions to gross domestic product (GDP) in mid-year did not trigger even a suggestion that changes to the strategy would be necessary. Nor did a contraction in the economy in the second quarter, announced on September 23rd.
The Government line, until recent weeks, was that the baseline adjustment in the 2011 budget would be €3 billion, with occasional hints that it could be larger to accelerate the path to recovery.
Then, suddenly, everything changed. Rattled-looking Opposition figures emerged from the Department of Finance after briefings from officials early last week. Seven days ago, the Economic and Social Research Institute discussed a worst-case budgetary scenario involving a €15 billion adjustment over four years.
On Monday night, it was confirmed that an already massive multiannual package of budgetary tightening measures would have to double in size to a worse-case scenario of €15 billion.
What changed so suddenly?
Before we answer that, we must make clear what did not change. Members of the Government have been talking about gloomier prospects for the world economy as a reason for the radical increase in the adjustment. This is nonsense, as the evolution in forecasts for Ireland’s main trading partners – set out in the box – demonstrates.
If developments abroad can be ruled out as a reason for the sudden and radical change in the magnitude of the budgetary adjustment, what explains it? There are three possibilities.
First, the sudden change was a carefully crafted plan to reveal the worst in one go. Having been accused of drip-feeding bad banking news, the State favoured a big bang approach on the budget crisis.
Such a dramatic move could also prepare the ground for triggering the get-out clause in the Croke Park deal. To do so would give the Government the option of slicing more off public sector pay and cutting numbers employed in the forthcoming budget.
Working against this explanation is that not even people in Government have suggested it. And as for a Machiavellian scheme to scupper Croke Park, Siptu president Jack OConnor told The Irish Timeshe did not believe that would happen. He said despite his "totally opposite worldview" to the Taoiseach and Minister for Finance he did not believe they were so "disingenuous" as to attempt to trash the deal so painstakingly negotiated earlier in the year.
A second explanation for the sudden change is a combination of incompetence in the Department of Finance in not seeing the writing on the wall and wishful thinking among those in Government and officialdom that everything would turn out in the end as planned.
There is a lot more evidence to support this explanation. The number of negative economic developments over recent months, listed in the opening paragraphs of this article, make it difficult to understand in hindsight why more was not done to prepare public opinion and the markets for such a surprise.
Regarding the former, it is not clear what political or other kind of gain there could have been for the Government to announce such a massive change on an already shell-shocked public, and the latter has clearly been spooked by the announcement. Since last Monday week, yields on Irish Government 10-year bonds have risen by almost three-quarters of a percentage point and are now close to the peaks reached at the worst moments of the euro zone debt crisis.
In addition, when questioned by The Irish Timesyesterday, sources in Fine Gael and the Labour Party familiar with the workings of the Department of Finance expressed grave doubts about its capacity in relation to its handling of the revelation.
A third explanation is that the change was triggered by Europe. There are also strong grounds to believe that pressure from EU sources – both the European Commission and the European Central Bank – were significant, if not instrumental, in the radical change.
The announcement of the “final” costs of the bank bailouts on that dramatic day on September 30th happened to coincide with the deadline all EU countries face for the filing of full budgetary figures to the EU’s statistical agency in Luxembourg.
These figures, known as the General Government Budget Balance, are the numbers that count when it comes to any real assessment of deficits (the exchequer figures, released by the Department of Finance each month, cover much less public spending and revenue).
It was in these filings that the gigantic figure of a budget deficit of 32 per cent of GDP in 2010 was first revealed.
It was not possible to establish yesterday whether the shock of these numbers led to Brussels and Frankfurt advocating the more drastic adjustment recently outlined, but all sources contacted by The Irish Timesacknowledged the very close involvement of EU institutions in recent weeks. (One even said that an adjustment greater than the €15 billion was originally sought.)
Though talk of the medicine killing the patient is fundamentally misplaced, there is no doubt that an adjustment of this magnitude will have a serious growth-dampening effect.
Given all the factors it is hard to avoid the conclusion that it is now as likely as not that the State will have no option but to resort to a bailout.
World economy: just a scapegoat
IN THE run-up to the framing of the original budgetary plans in December 2009, both the OECD and IMF published their forecasts for the world economy in 2010. They were downbeat about the pace of recovery then. Now both organisation’s 2010 forecasts for Ireland’s main trading partners – the euro zone, the US and Britain – are all stronger than a year ago.
That the world economy has turned out to be stronger than anticipated is reflected in surging Irish exports so far this year. To suggest that Ireland’s worse-than-anticipated position now is the result of weaker-than-expected economic growth abroad is derisory.
What about 2011? Neither of the main international organisations had forecasts for 2011 in their flagship publications in late 2009, but claims by the Government that a deteriorating international picture now is to blame for the sudden change are equally spurious.
Over the past three months, the consensus among a range of forecasters, as compiled by Reuters and published weekly in the Economist magazine, shows no such thing.
At the end of July, the consensus growth forecast for the euro zone in 2011 was 1.2 per cent. Currently, it is marginally better, at 1.3 per cent. The consensus forecast for British GDP next year is the same as three months ago, at 1.8 per cent. Only in relation to US growth are forecasters collectively less optimistic. The consensus is for an expansion of the US economy by a solid 2.4 per cent next year, down from 2.9 per cent three months ago.