John Bruton

Opinions & Ideas

Category: Colm McCarthy

IRISH ECONOMISTS AND BUDGET….WHAT IS TO BE DONE?

Over the last few days, four different Irish economists have been offering their thoughts on the Irish budget, due to take place in October. Some are more realistic than others.
……………………………………………………………………………………………………………..
IGNORE THE IMF ADVICE?
WHAT ABOUT THE PRIMARY DEFICIT?
WOULD AUSTERITY REALLY BE EASIER DURING A BOOM?
ECONOMICS SHOULD BE GROUNDED IN REALITY, INCLUDING POLITICAL REALITY
…………………………………………………………………………………………………………….
 
DAVID MCWILLIAMS
 
David McWilliams in the “Sunday Business Post”, who has, in the past, favoured Ireland leaving the euro , urged the Irish Government, in preparing the 2014 budget, to ignore the advice of the IMF, the EU, and the ECB, to complete the programme of budget consolidation it and its predecessor had agreed with them, and instead stimulate the economy.
The IMF, the EU and the ECB are lending the Irish government money to keep services going, at rates of interest below market rates, so David’s advice is daring, to say the least.
 And Ireland still has a primary deficit, it is spending more on day to day spending than it collects in day to day revenue, even before it pays a cent of interest on past debts.
 David justifies his advice on the basis of the Household Budget Survey, which suggests that many Irish households are cutting back on spending, defaulting on rent payments, and drawing down savings to meet day to day expenses. A good part of the problem seems to arise, not just from debts, but from higher than expected bills, for which families had not adequately budgeted in advance, like university or school costs, or unexpectedly high utility bills.
Of course, an easier budget would leave people able to spend a little more in the shops, and that would boost Government revenues. But a lot of any extra spending power, generated by a “stimulus” budget, would also go out of the country on imports.
Another problem is credibility. If people believe the stimulus is only temporary, they may decide to save whatever extra they get, and not spend it. To the extent that that happens, there would be no stimulus to the economy, just an increase in the debts the taxpayer would eventually have to repay, assuming some was prepared to lend it to them.
Then there is an even bigger question mark over David’s thesis.
Where, and from whom, would the extra money he wants to spend, be borrowed ?

COLM MCCARTHY


As Colm McCarthy, in the “Sunday Independent”, points out, the government has been adding to the outstanding debt it owes at a rate of 1 billion euros per month throughout 2013.
 
 He claims
 
“Government revenue is still, after tax increases and expenditure cuts, running way behind government spending and the state is continuing to overspend on a grand scale”
 
He adds
 
“It is bizarre that continued borrowing, which will add to the debt mountain, is routinely described as austerity”
 
Colm is also critical of the notion that, once Ireland is no longer borrowing new money from the IMF/EU/ECB troika (hopefully next year), it will somehow be in the clear, and restored to full fiscal sovereignty.
As he puts it, all that would then happen is that the discipline, required now by” official lenders” (who are under some sort of political pressure to keep the government going), will then be replaced by the discipline of “volunteer lenders”, who will be under no obligation to lend any money at all, to Ireland.
These volunteer lenders would, he claims, be

 “easily spooked by signs of consolidation fatigue and political irresolution in over-indebted countries”. 
 
I believe they would also be easily spooked by the sort of advice offered by David McWilliams, because they would be afraid that, if it was followed, they simply might not get all their money back. And they have plenty of other places to lend it. As private institutions, they are not obliged to lend to any particular country.
Furthermore, even when Ireland has exited the EU/IMF/ECB programme, it will still be required to abide by the disciplines of the EU Fiscal Compact, approved by the Irish people in a referendum, and by close EU supervision which will apply to all members of the euro zone.
It is important to remember that the banks, who would be lending to Ireland once it had  exited the EU/IMF/ECB programme, would be lending money that ultimately belongs to pension funds, insurance companies, and savers , and they would have clear obligations to take every step to guarantee that they would get their clients money back, with interest.
Colm also points out that Ireland has to make substantial repayment or roll over of existing debts, in particular years in the near future, for example,
 12.7 billion euros in 2016,
 19.6 billion in 2019, and
 26.8 billion in 2020.

CONSTANTIN GURDGIEV
 

Constantin Gurdgiev in the “Sunday Times” analysed where the money Ireland is borrowing is going.
He says
“The two main current spending lines, social protection and health, are running at 65.2% of total voted current expenditure, up more than  four percentage points since 2010”, when they were “only” 61% of all voted spending.
In other words, these two departments are elbowing out  the others. He adds that health, social protection, and education combined, absorb 90% of all tax receipts.
He goes on to talk about the cuts that have been made so far.
He says
 
“Much of the current spending cuts hit temporary and contract staff, leaving permanent and more expensive staff protected.”
 
He says most the  “savings “ in public sector pay, achieved by the Croke Park and Haddington road agreements with the public sector unions,  are not sustainable, and will be reversed, when the latter agreement expires.  In this sense, they do not represent a permanent structural reform.
He advocates   cuts in long term unemployment benefits, and the means testing of state pensions and of medical cards for the elderly.

KEVIN O ROURKE
 

Meanwhile, on the excellent “Irish Economy “ website, Kevin O Rourke, formerly Professor of Economics in Trinity College Dublin and now in Oxford University, writes about the effect of austerity, and the fact that austerity, by reducing spending, thereby reduces government revenue somewhat, and is, to that extent, self cancelling.
He says
“This does not mean that fiscal consolidation is never necessary, but the time for it, is when times are good, not when times are bad”

Well, who could really disagree with that?
It is sound economics…..but unlikely politics.
When times are good, and revenues are nearly in surplus, it is, of course, theoretically easier to cut spending without real damage.
But in a democracy it is almost impossible, politically speaking, to do it, because voters, who might be losing some benefit, will point to the plentiful revenues, and say
 
“We do not need to do this, to meet some book keeping rule. We have the money, so we do not need to impose suffering on ourselves”
 
Politically, in my experience, it is actually MORE difficult to cut in a boom, than during a recession! In a recession, people will see the need for cuts. In a boom, they will not.
The science of economics, divorced from the art of politics, is not all that useful!



A COMMENT ON THE COMMENTATORS…IRISH ATTITUDES TO THE EURO CRISIS

A lot of superficial commentary appears in the Irish Sunday papers. 

But there are two columnists I always try to read, because they usually have something to say that  you will not read elsewhere.
My favourite is Colm McCarthy, who writes in the Sunday Independent .
The other is Damien Kiberd, who writes in the Sunday Times(Ireland edition)

This week, Colm McCarthy’s article is entitled
“Now we are asked to trust the guys who screwed up EMU originally.”
Damien Kiberd’s is on a similar theme, and his article is entitled
 “Austerity leaves us in No Man’s Land”.

COLM MCCARTHY
Colm McCarthy claims that the EU single currency has been
 “an unmitigated disaster”. 
He refers to the recent admission by the German Finance Minister, Wolfgang Schauble, that the euro project was
” riddled  with design  flaws”.
Colm claims the “design flaws” were put in place because powerful lobbies in the French and German banking industry lobbied against effective banking union.
 He calls for a public enquiry into how these design flaws came about, because, he argues,  the EU public will be unwilling to  vote for greater EU powers, unless they can first  see that  the reasons for the original mistakes have been  honestly explored. I believe he is right in this.
He also says that
“During 2010, the Irish Government was bullied and harassed by the ECB, acting beyond its powers, into bankrupting itself through paying off foreign investors in bust banks”
This is a reference to the Irish state being required to pay back , in full, the senior unguaranteed bondholders of banks ,like Anglo Irish Bank, that were already bust.
Again he is right, and I agree with him, but he overstates his case a bit.
It was indeed senseless for EU institutions to have insisted on private investors, in a private bank, who made a mistake, getting 100% of their money back from the Irish taxpayer, when bondholders of the Greek sovereign state were subsequently required to take a large haircut.
Surely those who lend to Governments should have got preference over those who lent money, for a good potential rate of return, to private banks!

On the other hand, financial confidence was much more fragile in 2010 than it was in 2012. Perhaps the ECB was afraid of a knock on effect if unguaranteed bondholders were not paid back in 2010. But if the burden of the ECB’s caution has fallen on the shoulders of the Irish taxpayers alone, that burden should be relieved now that the panic is over.

But I think Colm overstates his case in suggesting that this has “bankrupted” the Irish state.
Ireland’s   financial difficulties derive, to a much greater extent from the gap, which still exists to this day, between tax revenue and daily spending on things that have nothing to do with money put into banks, or even interest paid on past debts.

THE IRISH STATE STILL HAS A PRIMARY DEFICIT…  THAT IS IT IS SPENDING MORE, EVERY DAY, THAN IT IS TAKING IN, EVEN IF IT HAD NO INTEREST TO PAY ON PAT DEBTS, AND HAD NOT PUT A SINGLE CENT INTO RECAPITALISING A BANK! 

This awkward fact is not much mentioned by Irish economic commentators. I do not know why. It is only fair to add that, while this primary deficit still exists, it has been dramatically cut since  2009 by the budgets since then, and will probably disappear altogether in 2014, if all goes according to plan

DAMIEN KIBERD
In his article, Damien Kiberd attacks what he calls “austerity economics”.
He says these austerity policies have been 
“dictated by EU leaders who are totally unaccountable –just like the elites that caused the First World War”
He complains that Irish banks were ”forced” to dump non performing loans which resulted in these loan losses being “crystallised within a very short time and at a very high cost”.
Damien’s thinking is a bit loose, to put it mildly. The elite, who” caused” the First War, WERE held accountable, actually. Several lost their thrones. The British Liberal Party never recovered. The Italian Liberals never saw power again. 

Did he really think the Irish banks could have continued carrying those big losses on their books, without recognising or quantifying them, and carried on lending as before? Of course, they could not have done so without a risk of a run on their deposits.

As far as “austerity” being “dictated by the ECB and EU leaders”, as Damien claims, the question he avoids is a simple one…..If the EU, the ECB, and the IMF did not lend Ireland money in 2010, to bridge the gap between day to day spending and day to day revenue, where else was the money going to come from? Who else was going to lend the money?

And if the answer is no one,  that would that have meant more, and faster, austerity, to achieve an immediate and complete bridging of  the entire gap between revenue and spending in ONE year, or even one month.

It would be more accurate to say that what  the EU, the ECB and the IMF “dictated” to Ireland  was that it bridge the gap between its own spending and its own revenue more SLOWLY than it would otherwise have done, by lending Ireland the  bridging finance.
If Damien is saying Ireland should have refused the EU/ECB/IMF money, then he is saying we should have had a huge dose of austerity in 2010, and risked a crash in our entire social system.
Some argue that, while austerity is inevitable for Ireland, Germany, Sweden and the Netherlands should run bigger deficits. Maybe.

But how easy is for them to do that if they are also having to put money aside, to lend to countries that may get into difficulty, and to provide funds for all their own baby boomers who are on the brink of retirement?

German incomes grew at about one fifth the pace Irish incomes grew in the 1994 to 2005 period. 
That is the reality German politicians have to face, and Irish economic commentators should address themselves to German voters, because those are the people who now have to be convinced. 

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