David Begg’s suggestion that the target date for returning the Irish budget to Maastricht compliance (that is, bring the annual deficit to below -3% of GDP) be postponed for four or five years certainly did get a response. Even Chairman Colm McCarthy felt moved to pen his thoughts on the suggestion (he wasn’t terribly enthused). And the Government moved quickly to stomp on the idea as well. Other commentators waded in over the weekend as well - running as far away as possible from the notion.
No sooner had David left the Morning Ireland studios last Thursday – where he made the suggestion – than Brian Lenihan was dismissing any notion of postponing the 2013 target date. He cited a number of reasons: higher interest payments, agreement with the EU Commission, the 2013 target was already a ‘long time’, etc.
Now this could be a bottomless pit debate over target dates (is 2017 better? What about 2016? What about September 31st 2015?). But a bigger picture is being missed. And that is, regardless of whether postponing the target date is a good or bad thing, how realistic is it that public finances can recover by 2013? This is a debate about realism. Let’s do some chronology:
- In October last year, the Government projected an annual deficit of 6.5 percent, with the budget returning to Maastricht compliance by 2011. That was a long time ago in a galaxy far away.
- By January, the Government rewrote their budgetary projections in an Addendum. They projected a deficit of 9.5 percent with public finances returning to Maastricht compliance by 2013.
- Prior to April, they were concerned that the deficit was spiraling downwards to 12.75 percent.
- Therefore, they introduced the April budget to hold the deficit at 10.75 percent.
What’s the projection now? The Government will probably announce that the year-end deficit will be -12 percent. This is certainly the consensus of independent forecasters.
Do you see a pattern? The Government, so fearful of seeing the deficit plummet to -12+ percent introduced a number of deflationary measures which pretty much ensured the deficit will plummet to -12 percent and possibly lower.
A big story is being missed here. With many commentators clamoring for more cuts in the upcoming budget (it really is becoming a machismo thing for some of them), they’ve all missed the fact that the Government has failed to achieve the only target it has set for itself. They never set a target for employment or consumer spending or investment – only the fiscal deficit. And it failed. It was always going to fail. Because it violated a fundamental rule of recession economics:
During a recession, fiscal strategy must be focused on ending the recession as soon as possible. ONLY once the economy has come out of recession and back on a sustainable path can fiscal consolidation strategies be effective.
Pursuing fiscal consolidation during a recession is like running in quicksand. During the past year the Government increased taxation by €1.8 billion and cut spending by €3.2 billion (capital expenditure, April measures, pension levy) – an ‘adjustment’ of €5 billion; and still the deficit rose.
We are now in a dark place – a much weakened economy saddled with a high deficit. And the Government is preparing for another assault on the economy - €4 billion mostly in public expenditure cuts. As we have seen, public spending cuts will weaken the economy further with little benefit to the deficit.
But do these machismo commentators glimpse this fact? Not a bit. They see neither the woods nor the trees nor the broken bodies from all that timber falling.
I suspect the reaction to David’s comments is not so much about his proposal to extend the target date. After, all the Government has done that already this year. Rather, he has touched a raw nerve - that there is little chance the Government can reach its target because their fiscal strategy, to date, has been wrong.
In the April budget forecast, the Government not only projected a deficit this year of 10.75 percent, this is their projection for next year as well. In other words, they only left themselves three years to close the gap– a gap of 7.75 percent. That was always going to be big ask – cutting the deficit by over 2 ½ percent each year.
Now their starting point is much worse: -12 percent. And the fiscal deficit is going in the wrong direction.
Of course, the recessionary fires are abating somewhat. With emigration climbing, unemployment costs are rising less rapidly (this is what saved the Fianna Fail bacon back in the late 1980s).
But now we have we have a weaker economy – more unemployed, less spending, less investment. If, as per the April projections, the Government can hold next year’s deficit at this year’s level, it will be looking to close a 9 percent gap in three years. We desperately need a debate, not in some kind of ‘wouldn’t-it-be-nice’ world, but whether it is realistic or even desirable.
If David’s intervention introduces a dose of reality in the debate, it will have been a good day’s work. For at the end of the day, it is process – not targets – that counts. If you get the process wrong, you can set yourself all the targets you want.
They will be just so many falling trees.