tommy271
Forumer storico
Economy: Hopes pinned on four-year fiscal consolidation plan
By John Murray Brown
Published: November 2 2010 17:22 | Last updated: November 2 2010 17:22
According to one of the placards brandished during street protests in Athens this year, “Greece is not Ireland.” The message was that ordinary Greeks would not put up with the sort of austerity measures dished out in Dublin.
But Irish officials believe the two economies are different in another important respect. Ireland has a dynamic export sector, albeit largely foreign-owned, which – given a fair wind – might just see the economy survive its current difficulties.
The next few months will be critical.
Later this month the government will for the first time set out a multiyear budget plan. This is aimed at reassuring international debt investors, but also at securing domestic political support for its strategy to put the public finances back on track.
On December 7, Brian Lenihan, the finance minister, will announce the first stage in the four-year adjustment – presenting to parliament his 2011 budget.
The hope is that, by producing a credible and detailed fiscal consolidation plan, Ireland’s cost of borrowing will have improved when it returns to the debt markets, as expected, early in the new year.
Ireland is funded until the middle of next year, and for this reason cancelled the planned debt auctions in October and November.
But its key debt ratios have worsened, with debt as a proportion of national output set to rise to 98 per cent by the end of this year compared with 25 per cent going into the crisis – largely due to the cost of the bank bail-outs.
Patrick Honohan, central bank governor, points out the deterioration is magnified by recent price deflation, which he calculates accounts for about a sixth of the increase in the debt ratios.
In late September, concerns over possible delays to its fiscal adjustment plan pushed the theoretical cost of Irish borrowing to record highs, with spreads on Irish government debt reaching a record 4 per cent above benchmark German Bunds.
Spreads later narrowed, partly in response to the welcome clarity provided on the final bill for the banking crisis by a statement made by Mr Lenihan on September 30.
But some in the market are betting that Ireland has taken on more than it can handle, and may eventually have to look to outside assistance from the European Union or the International Monetary Fund.
The current plan envisages that Ireland will reduce the underlying deficit – stripping out the one-off bank rescue costs – from 11.9 per cent of gross domestic product this year to below 3 per cent in 2014. Bank recapitalisations take the deficit this year to 32 per cent – or 10 times the target figure.
The deficit next year was originally forecast to fall to 10 per cent, based on €4bn ($5.5bn) of savings, including a €1bn reduction in the capital budget.
But the Economic and Social Research Institute, an independent think-tank, said in widely reported comments last month that it now believed the 2014 target was “worryingly ambitious”.
In its quarterly economic commentary, it calculated that Ireland would have to make savings of €15bn over the four-year period – equivalent to 10 per cent of GDP, twice the amount originally envisaged.
The government has now accepted the €15bn figure, explaining that the “key reasons for the significant increase are the lower growth prospects, both at home and abroad, and higher debt interest costs.”
The government’s options are limited. Public sector pay has already been cut by an average of 15 per cent in the past three budgets. In an attempt to secure industrial peace, the government agreed with trade unions there would be no further cuts before 2014 in exchange for verifiable improvements in work practices and in the delivery of public services.
On the tax side, no action has been taken on the long-term structural reforms, including the introduction of a property tax, suggested by a commission which the government appointed. Most commentators believe the minister will look to make a large part of the adjustment through cutting the welfare budget.
All this will be politically fraught. But some economists worry that the cuts could exacerbate the economic slowdown and imperil the recovery.
The ESRI now believes GDP will shrink by 0.25 per cent this year, against its forecast in the summer of growth of 0.25 per cent.
Gross national product, which economists see as a better measure of domestic activity, as it strips out the profits and dividends repatriated by foreign multinationals, is set to fall by 1.5 per cent this year, against a summer forecast of minus 0.5 per cent.
The more gloomy outlook follows what the ESRI describes as the “disappointing” second-quarter GDP figures, with the economy declining by 1.2 per cent, after rising by 2.2 per cent in the first quarter.
This may yet prove to be a statistical rather than a real setback. Quarterly output figures tend to be skewed by the behaviour of the multinationals, which account for 80 per cent of Irish exports.
Indeed, Mr Lenihan has put the setback down to an increase in the royalty payments that the local operations of multinationals make to their parents – for the use of designs and processes – which should, economists say, come through as higher exports in subsequent quarters.
But if Ireland is to avoid an external bail-out, it is not only the fiscal adjustment that it has to get right. A return to growth is essential.
FT.com / Reports - Economy: Hopes pinned on four-year fiscal consolidation plan
By John Murray Brown
Published: November 2 2010 17:22 | Last updated: November 2 2010 17:22
According to one of the placards brandished during street protests in Athens this year, “Greece is not Ireland.” The message was that ordinary Greeks would not put up with the sort of austerity measures dished out in Dublin.
But Irish officials believe the two economies are different in another important respect. Ireland has a dynamic export sector, albeit largely foreign-owned, which – given a fair wind – might just see the economy survive its current difficulties.
The next few months will be critical.
Later this month the government will for the first time set out a multiyear budget plan. This is aimed at reassuring international debt investors, but also at securing domestic political support for its strategy to put the public finances back on track.
On December 7, Brian Lenihan, the finance minister, will announce the first stage in the four-year adjustment – presenting to parliament his 2011 budget.
The hope is that, by producing a credible and detailed fiscal consolidation plan, Ireland’s cost of borrowing will have improved when it returns to the debt markets, as expected, early in the new year.
Ireland is funded until the middle of next year, and for this reason cancelled the planned debt auctions in October and November.
But its key debt ratios have worsened, with debt as a proportion of national output set to rise to 98 per cent by the end of this year compared with 25 per cent going into the crisis – largely due to the cost of the bank bail-outs.
Patrick Honohan, central bank governor, points out the deterioration is magnified by recent price deflation, which he calculates accounts for about a sixth of the increase in the debt ratios.
In late September, concerns over possible delays to its fiscal adjustment plan pushed the theoretical cost of Irish borrowing to record highs, with spreads on Irish government debt reaching a record 4 per cent above benchmark German Bunds.
Spreads later narrowed, partly in response to the welcome clarity provided on the final bill for the banking crisis by a statement made by Mr Lenihan on September 30.
But some in the market are betting that Ireland has taken on more than it can handle, and may eventually have to look to outside assistance from the European Union or the International Monetary Fund.
The current plan envisages that Ireland will reduce the underlying deficit – stripping out the one-off bank rescue costs – from 11.9 per cent of gross domestic product this year to below 3 per cent in 2014. Bank recapitalisations take the deficit this year to 32 per cent – or 10 times the target figure.
The deficit next year was originally forecast to fall to 10 per cent, based on €4bn ($5.5bn) of savings, including a €1bn reduction in the capital budget.
But the Economic and Social Research Institute, an independent think-tank, said in widely reported comments last month that it now believed the 2014 target was “worryingly ambitious”.
In its quarterly economic commentary, it calculated that Ireland would have to make savings of €15bn over the four-year period – equivalent to 10 per cent of GDP, twice the amount originally envisaged.
The government has now accepted the €15bn figure, explaining that the “key reasons for the significant increase are the lower growth prospects, both at home and abroad, and higher debt interest costs.”
The government’s options are limited. Public sector pay has already been cut by an average of 15 per cent in the past three budgets. In an attempt to secure industrial peace, the government agreed with trade unions there would be no further cuts before 2014 in exchange for verifiable improvements in work practices and in the delivery of public services.
On the tax side, no action has been taken on the long-term structural reforms, including the introduction of a property tax, suggested by a commission which the government appointed. Most commentators believe the minister will look to make a large part of the adjustment through cutting the welfare budget.
All this will be politically fraught. But some economists worry that the cuts could exacerbate the economic slowdown and imperil the recovery.
The ESRI now believes GDP will shrink by 0.25 per cent this year, against its forecast in the summer of growth of 0.25 per cent.
Gross national product, which economists see as a better measure of domestic activity, as it strips out the profits and dividends repatriated by foreign multinationals, is set to fall by 1.5 per cent this year, against a summer forecast of minus 0.5 per cent.
The more gloomy outlook follows what the ESRI describes as the “disappointing” second-quarter GDP figures, with the economy declining by 1.2 per cent, after rising by 2.2 per cent in the first quarter.
This may yet prove to be a statistical rather than a real setback. Quarterly output figures tend to be skewed by the behaviour of the multinationals, which account for 80 per cent of Irish exports.
Indeed, Mr Lenihan has put the setback down to an increase in the royalty payments that the local operations of multinationals make to their parents – for the use of designs and processes – which should, economists say, come through as higher exports in subsequent quarters.
But if Ireland is to avoid an external bail-out, it is not only the fiscal adjustment that it has to get right. A return to growth is essential.
FT.com / Reports - Economy: Hopes pinned on four-year fiscal consolidation plan
