Saturday, 20 March 2010

Bucket Of Cold Water...

EU Commission throws cold water on hopes worst of budget crisis over...

THE EU Commission yesterday took on the role of the man who blew out the light at the end of the tunnel.

Tuesday was a good day in terms of the public finances. The Government, through the National Treasury Management Agency (NTMA), managed to borrow €1bn at the lowest interest rates since December 2008, when compared with equivalent German rates.

The head of the NTMA suggested the gap between Irish and German interest rates on government debt could be less than 1pc by the end of the year.

Any sane person not still living in bubble land would regard that as an eminently reasonable "spread", given the differences between the two economies.

But the commission threw a large bucket of cold water on any flickering hopes that the worst of the budget crisis was over.

In its formal report on the public finances of 14 EU states, it warned that the tough Irish budgetary plans, over which so much anger and anguish has been spread, may not actually be tough enough.

Less happy

Like the financial markets themselves, Brussels gives credit to the Government for acting quickly and decisively when the public finances collapsed in 2008.

But it is much less happy about the plans to restore them to the EU rulebook by 2014, with a government deficit of less than 3pc of economic output (GDP).

The commission has two main concerns. It fears that the fact the actual measures to be taken in future budgets have not been spelt out raises the risk that they may not be implemented when the time comes.

Brussels will be well aware that the trade unions are already in negotiations about what will be done in future, and whether the past will be revisited in terms of the public sector pay cuts. That might be called political risk.

The second worry is more fundamental.

Despite further planned spending and tax adjustments of €5bn over the next four years, the Government targets depend on a return to growth next year and rapid growth of more than 4pc in the following years.

That always looked optimistic, and the travails of the world economy up to now have made it seem even more optimistic.

Growth will resume -- probably quite soon -- but cumulative real growth of 12pc over the next three years is a lot to ask.

Yet there is little room for slippage. The programme agreed with Brussels sees the national debt ratio peaking at 84pc of GDP in 2012, followed by a small decline to below 81pc of GDP by 2014. Interest payments on that debt will be eating up €1 in every €5 of tax revenue.

Any weakening of the budget discipline -- or even growth averaging less than 3pc a year -- could bring the debt ratio towards 100pc. The commission seems to think that is quite likely.

Debt ratio

"In view of the likely need for significant further capital injections into banks, and of the negative risks to the budgetary targets, the evolution of the debt ratio is likely to be less favourable than projected in the programme," it says.

To no-one's surprise, Brussels says the Government should be ready to impose even more stringent spending cuts should the need arise.

There comes a point, though, where such responses are self-defeating, if not downright politically impossible.

Whisper it not in Brussels, but the 3pc target is not sacrosanct. The British are not even trying, much to the commission's dismay. Ireland is doing a lot to restore its competitiveness and potential growth. More could be done, but the actual growth rate is outside our control.

Holding the level of current spending steady in cash terms, as the programme envisages, should be the central target, not the deficit.

Additional taxes will have to be raised, which will sorely test the political system.

Raise those, and Ireland will have done all that can reasonably be asked of any country.

However, those who argue that we can get away with doing less need to explain why their version of reality is so different from the stark one set out in Brussels.

Report by Brendan Keenan - Irish Independent

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