Eamon Quinn analyses government reasoning for the harsh Budget.
Most years the back-page documentation from the Department of Finance gives a greater insight into the Budget sums than the Finance Minister’s budget day speech itself.
The documentation and the five-year forecasts provided for the European Commission cannot provide spin or invite special interpretation. If the forecasts are seriously wrong, then like Greece, any government invites picking trouble with the sovereign debt markets that fund its borrowings.
As a European Union member and participant in the euro zone, the Government must show the Commission that its annual budgetary sums follow the strictures to control government expenditure. During crisis periods, the rules that stipulate that annual deficits should nudge under the 3 per cent deficit ceiling permissible for euro zone countries are loosened. But the rules of the club have to be applied nonetheless.
This year the back-page budget documents were more revealing, starkly showing the limited choices facing the Government for the next five years. It has to remove great slabs from its spending over successive years if it is to meet a newly extended deadline to control its finances by the end 2014. The deadline probably explains why the Government finally opted to take a big chunk of its targeted €4 billion this year from wage cuts from public sector workers. Anything less may have failed to provide the certainty that it needed to reassure the Commission and the sovereign debt markets.
The sovereign debt crisis is widespread across the European Union, including Britain which has not begun cutting its serious spending habit because of the looming election. Doubts remain about whether Ireland will reach the new deadline, should the budget measures spark widespread action by public sector workers. The fragility of the Irish banks is also expressed through the international sovereign debt markets where Ireland, after Greece, still has to pay the second highest interest rates in the euro zone to borrow money to plug its annual deficits.
In early 2009 there were fears that Ireland would be cut off from the international markets that lend the Government money. Assessing the risk of some sort of default, the markets through to early April 2009 demanded Ireland pay over 6 per cent to borrow money for 10 years, a risk premium that was double the rate than that demanded of Germany, a fellow member of the euro zone. Since then, the crisis has eased. But the rapid rise in its debt pile has changed Ireland’s international status from an almost debt-free to a debt-burdened government.
The figures on the back-page show that the deficit will be barely changed in 2010, at 11.6 per cent of GDP, from last year. That’s equivalent to about €20 billion in extra borrowings that will be added to the debt this year. Next year, the Government figures show that it expects the annual deficit to narrow only slightly, to 10 per cent of a diminishing GDP, amounting to about €16 billion of extra debt. Only in 2012 and 2013 do the figures suggest a large fall in the deficit, to 7.2 per cent and 4.9 per cent of GDP, respectively. The annual deficit is only seen to squeak below the 3 per cent ceiling in 2014, just in time to meet the Commission’s new target.
This is what the rhetoric about the economy ‘stabilising’ really means: government revenues which have slumped will not fall much further but will certainly not recover significantly before 2014.
Meanwhile, the Government forecasts that the debt pile will peak at 80 per cent of GDP, amounting to approximately €130 billion in 2012. The debt pile then only decreases slightly over the subsequent two years to 2014 as economic growth resumes.
Worse, the government calculations do not include the debt created by the purchase by the National Asset Management Agency (Nama) of the commercial property loans in the Dublin banks. The international credit rating agencies view the Nama as a so-called contingent liability for Irish taxpayers. Including the Nama bonds, Fitch Ratings estimates Irish gross debt will peak at 118 per cent of GDP this year or early 2011.
Furthermore, unemployment will scar Ireland for the next five years. The jobless rate will average 13.2 per cent this year. Unemployment is expected to remain high next year and in 2012, at rates of 12.5 per cent and almost 12 per cent, respectively. Even by 2014, the jobless rate is forecast to be as high as 9.5 per cent, a level last seen in late 1990s.
Of all the figures in the back-page budget documentation prepared for the Commission in Brussels, the high jobless rate is the most troubling.