NO says Dr Constantin Gurdgiev
HOWEVER one interprets the core parameters of the fiscal discipline to be imposed under the Fiscal Compact, several facts concerning the new treaty and Ireland’s position with respect to it are indisputable.
Firstly, the new treaty will restrict the scope for future exchequer deficits. Combined structural and general deficit targets to be imposed imply a maximum deficit of 2.9%-3% in 2012, as opposed to the IMF-projected general government net borrowing of 8.5% of GDP. Secondly, it will impose a severe long-term debt ceiling, but that condition will not be satisfied by Ireland any time before 2030 or even later.
The troika programme for fiscal adjustment that Ireland is currently adhering to implies a de facto satisfaction of the Fiscal Compact deficit after 2015, and non-fulfilment of the structural deficit rule any time between now and 2017.
No matter how we spin it, in the foreseeable future, we will remain a fiscally rogue state, client of the troika and its successor — the ESM.
Let me run through some hard numbers — all based on the latest IMF forecasts. Even in a rather optimistic scenario, Ireland’s real GDP is expected to grow by an average of 2.27% in the period from 2012 through 2017. This is the highest forecast average rate of growth for the entire euro area excluding the accession states (the EA12 states).
And yet, this growth will not be enough to lift us out of the sovereign debt trap. Averaging just 10.3% of GDP, our total investment in the economy will be the lowest of all EA12 states, while our gross national savings are expected to average just 13.2% of GDP, the second lowest in the EA12.
In short, our real economy will be bled dry by the debt overhang — a combination of the protracted deleveraging and debt servicing costs. It is the combination of the government debt and the unsustainable levels of household and corporate indebtedness that is cutting deep into our growth potential, not the austerity- driven reduction in public spending.
According to the data, smaller advanced economies with the average government expenditure burden in the economy of c.31%-35% of GDP have expected growth rates of 3.5% per annum. Countries that have government spending accounting for 40% and more of GDP have projected rates of growth closer to 1.5% per annum. Ireland neatly falls between the two groups of states, both in terms of the government burden and the economic growth rate.
Despite the already deep austerity, the Exchequer will continue running excess spending throughout the adjustment period. Between 2012 and 2017, government net borrowing is expected to average 4.7% of GDP per annum, the second highest in the EA12 group of countries. Put differently, calling on the Government to deploy some sort of fiscal spending stimulus today is equivalent to asking a heart attack patient to run a marathon in the Olympics. Between this year and 2017, our Government will spend some €47.4bn more than it will collect in taxes, even if the current austerity course continues. Of these, €39bn of expenditure will go to finance structural deficits, implying a direct cyclical stimulus of more than €8.4bn.
The exports-driven economy of Ireland simply cannot sustain even the austerity-consistent levels of government spending. The IMF projects that between 2012 and 2017, cumulative current account surpluses in Ireland will be €40bn. This forecast implies that the 2017 current account surplus for Ireland will be €10bn — a level that is 56 times larger than our current account surplus in 2011. If we are to take a more moderate assumption of current account surpluses running around 2012-2013 projected levels through 2017, our government deficits are likely to be closer to €53bn.
In short, there is really no alternative to the austerity, folks, no matter how much we wish for this not to be the case.
Instead, what we do have is the choice of austerity policies to pursue. We can either continue to tax away incomes of the middle and upper-middle classes, or we cut deeper into public expenditure.
The former will mean accelerating loss of productivity due to skills and talent outflows from the country, reduced entrepreneurship and starving younger companies of investment, rising pressure on wages in skills-intensive occupations, while destroying future capacity of middle-aged families to support themselves through retirement.
The latter is the choice to continue reducing our imports-intensive domestic consumption and cutting the spending power of the public sector employees, while enacting deep structural reforms to increase value-for-money outputs in the state sectors. Both choices are painful and short-term recessionary, but only the latter one leads to growth. The former is consistent with giving vitamins to a cancer-ridden patient — sooner or later, the placebo effect will fade, and the cancer of debt overhang will take over again, with even greater vengeance.
* Dr Constantin Gurdgiev is adjunct lecturer in finance at Trinity College, Dublin.
YES says Eoin Ó Broin
AUSTERITY isn’t working: 434,800 are out of work, 15,000 people are emigrating every week, and 92 households are falling into mortgage distress every day.
The deficit, according to Eurostat, has risen from €13 billion in 2008 to €20.5bn in 2011 and the state remains locked out of the sovereign bond markets.
Every single indicator of social and economic well-being clearly demonstrates that the austerity policies of Fine Gael, Labour and Fianna Fáil are failing. These policies are hurting citizens and blocking a return to economic growth.
Sinn Féin has consistently said that there are no easy solutions to our current economic and social crisis — but there are alternatives. We have repeatedly put forward detailed and costed proposals for reigning in the deficit, reducing Government debt and restoring economic growth.
Fine Gael, Labour and Fianna Fáil believe that you can cut your way out of a recession. Between the three parties, they have wrenched €24.6bn from the domestic economy in tax hikes on low and middle-income earners and cuts to frontline services. Last year alone Fine Gael and Labour poured €21bn into the banks, including €3.1bn into Anglo Irish Bank. Yet, they tell us they have no money for teachers, nurses or community employment schemes.
The Government tell us that their policies are working. But the facts tell a different story. Our debt-to-GDP ratio has risen, our deficit has risen, and unemployment has risen.
So what is the Sinn Féin alternative?
In place of regressive taxes and stealth charges on low and middle-income families, Sinn Féin advocates progressive tax reform. In our 2012 alternative budget, we outlined a net increase in tax revenue of €3.26bn. This included a third band of tax at 48% on income earned by individuals in excess of €100,000; reform of reliefs, including pension-tax relief; a wealth tax and the total abolition of the Universal Social Charge. Under Sinn Féin’s proposals all those earning less than €75,000 per year would see their tax burden fall.
In place of cuts to vital frontline services in health, education and community facilities, we advocated elimination of waste in public expenditure. Our alternative budget detailed a net saving of almost €1bn for 2012.
But the crucial difference between Sinn Féin and the consensus-for-cuts parties is our jobs and family stimulus proposals.
The alternative budget detailed a massive investment in job creation and retention. Taking money available to the Government from the National Pension Reserve Fund and the European Investment Bank, we outlined how a €7bn investment programme over three years could save and create over 100,000 jobs. We also outlined investment of almost €600m to help families struggling to cope with the economic crisis and undo the poverty and inequality.
Sinn Féin has also argued that our current debt-to-GDP ratio is not sustainable. The best way to reduce this is to secure a full write-down of the Anglo Irish promissory note, which would reduce our debt-to-GDP ratio by almost 20%. This would not only reduce our debt servicing costs, it would also dramatically improve our ability to return to the sovereign bond markets.
Every year since the economic crisis, Sinn Féin has outlined a fully costed alternative budget. We have met and in some cases exceeded the Government’s own fiscal targets. But crucially we have shown that there is a better and fairer way to reign in the deficit, reduce Government debt and restore economic growth.
Opposition to austerity is growing. This is because people know, from their own experience, that it isn’t working. People are, by their actions, passing judgment on the Government’s failing policies. The huge number of people refusing to pay the household charge; the opposition to septic tank and water charges; and the dramatic slump in the Government’s approval ratings are all saying the same thing: People are hurting and the Government must listen.
Unfortunately rather than change course, the Government is now asking people to support even more austerity. On May 31, we are being asked to support an austerity treaty that will result in €6bn of extra spending cuts and tax increases being imposed on people post 2015. This is on top of the €8bn the Government intends to cut in the coming four years. If you are against austerity, you must vote against the austerity treaty.
We need a new approach. One based on the principles and policies outlined above.
There are no soft options, but there are real choices, and this Government, like their predecessors, are making all the wrong ones. Today, the choice is clear: More austerity or investment in jobs and growth. The Government is for austerity and the austerity treaty; Sinn Féin is for jobs and growth.
* Eoin Ó Broin is an economic and European policy advisor to the Sinn Féin Dáil team. He is also the campaign director for the party’s austerity treaty referendum campaign.
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