No surprise that we need to cut another €4bn
The reality was that €3.6bn in adjustment had been pencilled in by the last government, and given that the domestic economic environment is turning out to be weaker than anticipated, it is only to be expected that the required adjustment would be larger.
The end-June Exchequer returns published this week show the magnitude of the fiscal challenge facing the country. In the first half of the year we borrowed a further €10.8bn.
The Department of Finance kindly pointed out that if we strip out the borrowing related to the banking bailout, the deficit would actually be €1bn lower than the first half of last year. Big deal. We still had to borrow €3.1bn for the banking-related payments; it will be added to our gross national debt and will attract interest payments. An overall deficit of this level is just not sustainable.
The other reality is that identifying another €4bn in tax increases and cutbacks in an economy where domestic demand is still on the floor will be difficult to achieve. On the expenditure side, the fact is that public sector pay and social welfare make up the bulk of expenditure and tackling either of these two areas any further will be politically very, very difficult.
I am not sure that any further increase in the tax burden will prove anything other than counter-productive. The Government will have to bite the bullet and immediately introduce a residential property tax and user charges for water. Both of those measures would still not come anywhere close to bridging the gap, but they would represent a start.
I suspect that every government department is being forced to go through every item of expenditure in minute detail in an effort to identify any spending that can be taken out. In December, we will most probably be given a long list of expenditure cutbacks across departments, and we can also be certain that the personal tax burden will be increased through the manipulation of tax credits and allowances. It will not be an easy task and we will all end up financially worse off once again. We can be sure that every initiative will result in public outcry, a fact that is amply demonstrated by the local stance on hospitals around the country.
Despite the ongoing fiscal correction, Ireland is no closer today to being in a position to re-enter bond markets than it was six months ago. The markets are attaching an interest rate risk premium of 880 basis points on Irish 10-year government bonds relative to Germany. That is the second highest in the eurozone, behind only Greece. In so far as the markets are paying any real attention to Ireland, what they are seeing is not filling them with confidence. Ireland has a long, hard road ahead to re-establish its economic and financial credentials.
The Portuguese are not too far behind Ireland. The credit ratings agency Moody’s has just reduced its credit rating to junk bond status. It clearly does not believe that the IMF/EU bailout fund for that country will succeed in getting Portugal back in shape, just as is the case with Ireland and Greece.
The eurozone sovereign debt crisis still has a long way to run and the powers in the EU still do not appear to get it. The latest interest rate actions from the ECB indicate just how far from reality that particular institution is. Meanwhile, we are getting a clearer idea of how much profit our EU and IMF saviours will make on the Irish crisis. Strange times indeed.
