Moreover, the Government should avoid measures like large-scale debt forgiveness and the firesale of assets that would weigh on the banks’ profitability, he added. If by 2020 the economy is back to health and the banks are functioning properly and profitable, then the Government could generate up to 20% of GDP through the divestment of its stakes in the pillar banks.
However, there was the risk that because the banks were in state control and subject to political pressures, decisions could be made that would undermine their profitability, he said.
Speaking at the ESRI conference in Dublin, he said Ireland’s ability to make a full return to the market depended on what interest rate the Government could sell Irish debt. If it was 5% then “that would not be sustainable for very long, it would have to be closer to 4% or below”.
But gaining market entry at lower rates depended on Ireland retaining market credibility. To this end, he praised the Government’s approach from 2011 onwards to “under-promise and over-achieve” in setting budget deficit targets and meeting them.
He contrasted this country’s favourable reception in the markets to Spain, which has consistently set tight budget deficits and failed to meet them. Over the past six months longer-dated Irish bond yields have eased to dip below 5%. Irish debt is now cheaper than Spanish debt, even though this country is part of an EU/IMF bailout programme.
If growth returns to Europe over the next few years, then Ireland, as an open trading economy, should be able to return to growth. Crucially, if the economy is growing, then the Government should be able to post budget surpluses from 2015 onwards.
However, if economic activity across the region remains anaemic, the Government will probably have to make savings in the budgets between 2016 and 2018 to meet the 0.5% structural deficit agreed as part of the fiscal Treaty.
It is very important that the Department of Finance calculates what Ireland’s structural deficit should be in the future because there were serious flaws with the European Commission’s methodology for determining Irish structural deficits. “The European Commission’s methodology produces numbers that are completely mad for Ireland,” he said.
Moreover, the Government should look to maintaining budget surpluses in the future because the country will be highly indebted with an increasing age profile, which would make it vulnerable to external shocks.
The economy will see the real benefits only towards the end of the fiscal adjustment programme. And because Ireland has a current account surplus, then it is in a position to make a quick rebound, said Mr FitzGerald.
Even though the country is in a bailout programme, the Government has a high degree of flexibility in terms of making savings either through tax increases or expenditure cuts. Whichever approach the Government takes it has to make sure that its policies remain pro-employment growth.