We need to stick with €3.1bn budget target

Pre-budget horse-trading between Finance Minister Michael Noonan and his Cabinet colleagues is well underway.

Each department will want to protect its interests as much as possible.

But whether Mr Noonan has to push through €3.1bn or roughly €2.6bn in spending cuts and tax increases will involve a game of brinkmanship that could drive a wedge between the coalition partners.

Labour leader Eamon Gilmore has staked his party’s credibility on lessening the burden on the already hard-pressed taxpayer.

These are political considerations that cannot be ignored. Relentless austerity is taking its toll. Cutbacks are crimping vital social services.

Over the medium to longer term, Ireland will be asked to vote on EU referenda. Indeed, the European Parliament elections are next June. The electorate are becoming more inclined to anti-Brussels sentiment. If the future of the euro hinges on closer political and fiscal integration, it is going to be very hard to get a mass buy in from Irish people.

But Ireland faces a different set of challenges over the near term. Those looking to ease up on adjustment argue that a €3.1bn budget has the potential to knock an incipient domestic recovery on its head.

There is a great deal of merit in this argument. The growth figures released on Thursday show the economy is still very fragile.

But the consequences of easing up on consolidation could prove to be very costly. In a conference organised by the Irish Banking Federation (in Dublin on Tuesday, one of the speakers mentioned in passing that a senior eurozone central banker had been full of praise for Ireland, describing the country as the “posterchild for austerity”.

The central banker was most likely the head of the Bundesbank, Jens Weidmann, and this view is widely held among senior EU policy makers.

That is why it needs the goodwill to continue long after the country exits the bailout programme in November. To this end, it is much wiser to proceed with the €3.1bn in budget cuts.

The agreement with the troika was that the fiscal deficit would be reduced to 5.1% next year, which was to be achieved through €3.1bn in cuts. The argument put forward by Mr Gilmore is that because of savings made through the restructuring of the promissory notes, the Government will reach the 5.1% target through a lesser nominal amount.

However, the IMF, the ECB and the European Commission all favour the €3.1bn adjustment on the basis that the economic backdrop is very uncertain and growth could undershoot.

The ESRI’s John Fitzgerald argues that it is better to do €3.1bn in October and take a wait-and-see approach to the 2015 budget. If a smaller nominal amount is made in October and growth undershoots next year, the Government will end up possibly missing the 3% target, which would result in another few hairshirt budgets.

Moreover, the Government needs to secure a precautionary credit line if it is going to make a successful exit from the bailout. This will come from the IMF, the ESM or the ECB, which means that it is of crucial importance that the troika remains well disposed to Ireland.

Also, this country is carrying too much debt. The Government is attempting to recoup some of the €30bn it has ploughed into the covered banks through a recapitalisation by the ESM. For this to happen it will need widespread political support.

If that means a €3.1bn adjustment to keep the country’s political paymasters happy, then it could be a price worth paying.