Public won’t endure another austerity budget

In many ways the Government’s dilemma over the scale of budget consolidation it should introduce on October 14 exposes in a nutshell the ongoing problems of an incomplete monetary union.

Public won’t endure another austerity budget

Since 2008, there has been a collective budget adjustment of 20% of GDP. This is almost unprecedented by OECD standards. That it was done with social cohesion remaining intact is remarkable.

But there is no appetite for further austerity and understandably so.

Growth in the Irish economy has exceeded all official expectations. Both the Central Bank and the Department of Finance are forecasting growth of roughly 4.5% this year, which is well ahead of the 2% forecast at the start of the year.

This means the Government should be able to comfortably meet the 3% fiscal deficit by implementing a broadly neutral budget. The only tax increase on the horizon is the water charges.

However, there is a clamour for income tax cuts for lower and middle-income earners and an increase in spending among practically every stakeholder group that has delivered a pre-budget submission.

On the other hand, the EU Commission, the IMF and the Irish Fiscal Advisory Council have all called on the Government to follow through with a €2bn adjustment agreed with the troika as part of the bailout programme.

How the Government balances these competing expectations will have a huge bearing on its chances of getting re-elected.

From a political perspective, it will be impossible to do a €2bn budget. The level of austerity fatigue is palpable. A consolidation package of that scale would create political instability that would be very hard to contain.

But from a pure economic perspective, a €2bn budget adjustment makes a lot of sense. Ireland is a highly indebted country that is still borrowing billions every year just to maintain basic services. The sooner the country gets back to a balanced budget scenario, the better.

Ireland is part of a monetary union that does not have a fiscal union. If there had been a fiscal union, including mutualised debt in the form of eurobonds, then the Government would have been able to take a more gradual budgetary consolidation path.

And this is the huge conundrum facing Ireland and other member states. The Government has done as much austerity as is politically feasible.

The main threat to the euro now is a political event — most likely a eurozone country electing a government whose sole aim is to leave the euro. To ensure the eurozone becomes a more viable entity, it would need to move to closer fiscal and economic union.

But this would require treaty change and in the prevailing climate of growing euroscepticism and populism, it is a highly unlikely outcome.

Moreover, it is also highly unlikely that the German government would agree with the more mutually beneficial elements of closer fiscal and economic union. Throughout this crisis, Berlin has acted in its own best interests at all times.

There is no certainty that the future of the single currency is guaranteed.

The conservative German economist, Hans Werner Sinn, is illustrative of challenges remaining. He is implacably opposed to any sort of German help for fellow member states. If official EU policy was to follow his recommendations, the euro would collapse within months. It is not clear whether Mr Sinn suffers from economic illiteracy or reckless solipsism. Unfortunately his views are at least partially shared with senior members of the German government.

How this plays out is the multi-billion euro question.

John Walsh is the Irish Examiner business editor

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