Borrow more and the country will be damned

THE latest figures on the economy ought to leave no one in any doubt that the problems facing this economy are deepening by the day.

We also have a banking system on its knees and a tax revenue base that is evaporating with each passing month.

Finance Minister Brian Lenihan delivered to the country some more home truths in the Dáil on Thursday when he warned the tax take this year will fall to €34 billion, having forecast that the figure would be €39bn in early January.

With projected government spending of €58bn for 2009 that presents the Government with a massive gap of €24bn to be made up.

The figures on the economy the same day, showing a decline in output of 7.5% in the last quarter of 2008, revealed how the economic slump is gathering pace.

We have to go back to 1956 to find figures for economic retraction of that level the Central Statistics Office pointed out.

To add to the growing unease about where this economy is headed, 2008 was the first time in 25 years the economy actually went into recession and declined by 2.3%.

In simple terms that means the value of our total output was 2.3% less than it was in 2007.

In other words this country is earning a lot less than it was and is now struggling with huge debt and spending obligations while the level of income in the form of tax has shrunk dramatically.

That is the undeniable dilemma facing the Government as it tries to figure out by how much to raise taxes and by how much it must cut the cost of running the country.

Getting the balance right in the current circumstances is probably not achievable.

The problem is that with an economy shrinking rapidly, cutting costs will take demand out of the economy while raising taxes will have the same impact.

Even at this stage, as the Government considers its options, the once sacred National Development Plan is no longer ring-fenced.

As some analysts tried to anticipate the slowdown they saw NDP as the comfort blanket we had to put over an economy that was beginning to feel the chill of recession.

But few anticipated the depth of this slowdown and the state has reached the point where even the NDP has to be cut severely as the Government tries to conjure a fiscal strategy to get the books back into balance by 2013, not 2010, thanks to an EU extension of that deadline.

The awful problem now is that there is no exact solution to the slump that has eroded our tax base.

Trade union leader David Begg said borrowing this year should be pushed out to 11% of GDP — up from the already out of line figure of 9.5% being talked about by the Government.

There is a view that because things are so bad we simply should borrow more.

We face precisely the same dilemma.

Our international standing has been shredded by the collapse of the property boom and the impact of the credit crisis on the banks.

The most dubious analysis of the present state of the nation says we are doomed and that a bailout by the IMF or indeed the EU will be required.

One thing seems pretty certain: If we try to go beyond the 9.5% in terms of the debt to GDP figure we risk damaging whatever bit of credibility that we have left.

Those who argue we can borrow and be damned should remind themselves that Britain last week failed to get a bond issue away because its credit rating has gone through the floor.

We cannot afford to take that risk, but the risks involved in raising taxes are also very worrying.

The solutions seem to be as bad as the problem and the danger is that we risk digging a bigger hole for ourselves, irrespective of what options the finance minister takes on April 7.