It’s important not to bite the hand that feeds
This is particularly true and particularly important at the moment, given the continued, obvious fragility of the economy and the fact that €2.5bn was the adjustment delivered rather than the full €3.1bn, which was the choice favoured by many.
The Department of Finance has based its budgetary arithmetic on growth of 2% in GDP in 2014. For what it is worth, the ESRI is forecasting growth of 2.6%; the Central Bank 2%; and the OECD 1.9%. We have to accept that accurate economic forecasting is by its very nature imprecise at best and impossible at worst.
However, there is some consolation to be drawn from the fact that the department’s forecasts are not out of kilter with the general consensus.
Delivering growth of 2% is not impossible. It is based on growth of 1.8% in consumption; 6.8% in investment (which includes output from the construction sector); and 1.9% in exports.
Given that we are coming off such a low base, these growth magnitudes are not outlandish, but how external winds blow will be absolutely crucial.
Some argue that if growth turns out lower than expected, the decision to go with the smaller adjustment of €2.5bn will be shown to have been a mistake.
I don’t quite get that logic. If growth turns out weaker than expected, surely a fiscal adjustment of €3.1bn would just exacerbate the weakness.
This week, we have seen just how difficult it is to come up with an adjustment of €2.5bn, and the pain and suffering it will cause. But the mind boggles at what might have been implemented in order to come up with an additional adjustment of €600m.
For Budget 2015, an adjustment of €2bn has been pencilled in for some time, but it is way too early and dangerous to even start speculating about that.
If growth turns out as expected, a much lower adjustment might well be sufficient, and indeed a ‘neutral’ budget might even be possible. That would be some boon to consumer and business confidence.
The main budget target is to get the annual borrowing requirement down to 3% of GDP by end-2015. Based on current projections, the deficit is anticipated to fall to 4.8% in 2014, 2.9% in 2015, and 2.4% in 2016.
Such an outcome would be good, but it does nothing to alleviate the reality that Ireland’s sovereign debt situation, not to mention the personal debt situation, is truly awful and frightening.
If the annual borrowing targets are achieved, the government debt-to-GDP ratio is projected to peak at 124.1% in 2013 and gradually decline to 114.6% by 2016. In absolute terms however, the level of debt is expected to rise from €205.9bn in 2013 to €211.6bn by 2016.
The level of GDP or income is the most important variable in determining how sustainable or affordable a debt level is, but the absolute number shows just how vulnerable and dangerous our situation is. The key priority is to get the economy growing as quickly as possible in a sustainable way.
In that context, it was good to see the efforts at stimulus in the budget, not least for the construction and tourism sectors. It was also good that there was no increase in the direct tax burden, which would have just served to choke off economic activity even further.
The taxes that employees pay and the health of the business sector are what finances the Government’s social spending programme. Damage either of these any further and there will not be enough resources to generate or sustain current levels of social expenditure. It is important not to bite off the hand that feeds.
