Since the costs of bailing out the banks has been quantified at around €50bn (manageable, they say, but surely still too high), the focus in Ireland has now turned to our budget deficit of just over €20bn. That this deficit is a greater threat to the solvency of the Irish state than the enormous cost of bailing out the banks shows just how big a problem it is. This €20bn needs to be financed through borrowing on the international bond markets this year, next year and every other year that it remains. That simply cannot be done; the markets just won't give us the money.
Ireland has agreed with the European Commission to get this budget deficit down to 3% of GDP by 2014. More crucially, the bond market seems to agree to lend to us once we provide a credible path towards achieving this. But the credible path that seemed to be charted last December by the Minister for Finance looks shaky now, with a higher cost of the banks and zero growth in the economy that has hampered the deficit reduction plans.
Our 10 year government bonds are now trading 4%points higher than the German equivalent (a serious risk premium). A 4 year budget plan is set to be unveiled over the next few months, along with the hairshirt 2011 Budget in December, in an effort to restore market and EU confidence. This is crucial to bring down our borrowing costs (too high at the moment to be sustainable) before Ireland goes back to the bond market in the new year.
The only solution to this problem is a serious austerity programme, as argued by Colm McCarthy. This will require a widening of the tax base, tax increases, current spending cuts, a reduction of the capital spending programme, the introduction of water charges and (if the government has it in them) a residential property tax.
Fun times.
The biggest problem I can see to the whole idea of a four year programme of tightening our belts(which undoubtedly needs to be done, especially in the terms of broadening the tax base ,reforming welfare and the public sector) is the current government only has maximum two years left in office. The markets are not blind, a four year plan from a two year government will not provide them with any medium term assurances. Regardless of outcome we need an election before next spring.
ReplyDeleteI do agree an election is needed. Political views aside, it would make the required cuts easier to implement as they are not coming from the hands that made them necessary. Also, a new govermnent would have greater political capial to implement the very unpopular mesures.
ReplyDeleteAs for the claim that a 4 year plan, with a change of government in the middle, will not provide any medium term assurance. Well, (not quite my opinion here but…) what other options does a beleaguered government have to calm markets on a multi-year issue (the Irish government deficit), when it fears for our solvency in the short term? It's not ideal but they see a need to assure the markets that a new government will go soft on taking power, thereby not affecting the current risk premium. It also is politically helpful as it forces the opposition's hand and makes the current government appear to be the markets choice, over the opposition.
This is despite the fact that a new government would have fresher ides, greater political capital, greater goodwill and a renewed capacity for reducing the €20bn budget deficit. This also means more pain.
Agin, fun times.