Ireland: A Warning
A year ago I wrote a post for Left Foot Forward on the Irish economy. I noted how, unlike Britain, the Irish Government had reacted to the global recession by cutting spending and attempting to drive down costs to remain globally competitive. I also noted this was broadly the policy pushed by the Conservatives at the time.
I assessed what had happened in the year between September 2008 and September 2009.
Nearly one year on, what has been the effect of these polices? Irish GDP is expected to fall by 12%, a staggering decline. Unemployment has reached 12.4% and is still rising. The economy is now in the grip of a severe deflation (minus 5.9%). Finance Minister Brian Lenihan openly talks of the need to “get our cost base down” in order to regain competitiveness. A policy of aiming to balance the budget and drive down wage costs is a throwback to the so-called Treasury View of the 1930s, a policy rejected then by progressives and rightly rejected now. The final irony is that, despite all of this needless suffering, the Irish Government will still be running a budget deficit of 12% of GDP this year while the ratings agencies have already cut Ireland’s sovereign bonds from AAA to AA.
In December last year, as Ireland delivered yet another emergency budget that was again praised by British Tories, I wrote an update.
Iain Dale writes that:
“The PBR the British Chancellor should have delivered, was delivered yesterday in Dublin. Hopefully George Osborne is studying it in great detail.”
The results of Ireland’s policy are plain to see:
• Irish unemployment is 12.5 per cent;
• The country is experiencing deflation at –6.6 per cent;
• GDP has fallen 7.4 per cent over the past year and 10.5% from its peak;
• And despite the cuts they have still had their credit rating downgraded.
But what exactly are the measures that the Tories are so keen to praise?
– Child benefit is being cut by 10%.
– Unemployment benefit is being cut by 4.1%, with larger cuts for those under 25.
– Public Sector workers are facing pay cuts of 5-8%.
– Prescription charges are being increased by 50%.
– Other increased health charges including A&E, inpatient and outpatient charges and a higher monthly threshold above which people cannot get free drugs under the Drug Payment Scheme.
– The Health budget is being cut by €400mn on top of previously announced cuts
– Further departmental cuts will be announced in coming days.
– €960mn is cut from the investment budget
So, a year after the first post and two years after Ireland embarked on its programme of cutting, where are we now?
Not in a good place. As the FT reports:
Ireland’s central bank governor has indicated that Brian Cowen’s government needs to go even further in cutting the forthcoming budget if it wants to restore international confidence in its management of the economy.
A year ago the populist Fianna Fáil-led coalition won international plaudits as one of the first EU countries to tackle the crisis head on, administering cuts in public sector pay averaging 15 per cent, and reductions in child and other benefits in the most savage budget in decades.
Yet today Ireland, together with Greece and Portugal, is seen as the most vulnerable of the EU’s peripheral economies, as it struggles with a property and banking crash that has blown a hole in the public finances and threatens the economic recovery.
As Ireland prepares to engage in (another) round of cuts, Bloomberg reports how unconvinced “the markets” are by Irish policy.
Thirty-seven percent of those surveyed say Ireland is likely to default, more than double the rate three months ago, according to a quarterly poll of 1,408 investors, traders and analysts.
Ireland is providing a vivid example that the “cuts don’t work”. As the head of asset allocation at Credit Suisse Private Bank warned a year ago
Spending cuts to be announced today by Finance Minister Brian Lenihan may end up sacrificing long-term economic growth for reducing the budget deficit, an Irish author and head of asset allocation at Credit Suisse Private Banking has warned.
Michael O’Sullivan, whose book, ‘Ireland and the Global Question’, was published in 2006, warned this week that Mr Lenihan’s expected swingeing cuts could do long-term damage. “Arguably the Irish bond market is being saved at the expense of Irish society”, said Mr O’Sullivan.
“By cutting spending you lower the trend line of growth and store up bigger fiscal problems down the line,” he added.
Cutting now reduces growth and tax revenue and increases unemployment and welfare spending. It does not close the deficit in a sustainable manner.
Ireland, a euro member, may have little choice but to pursue this policy. The UK though does face a choice, and we are making the wrong one.