Out with the old, in with the old

What does the future hold for Ireland as we begin 2012? Near permanent deflation, high unemployment and high debt - at least if the Government persists with its austerity mindset. By Michael Taft.

Ten years of austerity? What is the ex-ESRI researcher Richard Tol talking about? Wasn’t austerity to only last until 2015? Is this what we have to look forward to? You bet it is.

Tol’s reference to a decade of austerity is well-founded. While the debate is focused on what’s going to be in the next budget, or next month’s Exchequer Statement, there is little in the way of analysis over the medium-term. The target date of 2015 for Maastricht compliance is taken as some kind of ‘get out of jail’ year. But there’s every reason to believe we are serving the equivalent of a life-sentence. There are two aspects to this.

First, as Tol points out, even after 2015 we will have an enormous level of debt which will need to be reduced. Bringing the deficit to the Maastricht benchmark does not complete the task. The Government estimates that the debt/GDP ratio will be 115% by 2015 – courtesy of bank bailouts and austerity policies. Our debt levels will be the second highest in the Eurozone – behind poor Greece but ahead of other peripheral countries such as Italy, Spain and Portugal. The average debt level for other Eurozone countries will be between 75 and 80%.

There are few GDP/debt projections beyond 2015. Such estimates are, in any event, subject to considerable unknowns - known or otherwise. However, NCB takes a stab at it - their estimates stretch out to 2030.  They project the debt/GDP ratio to still remain high even by 2018 - at 113%. After that, they set up a number of scenarios based on average long-term GDP growth and interest rates. I’ll just take one combination - using the Government’s projected GDP growth in 2015 (4.5%) and historical interest rates prior to the recession (between 4.5 and 5%).

In this scenario, in 2030 our debt/GDP ratio would be between 73 and 80% - well above the Maastricht general debt target of 60%. To put this in perspective, our debt level in 2007 was less than 25%. Even if we reach our deficit targets by 2015 (something that is highly, highly unlikely under current policies) the new mantra will be “We have to continue cutting and taxing to bring down our debt levels.”

Second, there’s this little matter of the proposed Fiscal Pact agreed at the Eurozone meeting in December and which may or may not be the subject of a referendum here. This pact requires that countries reduce their ‘structural’ deficits to 0.5% deficit. The structural deficit is a contrived measurement that estimates what the deficit would be if the economy was running at full capacity. I will have more to say about this nonsensical and irrational proposal but let’s run with it here.

What is the Government’s estimate of the structural deficit in 2015? 3.7%. So to reach this new and improved fiscal target the Government will have to reduce the deficit by an additional 3.2% of GDP - over and above what they are currently estimating. What will this mean in spending cuts and tax increases?

If the Government continues with its austerity mindset, it will attempt to reach this target through €6 to €7 billion in even more spending cuts and tax increases. Of course, many of us would argue that launching this type of ultra-austerity programme would collapse a number of economic sectors and drive us into near permanent deflation, high unemployment and high debt (but when has the Government ever listened to our side of the house?).

So there you have it. We have years and years of further austerity to look forward to.

Have a good ‘new’ year.


Image top: robinsoncaruso.