My Sunday Times article from 26/02/2012 - unedited version.
So far, the explosive nature of Greece’s
crisis has been a boon for Ireland, as international perceptions of our
economic and fiscal fortunes have turned more optimistic in some analysts’ and
investors’ circles. This shift in the sentiment, however, may be threatening to
derail the already fragile momentum for economic reforms here.
Irish budgetary dynamics for 2011 were largely
on target, although this achievement conceals significant pressures on the tax
receipts side and the lack of real progress in tackling runaway spending in
three core current expenditure areas – Social Welfare, Health and Education. In
fact, much of the previous deficit adjustments have been based on the
Governments picking the low hanging fruit of capital spending cuts, administrative
savings, and substantial tax increases, soaking the middle and upper-middle
classes. Budget 2012 was pretty much the firs attempt by the Irish Government
to rebalance the overall budgetary dynamics that, since 2008, have penalized
higher-skilled and entrepreneurs. It is hard to see how this approach of
piecemeal changes targeting the path of political least resistance can continue
delivering ever-rising levels of fiscal adjustments already pencilled in for
2012-2015, let alone maintain the budgetary discipline thereafter.
Accounting for the delayed December 2011 tax
receipts that were incorporated in January 2012 figures, the Exchequer deficit
in the first month of 2012 was €160 million ahead of that recorded in January
2011. This gap shows that the pressure on Ireland’s fiscal dynamics has not
gone away.
There is a more fundamental problem looming on
the horizon – the problem of growth. To deflate the public debt that is now
well in excess of 107% of our GDP and climbing, we need some serious economic
growth. On average, over the next 10 years, we will need growth of over 3%
annually over and above inflation in order to bring our Government debt down to
90% of GDP. To sustain some private sector debts deleveraging will require even
higher rate of growth. Compare the current situation with that in the 1980s and
the maths required for budgetary and households’ deleveraging become dizzyingly
high.
In Q3 2011, Ireland registered the twin
contraction in GDP and GNP and majority of the analysts expect the same for Q4
figures. For the year as a whole, we are likely to post approximately 0.9% real
GDP expansion. Forecasts revisions for Irish economic growth have been driving
us beyond the bounds of the fiscal targets we set out for this year. The Budget
2012 assumed economic growth of 1.3% against the IMF, Central Bank, EU
Commission, and ESRI forecasts of 0.9-1.1% growth. More recent February
forecasts by the markets analysts and ESRI put the range for 2012 growth at -0.5%
to 0.9%. Much the same is true for forecasts out to 2015, with Government
growth prognoses coming in at a rather optimistic 2.43% annual average against
IMF November 2011 projection of 2.25%. Taking the lower range of most current
forecasts, the shortfall on Government current assumptions for growth can be as
high at €5 billion – a sizeable chunk of change. Under the adverse shock
scenario by the IMF, if average growth were to decline to 1% of GDP – a
statistically plausible assumption – the shortfall will be close to €10
billion.
This means that the pressure is still very
much on to deliver on 2012-2013 fiscal deficit targets of 8.6% and 7.5%
respectively. More importantly, the entire recovery framework for Ireland is
clearly misaligned. Instead of focusing on the simple short-term targets for
fiscal deficits, Irish Government must focus on long-term growth environment.
Putting the patient – the Irish economy – ahead of the disease – the fiscal and
household debts overhang – is a must.
This puts into the context the events of the
last two weeks. Specifically, it highlights the levels of unease with Irish
Government plans being expressed, for now rather quietly, by some markets
participants. It also underpins the subtle change in the Government own signals
to the Troika. And, it is simultaneously contrasted by the Government public
rhetoric that has been stressing the PR spin over sombre determination to act. Virtually
all recent actions suggest that the Government is hoping that something will
happen between now and 2013 to miraculously restore growth, thus alleviating
the need for serious corrective measures on the current expenditure side.
First, take the Memorandum of Understanding
(MOU). Last week, the Government review of budgetary adjustments targets stated
that 2013 fiscal savings will be “at least €3.5 billion” (page 14 of the MOU).
The subtle change of language from the November 2011 version of the MOU which
did not include the words ‘at least’ in relation to 2013 target might be a sign
that the Government is being forced to accept the reality of its multiannual
growth projections being overly optimistic in the current global and domestic
growth environments.
Yet, when it comes to outlining reforms
agenda, the MOU contains nothing new compared to its previous versions. The
already inadequate set of measures on dealing with personal debt announced last
night is presented as the end-all reform. Dysfunctional energy and utilities
sectors are barely covered with exception for one specific measure – creation
of the unified water management bureaucracy. Inefficiencies in the domestic
services sectors, poor institutions relating to supporting competitive markets
in these sectors and labour markets reforms are treated with generalities in
place of tangible proposals. Vague promises of reforms of social welfare system
and structural reforms in the state enterprises sector and financial services
unveiled and partially actioned in the past are simply repeated once again in
the current MOU.
In contrast, the Government has claimed this
week that it has rather specific targets for yet another spending project – the
‘jobs creation’ efforts to be financed via privatizations returns. In other
words, unlike Charlie McCreevy who spent the money he had, Minister Noonan is
eager to spend what he hopes to have. To-date, Minister Noonan has managed to
spend quite substantial funds on ‘jobs creation’ with various announcements
taking potential total bill for these initiatives to well over €1 billion
annually. Outcomes? Well, none, judging by the QNHS and Live Register data. The
JobBridge programme is a resounding failure with the vast majority of
‘apprenticeships’ in effect displacing real jobs that would have been created
through the normal course of business growth. The ‘Vat stimulus’ to tourism and
hospitality sector is another failure. Fas restructuring is shambles.
The privatization plans, supported by the ESB
and other state monopolies, are clearly designed to minimize any potential
disruptions in the status quo of the semi-states-dominated sectors. Thus,
privatization-induced changes in the energy and transport sectors will be
purely cosmetic, the structure of the regulated markets will remain as
anti-consumer as ever. Vast swathes of the domestic economy will remain
protected from private investment and enterprises as ever.
Despite major risks present in the global and
domestic economic environments, the Irish Government is slipping into the comfort
zone of PR exercises, photo opps, and foreign ‘investment missions’.
By postponing
the reforms necessary to boost our economic growth potential, the Government
currently is putting an undue amount of risk onto the Irish economy. Its gamble
is that sometime over the next 9-12 months Irish economy will be propelled to a
miraculously higher growth plane and that this growth will be sustained through
2015 and thereafter. In the mean time, the Government will spend its way into
jobs creation, while protecting its vested interests of the shielded sectors
and avoiding any real structural reforms.
Chart:
Sources: IMF WEO database and country updates
Box-out:
Much of the latest attention paid to the external trade
data has been devoted this month to the sudden and rapid slowdown in exports
over the recent months. And this analysis is very much correct: in H1 2011,
Irish goods exports and trade surplus grew by 6% and 2.5% respectively. In H2
2011, the same rates of growth were 1.9% and 1.5%. However, there are some very
interesting trends emerging from the trade statistics by geographical
distribution. Using eleven months data for 2011, annual rate of growth in Irish
trade surplus vis-a-vis the EU is likely to come in at -1.7%, against the
overall annual rate of growth of 1.5%. In contrast, Irish trade balance with Russia
is likely to rise a massive 92% in 2011 compared to 2010. Our trade deficit
with China is likely to decline by 9%. Although our trade deficit with India is
expected to widen by almost 11%, our trade surplus with Brazil is on track to
increase by almost 32%. Courtesy of Brazil and Russia, Irish trade surplus with
BRICs in 2011 is likely to have reached close to €238 million, first year
surplus on record.
