This meeting today between Fianna Fail, The Green Party, Fine Gael and Labour is difficult to fathom. Reading reports you get the feeling that the media is reporting from the other side of the looking glass, describing a world filled with Mad Hatter’s Tea Parties and other surreal events:
The framework itself is the most unreal of all:
“The talks will seek to agree a framework for a series of budgetary adjustments over the next four years designed to bring the country’s budget deficit, currently the worst in the EU, back to an EU limit of 3 per cent of GDP by the end of 2014.”
And the strategy is weirder than a floppy clock:
“However, Minister for Finance Brian Lenihan admitted at a banking conference today that “achieving targets set for the deficit expressed as a percentage of gross domestic product GDP will require more savings because GDP will now be lower than previously forecast”.”
To put this lunacy in perspective Michael Taft has some chilling analysis over on Progressive Economy. Michael reminds us that in the last budget Brian Lenihan said that the ‘worst was over’. Since then we have only seen the situation worsen.
Michael provides a dose of realism:
“The ESRI was the first to signal that the Government’s strategy will fail. The €7.5 billion would not only fail to reach Maastricht compliance by 2014, it would fail to do so by 2020. As a percentage of GDP, (with an additional €1.5 billion added due to increased interest payments and revising growth downwards by a third, which seems to be consensus projection) this is what the deficit would look like:
As can be seen, even with an additional contraction of €4 billion, on top of the current €7.5 billion, public finances cannot be brought into Maastricht compliance by 2020. It would flat-line between -4 and -5 percent. And each additional €1 billion contraction would only lower the deficit by between -0.1 and -0.2 percent.
There is much more to Michael’s analysis so his post should be read in full.
However, its also worth highlighting a further point: the scale of the policy catastrophe might well turn out to be even worse.
“Something darker may be hiding in the Government’s fiscal cupboard. Michael Burke referred to this when highlighting the findings of the IMF. In short, for economies that have hit an interest rate floor and where other countries are pursuing fiscal consolidation, a 1 percent budgetary contraction could produce a decline in the GDP of 2 percent.
To put this in perspective, current policies are closely following the rule of thumb – a 1 percent contraction is producing a fall of 1 percent in GDP (marginally more). However, if we start entering more sustained deflation, we could really be in trouble. Even if the IMF is only half right (I emphasise half right), we could find ourselves in this ugly situation:
The deficit would fall to only -8 to -9 percent of GDP by 2014 and then flat-line for the rest of the decade.
The more we engage in fiscal contraction, the more we would be entrenching high deficits in the economy.”
There are alternative options to cracked policy of deflation. Workable, practical and sensible ones, with plenty of evidence that they work have been provided in TASCs pre-budget submission. Michael Burke and Michael Taft have provided some analysis on these. Sinn Fein, who the government are not talking to because they do not think that it is possible to get the deficit down to 3% by 2014 are publishing their pre-budget proposals on Friday.
Critically, these arguments are not being made at the meeting today, where they should be – in fact their omission is glaring. Instead we have the Lenihan mantra, that with a declining economy more savings will be required. Brian Lenihan said in December that the worst is over. Considering the responsibility for leading us down this rabbit hole lies squarely with Fianna Fail he surely meant that it was only beginning.
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