MacGill Summer School session on “Managing the Economy and Public Finances after the Troika”
Glenties, 1st August 2013
Thank you very much for the invitation to speak here this evening on the theme of ‘Managing the Economy and Public Finances after the Troika’.
I would like to focus my remarks on a few topics, firstly the immediate issue of Budget 2014; what post budget interaction with the troika will look like as well as offering some thoughts on the economic and public finance issues we will face once we exit the current programme.
While the forthcoming Budget will be prepared under the shadow of the troika, it relates to the calendar year starting 1 January 2014 – when we expect that Ireland will have successfully exited the programme, so I believe it is appropriate to speak about it as part of this debate.
Over the past five years, the Irish people have displayed a remarkable degree of forbearance in the face of a seemingly unending series of demands on their income and their economic wellbeing.
The social upheaval and the disruption associated with widespread strikes and protests witnessed in other countries have been largely avoided here. This has to be acknowledged but certainly not taken for granted as we frame Budget 2014.
It is worth bearing in mind that October’s budget will be the 8th round of austerity measures since the first adjustments were made back in July 2008. Since then, extremely difficult decisions were taken and implemented and we have had success in bringing down the deficit.
While the work of the current government in reducing the deficit has to be recognised, it also has to be pointed out that three quarters of the fiscal adjustment achieved so far is as a result of Budgets introduced by the late Brian Lenihan as Minister for Finance in the previous government. In fact, were it not for the decisions Brian initiated between July 2008 and December 2010, our primary deficit this year would be 20 per cent instead of a projected 2.5 per cent. In that scenario, our public finances would have been completely out of control and our economy would literally have fallen off a cliff. This mammoth fiscal correction has of course come at a very heavy price indeed for the Irish people. They are weary and they want to know when all of this is going to end.
All of the main parties, including Fianna Fáil, are committed to bringing our deficit down to not greater than 3% by the end of 2015. The question currently taking up a lot of time on the airwaves is what the appropriate adjustment for 2014 is.
Principally due to the restructuring of the promissory notes, there is now some limited scope to moderate the correction of the public finances, perhaps by up to €1bn over the next two years.
But this debate has to be put in context. It is not a debate about austerity on the one hand or no austerity on the other hand. It is a debate about the degree of austerity for the next two years at a minimum. Even those political parties in Ireland that proclaim themselves to be against austerity are really just advocating another form of austerity, be it in the form of a wealth tax or a marginal tax rate of 59% for PAYE workers as some promote.
In reality, as a country, we can only say that austerity is truly over when the Minister for Finance is able to stand up on budget day and announce a neutral budget where the net total of taxation and expenditure measures is zero. That scenario is still some time away.
I strongly disagree with one of the suggestions of former IMF Mission Chief to Ireland Ashoka Mody. The idea that Ireland should consider abandoning austerity altogether for the next three years is simply not credible. With official funding from the troika now almost fully drawn down, if we were to revoke our commitment to reduce the deficit, I ask the question: how willing would the international markets be to lend money to Ireland at reasonable interest rates? Not very willing at all, I believe. In that scenario, I suspect we would find ourselves back in another bailout very quickly.
There is no getting away from the reality that Ireland’s deficit remains excessive and further cuts and tax increases are going to be necessary over the next two years. Whatever way you look at it, Ireland has to implement further spending cuts and tax increases of somewhere between €4bn and €5bn over the next two years. The ongoing debate about the precise scale of the adjustment in October’s budget is really only around the margins of that stark reality.
Let’s look at the question of what we should do in October’s budget.
The Memorandum of Understanding with the troika does not specify a nominal adjustment for 2014. However, the decision of ECOFIN on 7th December 2010, ratifying the troika Programme, requires Ireland, under the Excessive Deficit Procedure, to achieve a deficit not exceeding 5.1% in 2014 and not exceeding 2.9% in 2015.
So October’s budget must ensure that Ireland’s general government deficit in 2014 does not exceed 5.1% of GDP. That is the bottom line. Taking that as a given, as far as I am concerned, the troika cannot dictate the scale of the adjustment in October’s budget. I believe Ireland has demonstrated sufficient good faith in getting our public finances on the right track in recent years to be allowed to decide for ourselves how we achieve the required deficit target in 2014.
It is true that we cannot be certain at this stage of the exact of quantum of adjustment required to stay within the deficit limits.
As an opposition party, all that we have to go on in the Stability Programme Update(SPU) submitted by Government to the European Commission in April this year. This document tells us that an adjustment of €3.1bn in October’s budget will yield a deficit figure of 4.3% in 2014 – well below the limit of 5.1%.
I accept that the 5.1% deficit limit is non-negotiable. However, my question for the troika is what would be wrong with Ireland coming in with a deficit figure perhaps 4.7% or 4.8% in 2014? I accept that we have a lot of moving parts – principally emerging data on economic growth – and that it is not possible to finalise the fiscal adjustment until September. Having said that, at this remove, I believe we should be aiming for a deficit a little south of 5% which would probably involve an adjustment in 2014 closer to €2.5bn than €3.1bn.
A number of very significant voices have been raised in favour of sticking to a €3.1bn adjustment in 2014 including Klaus Regling of the ESM; Craig Beaumont of the IMF; the Fiscal Advisory Council and the Central Bank. Their opinions are important and should be listened to carefully. They cite the downside risks to growth as the reason to stick to the current adjustment plan and there are undoubted risks to our recovery.
However, we need to bear in mind just how weak the real economy is. In the first quarter of the year, the consumption element of GDP declined by 3% on seasonally adjusted basis.
This was the fastest rate of decline since 2009. GDP has now contracted for 3 quarters in succession. Economists now expect retail sales to fall by almost 1% this year. Budgetary policy has a key role in shaping consumer sentiment.
It would appear that we can no longer rely on exports to bolster the economy. Given the challenging international trading environment, the outlook for 2013 is not particularly encouraging on the export front.
In many respects, the debate about the budget adjustment is about spending cuts and any debate about spending cuts in Ireland is a debate about social welfare. The room to manoeuvre on the public sector pay and pensions bill is extremely limited following the Haddington road agreement. While you can trim around the edges in Departmental spending, the reality is that social welfare is the key area a government may decide to target for substantial savings.
As someone who grew up in a family which was completely dependent on social welfare income from when I was about eight years old onwards due to my late father’s ill health, I have experienced at first hand the vital importance of basic State support for people who fall on hard times for one reason or another. Through very careful management of the modest income from invalidity pension, my parents were able to raise a family of five and put some of us through third level. So you need to be very careful where the axe falls in social welfare.
As I see it, the provision of weekly social welfare support should be regarded as a social contract between the State and the citizen with obligations on both sides. The State is there to provide an essential safety net for people who are not capable of working and for those who are genuinely unable to find work. The corresponding obligation is that those who have the capacity to work are required to actively seek it and to engage meaningfully in the various activation initiatives offered by the State.
The key to social welfare reform and to achieving savings lies in the whole area of labour activation and not in cutting around the edges of the benefits given to carers, the disabled, the elderly and supports for children.
So what will the end of the troika programme mean?
As we prepare to exit the bailout programme the public will rightly ask how life will be different in the years ahead.
When I put the question to the troika as to what their involvement would be in the future, their answer was pretty simple: we will still make regular visits, our profile will be lower, we will just be a little less annoying but we will still be there.
Quarterly troika visits will be replaced by half-yearly visits. We will still have to reach our medium term objective which is a structural deficit of not more than 0.5%. Essentially the aim will be for balanced budgets over the economic cycle.
The departure of the troika next December will undoubtedly be a success for the government and the country, but we would do well not to exaggerate its practical impact. Given the development of strict European fiscal and debt rules, the reality is that economic sovereignty is a very qualified principle at this stage. Even if these rules did not apply, are we really suggesting that markets would demand any less fiscal discipline from us? I think not.
A constant criticism of public policy in Ireland is the belief that policy is formulated on the basis of short term needs and takes little or no account of the longer term implications of decisions taken.
As we move towards exiting the bailout programme we could do with taking a hard look at how long term policy formulation is undertaken. The days of aligning economic and budgetary policy with the electoral cycle has to be put firmly behind us. A proper structure must be put in place that requires governments to devise policies that base our public finances and economic performance on an economic model sustainable over the longer term. The establishment of the Fiscal Advisory Council has been a very positive step in the right direction.
While much of the debate centres on the public finances, the truth is that a reinvigorated economy will solve our unemployment crisis and correct our public finances.
We’re still doing quite well on inward investment. Ireland remains an attractive location to invest. As the only English speaking country in the eurozone with a stable political system and a well-educated workforce, we have great strengths. Our corporation tax regime is attractive and we have consistently rated high among countries as a good place to do business.
I genuinely believe that the whole area of small and medium sized businesses does not get the attention it deserves. Employing in the region of 700,000 people, SMEs are the engine of the Irish economy. Some key issues need to be addressed to help them along the way:
- Our cost base is still too high – for example, the cost of gas, electricity, and waste disposal are critical issues for business.
- The burden of local authority rates is crippling small business. This area is crying out for reform.
- Too many businesses are locked in to Celtic Tiger type rents that are totally inappropriate for the economy in 2013.
- The amount of red tape and compliance facing SMEs has to be seriously examined.
- The banks need to finally start meeting the lending needs of the economy.
- The tens of thousands of families who cannot play an active role in the economy because of the overhang of mortgage arrears and personal debt need sustainable solutions for once and for all.
- The thriving black economy has to be tackled with imaginative initiatives such as rewarding households that use registered, tax compliant contractors for home improvement work.
- The social welfare system has to be reformed in two fundamental ways:
o Firstly, it should always pay to go to work. The truth is now – when you take into account the range of secondary benefits – it does pay a lot of people to remove themselves from the welfare net for the type of money they would be likely to earn.
o The second key welfare reform that is needed is to put some safety net in place for self-employed people who fall on hard times. It is completely unfair that a person in business paying into the PRSI system for decades and employing people in the local economy has no automatic entitlement to any benefits whatsoever when their business gets into difficulty.
- There is an absolute need to balance fiscal consolidation with investment in the economy. The Strategic Investment Fund – with the potential to invest about €6bn in the economy –has to be fast-tracked.
- The remaining sheltered sectors of the economy – including many of commercial State companies – need to experience the cold winds of competition.
All of these issues must be a priority in the post troika Ireland.
In conclusion, to a large extent, the troika have been a convenient whipping boy for government, opposition and interest groups alike. Many reforms which we knew deep down were needed could at last be initiated safe in the knowledge that we could claim that it was being forced on us by the troika.
Their departure will not relieve us of the need to continue the process of fiscal adjustment and economic reform. The lasting legacy of the programme should be a commitment across political parties to stable public finances and to foster policy formulation based on the long term economic and social needs of the country.
Over the next few years, we will find out whether Ireland – and indeed Europe – has truly learned the lessons from the most turbulent economic period in over half a century.
Thank you for listening.