OPINION:The Government is trying to dismiss the potential doubling of the deficit as a mere technicality

THE GOVERNMENT appears to be trying to have it both ways on this business of the impact of the Anglo Irish bailout on the annual exchequer deficit.

For the past couple of years the size of the deficit in comparison to the overall size of the economy has been the preferred measure for charting our decent into Hades and subsequent progress on the road to redemption.

In a similar vein the holy grail in this regard is to reduce the deficit – expressed as a percentage of Gross Domestic Product – down below 3 per cent.

This is the target set under the Maastricht Treaty and is generally accepted to be a sustainable level of growth in borrowing. (The deficit is essentially borrowing as it is the difference between what the Government spent and what it took in in taxes, etc.)

Up until last week the Government’s stated position was that the deficit in 2009 was 11.8 per cent of GDP and it would fall to 11 per cent this year and shrink on down to 3 per cent by 2014. In order to get there public sector wages have been cut and the electorate subjected to unrelenting pain in the form of tax hikes and spending cuts.

However, the European Commission threw a spanner in the works last week when it said the 2009 deficit was actually 14.3 per cent – the EU’s largest – because the Government had forgotten to include the money spent to date bailing out Anglo Irish Bank: €4 billion in 2009.

In a similar fashion the deficit will actually rise to at least 17 per cent this year, because of the additional €10.9 billion earmarked for Anglo Irish Bank and Irish Nationwide. Indeed, the deficit could be substantially higher if the worst-case scenario manifests itself and a further €11 billion has to be ploughed into the deadbeat banks.

Thus, in the stroke of a Eurostat spreadsheet, Ireland has gone from a scenario in which the deficit steadily marches down to 3 per cent, to one where it potentially balloons out to over 20 per cent this year and could remain stubbornly high if more money is needed for Anglo Irish and Nationwide.

Equally swiftly the concept of the deficit (as percentage of GDP) as the ultimate arbiter of fiscal rectitude has been brushed aside and replaced with something called the “underlying” deficit.

This, to paraphrase Warren Buffett, could best be seen as the deficit without the bad stuff, ie the deficit as it would be if we did not have to face up to the fact that Anglo Irish and Irish Nationwide are costing taxpayers €22 billion in cold, hard cash for which they will get nothing in return.

This is all very well but it raises a pretty fundamental question: either the deficit figure means something or it doesn’t.

Moreover, can you really subject the taxpayer to the most brutal measures seen in the history of the State in order to rein in the deficit and then dismiss a potential doubling of the same deficit as a mere technicality?

The Government seems to thinks it can because that is exactly what it is doing. It remains to be seen if it can do it and hang on to what little credibility it retains with the electorate.

But as with so much that has been done in the last few years, the constituency that counts is not the by now bewildered taxpayer, but the bond market.

The hope, and it’s not unreasonable, is that the bond markets will accept that the “underlying deficit” is truly reflective of what is happening in the economy, ie the interplay between taxation and spending, which is the real issue when it comes to forming a view as to whether the economy is stabilising and the Government is able to pay its debts.

What is really important in this regard is the overall stock of debt and that remains unchanged.

Instead of showing up in one part of the Government’s books, the borrowing for the Anglo Irish and Nationwide bailouts will now show up in another part of the books.

This is the view of the debt rating agencies who assess Ireland’s ability to pay its debts. They have indicated they will not be changing their ratings.

We must hope that the bond market takes the same view and the early indications are that it has, with the cost of borrowing remaining largely unchanged. But the capitulation of the Greek government last week means that the sovereign debt market is likely to be a pretty nervous place for the foreseeable future.

Any suggestion that Ireland’s national accounts are not what they seem would have catastrophic consequences for Ireland’s creditworthiness.

Faced with such a prospect it is easy to see why the Government has not lost too much sleep over how it will explain to the electorate that the deficit figure it has been beating us over the head with for the past three years is really just a technicality.