ANALYSIS:The credibility of Fine Gael's plan is being questioned because the party has not provided enough detail
THE CLAIMs and counterclaims among the political parties on their budgetary plans show no sign of abating.
One of the most controversial claims being made comes from the Labour Party.
Eamon Gilmore and his colleagues say there is a “black hole” in Fine Gael’s plan and that the party’s figures are out by a massive €5 billion.
Fianna Fáil yesterday jumped on the “black hole” bandwagon to echo Labour’s €5 billion charge.
The claim is bunkum, even if Fine Gael has made it easier for its opponents to question its credibility by the way it has poorly communicated its plans.
The origin of Labour’s charge is to be found in a European Commission report on the Irish economy published last Thursday.
This included an updated growth forecast for the Irish economy, which takes into account the dampening effect on economic activity of the huge 2011 budget adjustment unveiled in December, and the larger than previously pencilled in €9 billion adjustment over the 2012-14 period.
The commission now has the most pessimistic forecast for gross domestic product (GDP) of any of the domestic institutions and the International Monetary Fund for the 2011-15 period.
Due to such weak growth forecasts, it believes that even with the €15 billion adjustment up to 2014, the State’s budget deficit will still miss the 2014 target.
The rules governing euro zone countries are based on a deficit: GDP ratio of no more than 3 per cent.
This means that even if the deficit – revenues less government spending – is on target, a lower GDP number will cause the deficit/GDP ratio to deteriorate.
Last week, the commission forecasters said that to reach the target using its GDP forecasts, the 2011-14 budgetary adjustment would have to be between €19.5 billion and €20 billion, rather than the €15 billion set out in the bailout conditions.
The difference is the €5 billion Labour and Fianna Fáil have been goading Fine Gael with.
But as Fine Gael is not using the commission’s GDP forecasts – nor did it ever suggest as much – the charge is baseless.
The debate is descending into farce. It would be far better if both Fine Gael and Labour published a detailed set of year-by-year forecasts, including all real and nominal GDP figures.
This might allow the debate to focus on more substantive issues. The Irish Times has asked both Fine Gael and Labour to provide the spreadsheets that contain their full set of numbers – neither party was willing to do so.
At the bottom of all this is an argument about the effects that fiscal tightening has on economic growth.
This debate is raging among economists, with some claiming that aggressive deficit cutting is the best way to trigger a virtuous cycle of lower deficits and a higher rate of economic growth.
The contrary view is that aggressive budgetary tightening becomes self-defeating, locking economies into vicious circles of low growth and ever-rising deficits.
The latter camp can point to Britain and Greece, where austerity may be negatively affecting growth.
The hawks can point to the Baltics, where big frontloaded adjustments appear to have worked.
These divisions between fiscal doves and hawks are not confined to the rarified world of academic economists, but are to be found among Ireland’s bailout troika.
The commission’s report last week confirmed that it was in the hawks’ camp, along with the über-hawkish European Central Bank. The IMF, by contrast, is more dovish.
Who is right? The truth is that the evidence base is just not strong enough to say for certain.
What can be said with confidence is that every course of action at the current juncture is beset by risk.