ANALYSIS:Labour and Fine Gael are making promises they will not be allowed keep under bailout, writes
DAN O'BRIEN,Economics Editor
THE LOSS of sovereignty recently suffered by this State affects very seriously the scope of the choices political parties can realistically offer in the forthcoming election.
From the economic policy ideas unveiled yesterday by Fine Gael and Labour, it appears neither party wishes to acknowledge fully this tragic reality.
On banking, Fine Gael differentiates itself from the incumbents’ position in so far as it advocates burning at least some of those bondholders everyone is so sick of, and so sick of hearing about. Fine Gael makes clear it would force losses on the unsecured senior bondholders in Anglo Irish Bank.
Given that the ECB – which provides the liquidity that keeps the banks open – has been so opposed to taking this sort of action, Fine Gael looks to be setting itself up for a slapping down by the Frankfurt central bankers if, and almost certainly when, it takes the reins of power in the new year.
The Labour Party in its policy document does not focus on the banks, but it reiterates the party’s position that it would reject the €6 billion budget adjustment in 2011, which is a clear condition of the bailout. Labour (rightly) says that the €6 billion correction next year poses risks to economic growth. But that is what this State has been told to do by those who decide these things now. This is the awful reality of a loss of sovereignty.
The ECB, again, is particularly important with regards to budget targets. By all accounts of the discussions leading up to the setting in stone of the bailout terms, it wanted an adjustment even larger than the €6 billion that has been formalised. The notion that the ECB hawks would countenance slippage on this condition seems more than fanciful.
That said, Labour may have given itself more wiggle room in the commitments it made yesterday than did Fine Gael on bondholders.
The 2011 budget is already likely to be operational by the time Labour takes power in the new year. This will allow the party to throw up its hands and say that it can’t undo the budget.
Interestingly, yesterday’s Labour Party paper makes almost no commitments beyond 2011. If it does take office in, say, March, and then accepts that the 2011 budget cannot be re-opened, it effectively has a free hand as of now.
In contrast to the Labour Party, Fine Gael’s budgetary commitments announced yesterday do not appear incompatible with the bailout terms.
The largest Opposition party says that it will respect the size of the adjustment over the three years of the rescue and into 2014. But it intends to place a greater emphasis on spending cuts over tax increases, something that the terms of the bailout do not rule out.
The current Government’s strategy to close the yawning gap between spending and revenues involves two-thirds spending cuts and one-third additional taxes.
Fine Gael said yesterday that it would reduce the role of tax increases so that they account for “less than a quarter of the adjustment in 2011, and just over one-third of the adjustment in the remaining years.”
A close reading of the FG appendix shows that over the full four-year period, taxes would account for just over €4.8 billion of the adjustment and spending cuts just under €15.2 billion. As these headline numbers differ hardly at all from the Government’s aggregate figures over four years, Fine Gael’s strategy is more about a change of sequencing, with more frontloading of cuts and more backloading of tax increases.
Based on the literature on budgetary adjustments historically, this strategy is more evidence-based than the Government’s.
But how will this strategy be affected by arriving in office in March when the 2011 budget is already in place and cannot be unpicked?