The State's financial credibility rests on the commitment to cut the deficit to 3% of GDP over the next four years, writes GARRET FITZGERALD
AT LAST public attention has switched from almost total absorption with the banking crisis to the critical issue of the public finances. Everyone is now conscious of the fact that the December budget, now just one month away, is going to be the toughest in the history of the State.
As a result of some media misinterpretation of the Economic and Social Research Institute’s comment on the 2014 deadline for our austerity programme, many readers and viewers may not have been clear that, far from challenging that deadline, the institute had in fact said that, “we must operate within the constraints as presented”.
However, confusion on that matter failed to disturb the unanimity of all those political parties either actually or potentially in government on the key issue of reducing our general government deficit to about 3 per cent of GDP by the year 2014. That Dáil cross-party support may prove crucial to our international financial credibility.
Michael Noonan for Fine Gael has refrained from committing himself to the €15 billion target for fiscal adjustment over the four-year period, because, he has pointed out reasonably enough, “this is a forecast not a target”. But, addressing the trade unions and Sinn Féin, he added trenchantly that however sincerely held their contrary views might be, to try to extend the target beyond 2014 could bring about a situation where we would not get the money to run the country next year.
For his part Eamon Gilmore, while also not accepting at this stage the €15 billion forecast adjustment in respect of the next four years, committed his party to a plan to convince international bond markets to invest in Ireland while we go about the difficult task of restoring the public finances.
This unambiguous four-party commitment to the achievement of the 3 per cent deficit target by 2014 is of crucial importance at a time when, just two days ago, new problems in Portugal and Greece temporarily – and quite irrationally – increased the interest rate on Irish 10-year bonds and then reduced it again almost immediately.
Of course, each of the Opposition parties will have its own view on how best to meet this year’s adjustment target of around €5 billion. That is what politics is about. The two Opposition parties will no doubt differ from the Government – and also from each other – on the details of spending cuts and tax increases.
Fine Gael wants tax increases to be limited to one-quarter of the total adjustments, while Labour would prefer one-half to be achieved by means of increases in taxation. But this disagreement on the budget provisions would prove a problem only if the Fianna Fáil/Green Coalition failed to get the budget approved by the Dáil.
It seems to me that in the present critical situation, the national interest would not be served by a Dáil defeat of the budget – whatever its contents may be. In the perhaps unlikely event of that happening through a defection by one or more Government supporters, it might then be necessary for Government and Opposition to agree immediately on a deal involving an acceptance on the part of the Government that it would dissolve the Dáil either at once, (or, perhaps preferably, in early January*), in return for which the Opposition would agree to an immediate further vote to adopt the budget.
If the Opposition parties then won the subsequent election, as seems almost certain, and if the two of them together agreed on budget changes that would not affect the size of the general government balance in 2011, they could then effect such changes when they took power after the election.
Such an arrangement could avoid the potentially disastrous impact of a budgetary collapse followed by a consequent dissolution of the Dáil and weeks of electioneering, while our financial stability was being put at risk. I raise this matter now because unless some arrangement of this kind is contemplated, a budget defeat in the Dáil could leave us without either a government or a budget for a month or more, followed by the likely emergence of a new government under huge pressure to produce a new budget at once.
We know from experience that new governments coming to office at budget time have found it necessary to adopt their predecessors’ proposed budgets with little change, because, in the short time left to them, they simply cannot devise a completely new approach to the budget. That proved true both after my governments’ budget defeat in January 1982, and again after the 1987 election.
Thus, the Fianna Fáil budget brought in by Ray MacSharry in March 1982 was basically that which had just been defeated by one vote, subject only to a fairly disastrous decision to cover the cost of dropping an important tax increase in our budget by bringing revenue back from the subsequent year, 1983. (That, of course, made the 1983 budget much more onerous than need have been the case.) And the March 1987 budget brought in by Ray MacSharry after our election defeat was basically the one we had just put to the electorate during the election campaign.
When the key 2011 budget is finally behind us, whatever government may then be in power during next year will have the task of devising completely new arrangements to ensure that there will be no third crisis of the kind that we experienced in the 1980s and are now experiencing again.
I shall return to this matter after the publication, next Tuesday, I believe, of a report on this subject being prepared by the Joint Committee on Finance and Public Services, chaired by Michael Ahern of Fianna Fáil – a committee of which both Michael Noonan and Joan Burton are members.
*It may be recalled that when in December 1986 Fine Gael and Labour in government could not agree on the terms of the 1987 budget, they decided to postpone the consequent election until January 1987