Labour's failure to back brave budgetary plans has given rivals sole footing on high ground, writes GARRET FITZGERALD
THE Information Note on Economic and Budgetary Outlook 2011-2014, published by the Department of Finance on Thursday, has clarified the scale of front-loading of the four- year fiscal adjustment that will be involved in our impending budget.
First of all, this document made it clear that the fiscal adjustment will be even larger than had previously been suggested.
At €6 billion it will be twice as large as the figure of €3 billion that had until quite recently been the proposed target for this year’s budget. This document also sets out several reasons as to why the scale of the adjustment has had to be so radically increased.
Some of these reasons are familiar as they have already been mentioned officially or semi- officially in recent weeks – including the recent acceptance by the Central Statistics Office that earlier estimates of our national output had inadvertently exaggerated its scale, and a reduction in the scale of future economic growth arising from a reassessment of the scale of the damage done by the property bubble.
Moreover, the promissory notes issued to Anglo Irish Bank and two other institutions are going to cost us €3.4 billion in 2013 and 2014, for which no provision seems to have been made – for reasons that are unclear. And of course the additional €7.5 billion costs that now have to be imposed on the economy will themselves further reduce our economic growth.
Because of all this, the growth rate of our economy is now estimated by the Department of Finance to be just under 2 per cent next year and to then average 3 per cent during the following three years.
The estimate for Irish growth in 2011 is based upon the most recent IMF global growth estimates. For later years our forecasted growth rate is based upon a belief that global growth will increase, on the adjustment in Irish competitiveness that is already evident, and assuming a positive dividend to growth from impending structural reforms.
When the four-year fiscal plan is published, we shall presumably see just how much the Government expects to save from structural reforms arising from the Croke Park agreement.
Clearly none of these savings will accrue in the present year because, seven months after that agreement was reached, the Civil Service does not seem to have secured any such reforms – indeed it is not clear whether they have even told the unions what changes in work practices the Government is seeking.
On these pages yesterday, Dan O’Brien gave several reasons why these targets might be difficult to achieve – including doubts about the scale of employment and consumer spending in the years ahead. The latter, he said, could be at risk from a further rise rather than a fall in savings.
However, there is also a potential upside, for growth could equally end up higher than the department has projected.
If there is a general recovery in the developed world in those years, our very open economy will be exceptionally well placed to benefit for it. Already we have seen this year significant growth in our exports, of both goods and services, which bodes well for the future – although it will of course take some time before this development will impact upon our domestic economy.
In this connection, the very striking front-loading of our fiscal adjustment could prove helpful because, while it will have a short- term negative impact on growth in 2011, it has made it possible to reduce the subsequent adjustment burden progressively – from €3 to €4 billion in 2012 to €2 to 2.5 billion in 2014.
If it had not been necessary to make such large fiscal adjustments, our growth rate could well have attained 5 per cent to 6 per cent on the rebound, in the immediate aftermath of the crisis. Even with the scale of adjustment now proposed for those years, which will reduce our growth potential by about 1 per cent, we have a very good chance of doing better than 3 per cent annual growth during that period.
The Government’s commitment to such a large adjustment in 2011 is courageous. Clearly Brian Lenihan is determined to put country before party, and has brought the Government with him, perhaps also his party – although that is less certain.
This is a wise decision, not just from the country’s point of view but also in the longer-term interest of Fianna Fáil.
The party is bound to be heavily defeated in an early election – but its capacity to recover thereafter may be significantly improved if it is able to say: “Yes, we made a mess of things, but we had the guts and the patriotism to do what was necessary to recover as much as possible of the economic ground lost by our mistakes – regardless of the impact of those measures upon our party’s popularity.”
Meanwhile Fine Gael, under the guidance of its finance spokesman Michael Noonan, has been playing its cards skilfully – criticising the Government for its failure to foresee the scale of the crisis that has unfolded, but supporting both the target of a 3 per cent deficit by 2014 and the scale of the adjustment now being proposed in the current year, as well as the proposed balance between tax increases and spending cuts. Meanwhile it is keeping open the right to criticise the details of the budget.
Labour has been less skilful. It deferred its own budget proposals a little too long, and then, having, like Fine Gael, committed itself to the target of a 3 per cent deficit by 2014, on Thursday Joan Burton pulled back from support for the 2011 budget adjustment of €6 billion, describing it as “unacceptably risky”. This was at the very same moment this target was securing the vocal support of Olli Rehn for the European Commission and Jean-Claude Trichet for the ECB.
This has given Fine Gael sole command of the high ground that Labour had hitherto shared – which in the election could cost it some precious middle-class support.