Opinions & Ideas

Category: deficits. budget proposal



The European Union is a union of sovereign states, who are sovereign in that they are entirely  free to leave the EU. This freedom to leave means that the EU is not a “super state”. There is no coercive force, no EU army, to force Britain or any other country to remain in the EU. Britain enjoys a freedom, within the EU, that colonies did not enjoy within the British or other European Empires.
Britain is thus entirely within its rights in considering the option of leaving the EU, although that does not mean that such a course would be wise.

The EU does not exist on the basis of coercion. It exists on the basis of common rules, or Treaties, applicable to all, interpreted independently by the European Commission and the European Court of Justice,  that EU have so far countries freely abided by, even when particular decisions were not  to their liking. If countries started systematically ignoring EU decisions, the EU would  soon disappear.

One set of particularly important set of EU rules are the ones that apply to budget deficits and debts of EU countries within the euro zone. These rules have been incorporated in EU Treaties and in Treaties between Euro area states. One of the provisions is that if a country has an excessive deficit, it must reduce that deficit by an amount equivalent to 0.5% of GDP each year until it gets its deficit below 3%.

France and Italy, big states that were founder members of the EU, have both produced budgets for 2015 that do not comply with the rules.

Initially the European Commission objected, and both countries have adjusted their budgets a little.  But, even after these revisions, the budgets are still in breach of the EU rules.

Some will argue that it is the rules that are at fault, not France and Italy. Inflation is negative, so debts increase in value, while prices are falling.

Countries are caught in a debt deflation trap of a kind that was not envisaged when the rules were drawn up.  But that is an argument for changing the rules, not an argument for ignoring them or pretending they have been complied with when they have not been.

But changing the rules would require EU Treaty change, and nobody wants to change the Treaties, because a Treaty change would have to be unanimously agreed among all 28 EU states. Other states fear that would be an opportunity for Britain to use the lever of blocking  a Treaty change to revise the fiscal rules, with  which it might otherwise agree,  simply as a means of getting  a concession of British demands for

+  a restriction of free movement of people within the EU,  
+  vetoes for a minority of national parliaments on EU legislation and
+  the  scrapping the goal of “ever closer union” within the EU.

This is a form of blackmail, but it has happened before in EU affairs.

But if the EU is unable to change its Treaties, because of blockages like this, the EU will eventually die. Necessary EU Treaty change cannot be dodged indefinitely. The EU will atrophy if it cannot change its Treaties, in the same way that states would wither, if they could not change their constitutions from time to time.
In a recent commentary, Daniel Gros of the Centre for European Policy Studies has criticised the European Commission of Jean Claude Juncker for failing to either 

a.) Insist that France and Italy stick by the existing fiscal rules or, if not
b.) Call for a revision of the rules to take account of the exceptional deflationary conditions that exist

He  is right .


There were some interesting points made in the commentary on last weeks Irish budget proposals for 2014.

Minister Brendan Howlin drew attention to some of the push factors that are driving spending levels upwards…. Since 2008,

+  the numbers in schools and universities have risen by 8%,+  the number  of medical card holders(entitled to free healthcare on income grounds) has risen by 40% and+  the  number of people of pensionable age has risen  by 13.5%

Meanwhile, the number employed in the public service has fallen by 10% and the size of the public service pay bill has fallen by 17%. So there are fewer people who have to do more. This is a considerable managerial achievement for which all Ministers can take a lot of credit.

Minister Michael Noonan drew attention to another very positive development, the fact that there is now a net increase in jobs in the Irish economy of 3000 per month.

On public spending, Michael Noonan said there will be a ceiling on public expenditure of

+   51.5 billion  euros in 2015, and
+   51.9 billion in 2016.

Given the ongoing, demand led, upward pressures on spending, referred to by Minister Howlin, these caps will require policy changes in future budgets.
Michael Noonan said Ireland would still have a budget deficit of 4.8% of GDP in 2014, which he intends to reduce to 2.9% of GDP by 2015.

As Pat Leahy put it in the Sunday Business Post, the Irish state is spending 13 billion euros more than it raises in taxes this year, and its debt is scheduled to reach 205 billion next year. He says that only 60 of the 205 billion is due to  bank recapitalisation, the rest is due to  simply spending more than revenue on an ongoing basis.
This is a fact that those who say they are against “austerity” fail to deal with. What would they/we use for money if they/we spent more? Who would provide it, and on what terms? 

The Department of Finance’s own figures see the debt reaching 211.6 billion euros by 2018, when the Fiscal Compact will come into force.

From 2018 on, we will be obliged to move towards a structural deficit of no more than 0.5% of GDP (as against out structural deficit of 5% in 2013).
My own sense is that the burden of interest on our over 200 billion euro debt is going to get higher, rather than lower. Global interest rates will eventually rise. So we need to reduce the debt, and remove factors that push spending upwards.
Against that background, it might have been better to use the 200 million euro proceeds of the sale of the National Lottery to reduce the national debt.
Free GP care is to be made available for all children under the age of 5. This will benefit only the 60% of families, whose incomes are above the medical card income limit. The under 5 year old children of medical card holders get free GP care already.

This is a step towards free GP care for everybody, which again would only give something new to those whose incomes are above medical card limits. Unless free GP care proves to have no net cost because it saves on hospital treatment, it will add a new, long term, challenge to the many unfunded, and demand led, spending challenges Irish Governments already will have to meet, based on the combination of demographic trends with existing policies on health, pensions etc.,( along the lines mentioned by Brendan Howlin in his speech).

As noted in an earlier post on this site, these 2014 draft budget proposals will be subject to peer review by the other Governments of the EU, before their final adoption at the end of the year. So also will be the budget proposals of every other EU government…..large or small, and whether in a bail out or not.

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