Opinions & Ideas

Category: Maastricht Treaty


One of the reasons Ireland, notwithstanding its budget deficit, will soon be able to borrow at bearable interest rates in commercial markets, is that it has met all the deficit reduction targets it had agreed with the EU/ECB/IMF troika.

All parties who have held office in Government since the programme was agreed deserve great credit for that.
Against that background, one or two statements, buried in the middle of a long article entitled 

 “No Margin for Error”,

in the “Sunday Times” on 10th November, on Ireland’s exit from the troika’s loan programme, ought to be discussed more widely.
On the question of whether fiscal discipline would be maintained, after the troika were no longer visiting every three months, the Sunday Times claimed
“One senior Labour source said he expected the government to immediately ease back on austerity once the troika left town”.
The “Sunday Times” went on
“” There are all those new EU oversight rules, but there is already a general sense that they will not be taken too seriously” said the Labour source.”
”The government will be taking the foot off the pedal as soon as we are out of the bailout. I think there will be tax cuts, maybe even a reversal of some of the unpopular budget cuts“, the source continued, according to the Sunday Times.
This senior source seems to assume that the reason Ireland had to impose austerity was because of instructions by the troika.

He or she also seems to think that commercial lenders, on whom the country will be relying future, will be much less worried about whether the government is meeting its budgetary targets, than the Troika would have been. 

My understanding is that austerity came about, not because of instructions from anybody, but because Ireland was unable to borrow in commercial markets because the gap between its spending and its revenue was just too big in 2010.

That was not “imposed” by the troika, but by an Irish government’s own earlier spending decisions, decisions that could no longer be financed by commercial borrowing. 
To meet day to day outgoings, there had to be seen to be a plan to close that gap between spending and revenue , troika or no troika, if the state were to continue borrowing for those outgoings……from ANYBODY. 

Given that commercial lenders, or purchasers of future Irish government bonds, will want their money back with interest, just as much as the troika will, is hard to see them taking a more relaxed view of budget targets than the IMF would in similar circumstances, especially as commercial loans/bonds will be subordinate to the existing IMF loans.
I am also surprised to hear that a senior source believes that the new EU rules will not be taken “ too seriously”.  I had not come across that view before, until I read it in the “Sunday Times”!

These rules have only recently been approved, after long debate, by the European Parliament and apply to all euro area states. My sense is that they were necessary to persuade EU states, with good credit ratings, to lend money or provide back stops to  EU states with poorer credit ratings. 

These rules are also based on EU Treaties, which the Irish people themselves approved in referenda ….. the Maastricht Treaty, and  the Fiscal Compact Treaty. 

The Fiscal Compact Treaty explicitly commits Irish governments to continued reduction in deficits, until we achieve a structurally balanced budget. We are not there yet.

The Maastricht Treaty commits the state to a deficit of no more than 3% of GDP, and a debt/GDP ratio of 60%.  Ireland exceeds both numbers substantially, indeed by more than almost any other EU state does at the moment. 
As long as it has to pay any interest rate, a government, which borrows money, will find itself repaying MORE than it has borrowed.
Repaying loans will require a future government to set aside money that it will have to raise from taxpayers, refuse to spend it on services , and instead  pay it to government bondholders. 
That might not be a problem if the economy is growing rapidly, but who can guarantee that, ten years ahead?

I doubt if the anonymous “source” can give any such a guarantee!


Work is now intensifying on the preparation of the budget for 2013.

It is part of a process of reducing the gap between revenue and spending (including spending on interest payments) to   3% of GDP, in accordance with EU rules and the Maastricht Treaty which the Irish people approved in 1992. This reducing of the gap is called ”fiscal consolidation”.

In 2009, the fiscal consolidation was 7.6 billion euros, 
in 2010, 6.4 billion,
in 2011, 6.1 billion, and
in 2012, 3.8 billion.

In the budget now under preparation, a consolidation of a further 3.5 billion has to be made for 2013.
For 2014, a consolidation of an extra 3.1 billion euros must be made.
And , finally, to  get on target, yet another consolidation of 2 billion  must be made for 2015.
While these figures show that a consolidation of 22 billion has already been made, and the remaining consolidation is “only” 6.6 billion, the truth is that the further one goes along a road like this, the harder it gets.
The “easy” tax increases or spending reductions are made in the earlier rounds, and the much harder ones tend to get postponed to the later stages. We are now getting to the hard part.

I think there is a strong argument for announcing, upfront next month, a full programme of all the  cuts and tax increases  for all three remaining  years- 2013,2014 and 2015. We should have a three year budget, rather than a one year one.
Doing the job one year at a time adds to the uncertainty, and does not reduce the pain. It also prevents people seeing what the real alternatives are.
The last time Ireland faced a similar crisis , in 1981, I was the Minister for Finance. Within 4 weeks of taking office I introduced and passed an emergency budget in July 1981.
I then prepared a White Paper on how the country could avoid getting into the same sort of mess again.
It  was entitled “A Better Way to Plan the Nation’s Finances”. Unfortunately, because the Government had no Dail majority, and fell on the proposed budget for 1982, I did not get a chance to implement the reforms I had proposed in the White Paper.
But the reforms proposed in that paper are just as relevant to today’s problem, as they were to those of the early 1980’s.

In “A Better Way to Plan the Nations Finances,  I suggested a new timetable for budget preparation for the following year which would see the proposed tax and spending measures published  in the previous October, allowing 2-3 months for debate, and even changes, before the measures took effect.
The 1981 White paper suggested that the budget be  accompanied by estimates of the tax changes and spending  changes that would be needed to stay on track for the subsequent  two years….a sort of three year budget. That would have taken a lot of the secrecy out of budget preparation, and given everybody a greater sense of involvement with the choices that had to be made, and a sense of   how difficult they were.
By having the debates ahead of time, the possibility would be opened up of making amendments in a non dramatic way.  It would not be so much a question of dramatic “climb downs” and “U turns”, but rather of listening and learning from rational debate.
And the  1981 White Paper suggested a  change to Dail procedure to allow opposition parties to make detailed  proposals for amendments to spending plans, so long as they put forward equally detailed alternative ways of bridging the gap.
It also proposed an independent Public Expenditure Commissioner who would analyse the choices for the Dail.

It seems to me that it would be very helpful today if information was published, on a regular basis, by someone like a Public Expenditure Commissioner, comparing different types of public spending  and tax breaks here, with those applying in other  jurisdictions, like Northern Ireland, Germany or Spain.
For example, we could usefully know how things like

 medical consultant’s salaries,
 teacher’s salaries,
 public service pensions, and
 jobseekers allowances,
 here compared with the other places.
It would also be useful to be regularly informed what particular medical procedures cost in different hospitals in Ireland, and in hospitals in other countries.
One could also compare the unit costs of the courts and legal proceedings, and of prison services here with other countries.
Publishing this sort of information routinely, and setting out the budget over three years ahead, would make the Government’s political task easier. And  it would help people to see where their money was going and why.

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