A Discouraging Dail Debate

Yesterday’s Dail debate shows that Fine Gael’s approach to the upcoming budget and four-year plan debates appears to be to emphasise the idea that economic growth may be higher in future years so that €15 billion in cuts will not be needed.  The ESRI’s high growth scenario gets a lot of play in these discussions.

From Enda Kenny’s speech in the Dail:

There are better possible outcomes. For instance, if the ESRI’s updated high-growth scenario of an average growth of 4.5% were to materialise, a smaller package of fiscal measures would be needed to hit the 3% target by 2014.

That is why Fine Gael believes it is necessary, over the coming weeks, to put a relentless focus on the ways to support growth and jobs as the country attempts to repair its public finances. That is why Fine Gael believes that any fiscal plan has to operate in parallel with a credible growth and jobs plan to turn the present downward vicious cycle into an upward virtuous cycle. We have a different approach from the Government. Fine Gael offers real hope that we can rebuild our economy and restore trust in politics and in Government.

This was backed up by Michael Noonan, who was pretty clear about the political costs to the opposition of agreeing to the €15 billion figure:

When the €15 billion is a forecast and when minor adjustments in the growth rate can make such vast variations, would we not be desperate clowns to tie ourselves in to the Minister’s figure, especially when the Taoiseach could not answer Deputy Gilmore this morning when he asked what was factored into the estimate of growth?  …. The key element is the forecast for growth and there is a vast variation between Davy’s forecast, which would take us over €20 billion, and the ESRI high growth forecast, which would bring us down to €9 billion.  The Minister is on the mid point so maybe he is right, but we are not buying in. We need more information.

I’m pretty sure that Fine Gael are aware that the previous budget’s growth projections are now considered to be highly aspirational by the European Commission and that any plan that is agreed will have to be on the basis of lower growth figures than contained in the ESRI’s high growth scenario.

You can call this unfair if you want (and some will—no doubt we’ll have comments here about the need to wear shades due to the brightness of our economic future.) However, that’s the way things are going to work and with the EFSF waiting in the wings to bail us out, the government probably doesn’t have a lot of bargaining power to make the case for a more optimistic scenario.

Indeed, I’m sure even the ESRI don’t believe that their high-growth scenario is the appropriate basis for fiscal planning over the next few years. Recall that the Recovery Scenarios document gingerly raised the question as to “whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy.” Note also that, on its own, the news about €1.5 billion per year in promissory note interest would take us to €9 billion even on the basis of the government’s December 2009 calculations. 

What this emphasises, I’m afraid, is that the current political situation makes a cross-party consensus on multi-year budgeting essentially impossible. Opposition parties do not want to campaign at the next election on the basis of €15 billion in adjustments and who can blame them?  However, this will gravely undermine the credibility of any four-year plan introduced by the government and will also worry financial markets. 

McDonald and Cuffe on Metro North

On PrimeTime last week, Sean Barrett and Edgar Morgenroth cast severe doubt on the wisdom of Metro North. They are now joined by Frank McDonald.

Cairan Cuffe’s response starts with “[n]ow is the time to invest”. That says it all really. You can read the rest for yourself.

The Green Party is apparently still oblivious to the situation with the economy and the public finances. Cuffe wants to invest billions of euros in a project with a doubtful return. Gormley wants to spend unnecessary hundreds of millions of euros on waste disposal, despite warnings of his own EPA.  Ryan invests ESB’s money in electric cars and continues a subsidy scheme that does not deliver according to his own SEAI.

It is never wise to waste money, but now is a particularly bad time.

Dublin is badly served by public transport at present. Liberation of the bus market is the way forward.

UPDATE: Metro North got planning.

Address by Governor Patrick Honohan to Institute of Certified Public Accountants in Ireland

His speech is here.

Ireland’s Experience in the Bond Markets

Oliver Whelan of the NTMA gave a presentation on this topic to the IIEA last week. His slides are available here.

What sort of four-year plan?

While there has been much comment about the four-year fiscal plan since the government announced it last month, it is still not clear what sort of plan they have in mind.  At one end of spectrum (the relatively useless end) would be new targets for current spending, capital spending and tax revenues, with possibly a listing of realistic options for achieving those targets.   At the other end of the spectrum would be a true multi-year budget, with detailed phased measures that are legislated where possible. 

The governments statement yesterday hardly suggests that a proper multi-year budget is what they have in mind:

The purpose of the Four Year Plan for Budgets and Economic Growth is to chart a credible way forward for this country. The size of the adjustment for 2011 and the distribution over the remaining years will be announced in the Four Year Plan. The Plan will contain targets for growth and strategies for the achievement of those targets.

When exactly did the four-year plan become a plan for economic growth?   While returning the economy to growth is a critical part of the overall challenge, the four-year plan had a specific and urgent goal: to convince potential buyers of Irish debt that Ireland could lower its borrowing requirement sufficiently to avoid a bailout or default.   Of course, decent economic growth will make this challenge easier, but I cant see how the year-by-year, sector-by-sector fiscal plan expected by the EU Commission is the place for growth targets and strategies.  We have to worry that the targets and strategies are filler to distract from the paucity of the fiscal plan itself. 

Minister Lenihan also confirmed yesterday a nominal cumulative deficit adjustment target of €15 billion by 2014.  The debate has now switched to how much to frontload this adjustment in 2011.   Of course, the necessary front-loading depends on the credibility of the overall plan.   The more investors have doubts that we can make good on our promises, the more they will need to see the money taken out up front that is, the more the adjustment must be inefficiently concentrated at the time when our anticipated output and employment gaps are at their largest.   Having to frontload because the government (and opposition) cant or wont deliver a true multi-year plan would be a serious policy failure.