Colm McCarthy makes an important contribution to the fiscal debate in today’s Irish Times. I agree with most of it: the precariousness of creditworthiness, the rebuttal of Ray Kinsella, and the reputational damage associated with an IMF/EU bailout.
But Colm continues to provide the best analysis around of half the challenge facing the government – creditworthiness. The other half is the collapse in domestic demand. Colm is right that there is a tradeoff between the two. What he doesn’t offer is suggestions on how the tradeoff can be improved, such as measures that increase the credibility of the four-year plan that would limit the necessary degree of front loading.
Leo Varadkar’s piece in the Sunday Business Post is interesting in this regard. On its face, it might seem that he is advocating an extreme front-loading of the adjustment. The twist is that he advocates using the NPRF to maintain investment spending. Thus he combines a large upfront and permanent improvement in the deficit with measures to limit the deflationary impact. Of course, this could also be achieved by directly protecting the capital budget and imposing bigger burdens on current spending and taxation. But that does not appear politically possible. Deputy Varadkar’s proposal would obviously also be very difficult to pull off. But it is worth debating.
Unlike many others, I think the NPRF had value for its stated purpose of pre-funding future pension costs. But that ship has sailed. More recently, it has served as a valuable liquidity backstop against a self-fulfilling fiscal crisis. It is worth considering now how the fund might be used to improve the creditworthiness-demand tradeoff.