Four year plan: Energy and environment

Overall, the four year plan repeats many of the things that we have seen before. It is not a new strategy. It is more of the same. The broadening of the tax base and the pension reform are steps in the right direction. Strikingly, there is no culling of quangos and no privatization. There will be a poll tax rather than a property tax. R&D will be stimulated by abolishing the tax exemption for patent royalties.

On energy, there is little to say. Essentially, the intention is to continue to pump billions of euros into renewable energy with the intention to make energy more expensive.

The carbon tax will be doubled between now and 2014, but coal and peat are apparently still exempt, and the subsidies for insulation and renewable heating remain. Doing away with exemptions and subsidies would bring in roughly the same amount of money, and would remove distortions in the economy.

Water charging will be postponed to 2014. That probably means that DEHLG still plans for a 3-year, top-down programme to roll-out water meters, paid by the NPRF! A system with a flat-water-charge-unless-you-install-a-meter-yourself can be up and running in a year.

Tax reliefs will fall for pollution control on farms. REPS payments will fall too.

No specific announcements for waste or transport (but see Hugh Sheehy’s comment #8).

From the perspective of energy and the environment, this four-year plan is the tired repetition of moves.

The Four Year Plan

The plan is here.

Not All About the Banks

The government has pushed the line in recent days that the flair up in the crisis is all about the banks.  There is little doubt that the trigger was ECB concern about their large and rising exposure to the Irish banking system.   But the idea that the banks are the problem and the state is fine – happily pre-funded as it is through the middle of next year – is nonsense.   As it stands, the Irish state is not creditworthy.   All else equal, it will become even less creditworthy as it burns through its valuable cash buffer.  The vanishing credibility of the ELG guarantee along with the creditworthiness of the state is the major cause of the banks’ increasing reliance on the ECB.  The intensified banking crisis is a (very significant) symptom of a deeper problem.

Of course, hopes are pinned that we can demonstrate political capacity to stabilise the debt to GDP ratio through a credible four-year plan and budget.  This will be a massive challenge.   Funding support on good terms – part of which could be used to “overcapitalise” the two main banks – would be a significant advantage in regaining market access; indeed, probably indispensible.   The last thing we need is another incorrect diagnosis of the problem. 

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. 

Abandoning the four-year plan

The publication of the Autumn QEC certainly has created a stir this morning.  Having been an advocate of front-loading the adjustment albeit with nuance the ESRI have now expressed doubts about the four-year time frame.

I am bit puzzled by the shift in their position.  Based on the Institute’s evolving view of the economy, I would have thought the case for back-loading was actually stronger a year ago.   While already stressed, international credit markets were then more favourable to the “peripherals” than they became after the Greek crisis.   In addition, the ESRI were then forecasting what was effectively a V-shaped recovery.   This suggested room to avoid an excessively pro-cyclical adjustment.   (A basic principle here is that there is more scope to smooth temporary growth shocks than persistent shocks.) 

Now that credit markets have turned extremely unfavourable and the underlying output path looks closer to the dreaded L-shape, I actually see less room for manoeuvre.   (It is interesting that the ESRI are now focusing on their low-growth scenario from their Recovery Scenarios update, which itself might be viewed as in line with a modest V-shaped alternative, with average real growth of 3.2 percent between 2011 and 2015.)  Moreover, the need to establish credibility around a focal adjustment path has if anything increased – the most obvious being the 4-year path already agreed with the European Commission and the major political parties.   

From media reports, it appears that outside observers consulted by the ESRI are increasingly concerned by the poor outlook for growth.   But the main reason for the worsened outlook is the drag caused by Ireland’s balance-sheet recession.   While a contractionary fiscal policy will slow growth even further, I can’t see how extending the adjustment period is the best route to convincing investors that we can steer our way through this without default.