Ireland's emergency budget: Swimming against the current.

I wrote some time ago about how the Irish economic outlook was looking bleak. Unfortunately the situation has since deteriorated. On the 27th of March Standard and Poor’s downgraded the Irish sovereign debt rating from AAA to AA-plus, and labelled its outlook rating as “negative” meaning a future downgrade could be on the cards. As fiscal receipts tumble and the demand for welfare payment booms the budget deficit for 2009-10 is estimated at around 12%. With Standard and Poor’s predicting that Ireland’s net general government debt burden could peak at over 70 per cent of gross domestic product by 2013, and GDP declining by 7.5% in the last quarter of 2008, the call for a decisive response could not be clearer.

So it was with a sense of baited breath that many in Ireland waited for the emergency budget which was released this Tuesday the 6th of April. The task facing finance minster Brian Lenihan was nothing short of Augean. Faced with a burgeoning public sector pension burden, a public service unwilling to forgo any of their privileges, a banking sector who have lost the confidence of investors and consumers alike, and a private sector who are facing an exodus of the FDI few, if any, can see the light at the end of the tunnel. Indeed, many were questioning if Brian Cowen’s government was capable of discerning a path which would lead Ireland back up towards daylight.

The emergency budget set out to try and slow Irelands slide towards ever greater debt and attempt to prop up a banking system which lies paralysed and some argue insolvent. The centre piece of the measures to reign in the deficit is a levy of 2, 4, and 6% respectively on the gross income of those earning above 5,028 euro, 75,036 and 174,980 euro. This levy seems to be a clear statement by the government that they believe that while the G20 calls for ever greater stimulus packages, Ireland simply cannot afford to further imperil its public finances. Brian Lenihan believes that the higher interest rates which would accompany further borrowing would outweigh the positive aspects of an increase in spending.
However, the government also announced the creation of the National Asset Management Company which will take over €80-€90bn of bad loans. This makes Ireland the first EU country to implement the much debated bad bank solution in a bid to restore liquidity in the Irish credit markets, and also burdens the government with the debt it is trying to minimise. The government argues that this is justifiable as the negative economic effects of a continued nuclear winter in Irish lending markets would be catastrophic for national GDP, unemployment rates and the confidence of the international markets.


While Brian Lenihan’s move against the consensus expressed at the G20 for financial stimulus may at first to appear to be foolish, the markets lack of faith in Ireland’s ability to repay its debt, the restrictions on monetary freedom imposed by membership of the Euro lend it a certain air of sagacity. Ireland’s recovery will depend on export led growth and thus it is key that we strive to minimise the extent to which our ability to respond to the eventual global recovery is compromised by the debt burden. The next task, in the name of both equality and economic rationality is to tackle the bureaucracy that cripples the efficiency of the public sector and the health of the Irish exchequer. This will be neither popular nor straightforward, but unless government spending is brought back into a sustainable range Ireland’s recovery will be seriously impaired. With the latest budget it seems that Brian Lenihan has picked the right road. Now he must continue in the same direction, delays must be avoided for in the current environment hesitation spells devastating consequences.