Brian Lenihan's spending cuts and tax hikes are sucking demand out of the Irish economy – and threaten to keep the Republic mired in recession alongside Greece Cranes stand idle on a commercial building site in Dublin - victims of the country's property boom and bust. Photograph: Crispin Rodwell/Bloomberg Last December, on the same day that Alistair Darling delivered his pre-budget report to parliament, the Irish government announced its own plans for tax and spending. Darling said he would delay Britain's fiscal pain; Ireland's Fianna Fáil finance minister, Brian Lenihan, tackled his country's budget deficit head on. Darling has no intention of being swayed by critics who say that Ireland is showing how deficit reduction should be done. Indeed, he would quite welcome some interest being taken in events across the Irish Sea, for ifGreece is the right's nightmare vision of where the UK is heading under Labour, Ireland is Labour's dystopia of a Tory Britain. Unlike Britain, the United States, France, Germany, China and the rest of the G20, Ireland has not rediscovered Keynes. It has spurned counter-cyclical budgetary policy and instead has been raising taxes and cutting spending in a series of budgets and mini-budgets that have sucked demand out of the economy. Lenihan has cut child benefit by 10%, public-sector pay by up to 15%, and raised prescription charges by 50%. One eighth of the working population has no job, yet unemployment benefit is being cut by 4.1%. For the young unemployed, the measures are even more draconian: the dole has been slashed by 50%. The consensus view in the markets is that Ireland will be rewarded for its prudence. Bond yields will come down because investors will grow less anxious about a default. The ratings agencies will think again about downgrading Ireland's credit rating. This, though, is by no means guaranteed. Ireland has experienced near-depression conditions over the past 18 months, and the expectation that budget cuts will lead to spontaneous recovery through which the private sector will compensate for the retreat of the public sector is unproved. Indeed, there is a considerable risk that removing spending power from the economy will lead to more companies going bust and deter the survivors from investing more. Greece, Spain and Portugal – all under pressure to follow the Irish lead – also have to balance the struggle for " credibility" in the markets against the short-term hit to demand. Jonathan Loynes, chief European economist at Capital Economics, said Ireland was further down the road with its austerity measures than Greece, having already imposed a squeeze amounting to 5% of GDP in the past year. "Meanwhile, Greece's deficit reduction plans rest heavily on a strong recovery in the economy, which we think is unlikely to materialise. As such, we expect that the deficit will come down rather more slowly," Loynes said. "But these uncertainties are not exclusive to Greece. Indeed, while we expect Greek GDP to drop by around 2% in 2010, we expect Ireland (and Spain) to fare little better. And if Ireland's earlier fiscal tightening ends up keeping the economy deep in recession, that could clearly have an adverse effect both on its fiscal position and its commitment to further deficit reduction." Unlike in Greece, there has been no rioting on the streets. Ireland has a corporatist system of government in which the social partners seek consensus rather than confrontation. The onset of austerity, according to some commentators, has been greeted with a certain stoicism, as if there had to be payback time after the excesses of the boom years. Even so, the fiscal retrenchment is stretching the social fabric to its limits. David Begg, general secretary of Ireland's Congress of Trade Unions, has described the policies of the Fianna Fáil/Green coalition as a "charter for exploitation" that puts "very deep blue water between this government and the majority of Irish people". The options for a young Irish worker, Begg says, "are to take a job at any price or emigrate. Once again, we will see our youngest and best-educated either beaten down by exploitation or forced overseas." The Irish Labour leader Eamon Gilmore described the Lenihan package as "viciously anti-family, fundamentally unfair and socially divisive". The Celtic Tiger years of the 1990s seem a long, long time ago as Ireland accepts real cuts in living standards as the price for keeping the bond market vigilantes sweet. Both Ireland and Greece were enthusiastic founder members of the single currency; they are now painfully discovering the dark side of the euro. Labour and the Conservatives agree that the current pain being imposed on the weaker members of the eurozone emphasises the wisdom of keeping Britain outside the single currency. Ireland's property boom-bust during the noughties was a textbook example of what can happen if a country loses control of its own monetary policy – rates were too low early in the decade, leading to a colossal misallocation of resources away from exports towards construction, whose share of the economy more than doubled from 6% to 14%. Windfall tax receipts from the builders and the bankers financing them provided the government with the false impression that the budget was healthier than it was. When the inevitable bust came, Ireland (like Greece and Spain) found it had no independent tools available. Over-heating in the boom led to a loss of competitiveness, which could only be regained through deflation by diktat. The stability and growth pact decreed that the budget deficit be brought below 3% of GDP within three years. This was precisely the scenario that left-of-centre critics of the single currency warned of when Britain was debating membership of monetary union back in early 2003. Far from being a progressive panacea for Britain's (very real and enduring) economic problems, it was said the euro would cause severe instability. Giving up macro-economic autonomy would leave the government with no alternative but to adjust to an economy shock through cuts in public spending and reductions in real wages. As in Ireland, the burden of that would fall on the weakest members of society. Stephen Lewis, chief economist at Monument Securities, said: "It is surely now evident to all who would see that a 'one-size-fits-all' monetary policy is not well suited to a range of economies as disparate as those that make up the eurozone. Further, the absence of any fiscal counterpart to the monetary union is a recipe for economic instability in the zone's member states. "EU policymakers are presenting the problems of Greece and other peripheral eurozone members as if they were solely financial, to be solved through vigorous budgetary action alone. However, the yawning fiscal gaps in some of the weaker economies reflect fundamental forces that will not be easily ameliorated." Nick Parsons, head of markets strategy at nabCapital, said that while membership of the single currency might make sense for a small country such as Ireland, which risked being picked off by the speculators if it remained outside the single currency, it was a different story for Britain, where the Bank of England failed to prevent a bubble developing in the housing market even with the bank rate at 5% and above. "It shows the advantage of the UK being outside the eurozone. What would it have been like with a 2% interest rate in an open economy like the UK?" Parsons said. It would, of course, have been utterly inappropriate, creating the conditions for a boom-bust that would have put Ireland's in the shade. Which is why the lesson for Britain is not that there should be immediate, swingeing budget cuts – but that staying out of the euro was the best decision Gordon Brown ever made. guardian.co.uk/business/economicsIreland's suffering offers a glimpse of Britain's future under the Tories
Sunday, 16 May 2010
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