Notes on the Front

As my people would say – what the Sam hell!  The Government has announced they are not going to participate in the EU Commission's economic stimulus programme.  They made that clear last week.  The EU Commission's plan foresees an economic stimulus of €200 throughout the Union made up mostly from national budgets and the European Investment Bank, with social and structural funding being accelerated.  These monies should be spent, according to the Commission, on short-term measures (tax cuts, spending increases, etc.) and 'smart'investment with particular emphasis on 'green' investment.  Of course, some countries have already spent this 'stimulus' (e.g. the British Labour initiative), some won't go along and some of the steps that will be taken may not be joined up.  And there is the critical question – is it enough?  Still, it represents a step in the right direction and, hopefully, will presage further steps, more radical steps.

The Irish Government's response?  They have decided to opt-out.  No surprise really – Ireland opts out a lot.  But it's the explanation for this opt-out that is absolutely fascinating.  It shows a frightening divorce from reality.

The Government's priority is to get our public finances back in order.  The claim this is acknowledged in the EU plan.  This is disingenuous.  Yes, the EU Commission claims that it's plan is 'anchored'in the Growth and Stability Pact – those infamous (former Commission President Romani Prodi called them 'stupid') deficit guidelines that says a Government shouldn't borrow more than 3% of its GDP annually.  But it goes further:

'For Member States considered to be in an excessive deficit, corrective action will have to be taken in time frames consistent with the recovery of the economy. This is fully consistent with the procedures of the Stability and Growth Pact which guarantee that the excessive deficit will be corrected in due time, ensuring long-term sustainability of the budgetary positions. The Stability and Growth Pact will therefore be applied judiciously ensuring credible medium-term fiscal policy strategies.'

This is pretty much an invitation to blow gaping holes through the deficit guidelines – as long as its part of a medium-term strategy integrated with economic recovery.  Flexible and pragmatic.  But it depends on having a strategy.  The Government doesn't have one, apart from balancing the books.  Therefore, they resort to misrepresenting what the EU Commission actually says.

But more fascinating is the Government's claim that they actually are doing what the EU Commission is asking.  First, they claim they are already 'stimulating' – stimulating to beat the band. 

'Next year's general government deficit is budgeted to be 6.5 percent which in itself is a substantial fiscal stimulus.'

Wow, I didn't realise the Government's borrowing programme was part of a thought-out and deliberate strategy to provide fiscal stimulus.  If so, where's the pump-priming?  In the budget the Government froze personal credits (therefore, cutting them in real terms), imposed a 1% levy on incomes and increased VAT.  If that's pump-priming, get me out of here.  The fact is the Government did not 'plan' the high deficit, it was an inevitable result of the meltdown in tax revenue and the cold, hard fact that there is little 'fat' in government expenditure to cut. 

Second, they claimed that the 'low tax rates for the employed' was consistent with the EU plan – because such rates are already 'stimulating'.  This is pretty neat because this allows the Government to claim that, through pursuing a low-tax regime for years, they actually anticipated the need for stimulus well ahead of other European states.  What foresight!  Of course, it is the low-tax regime, itself, that is a prime contributor to fiscal paralysis. 

If I had a 10 pence piece for every time I heard the statement, 'we relied far too much on the property market for tax revenue' I could buy out the national debt.  We didn't 'rely' on property-rely taxes.  We had so slashed and burned every other tax (income, PRSI, capital and corporate) that the property boom helped disguised the fact that we don' have the revenue base to maintain current expenditure levels, never mind levels appropriate to a modern European economy.  'Disguised' temporarily, that is.  Now in its in our face.

Third, the Government claim that their high levels of capital expenditure, again, anticipated the need for stimulus; they're been doing it for years – that ol' Fianna Fail foreseeing.  Yes, Ireland has been engaged in more capital expenditure than most other EU states.  It's had to.  We're playing catch-up and we're losing; we rank 64th in the global infrastructural rankings.  When Charlie McCreevey took office in 1997, rather than investing into the economy, he invested into a property boom; our high capital spending is a belated recognition of that disastrous policy.

In any event, the Government is cutting capital expenditure.  By 2011, they will have slashed the capital budget by over 11 percent in real terms.  Just what we need – less investment from the only economic sector capable of mounting investment.  By the time this recession is over we'll be lucky to be in the top 75 in the global infrastructural rankings.

Cut through all the blather and you will find a Cabinet sitting in the middle of the road in front of the recession lorry – blinded like rabbits in the headlights.  They have no strategy to stimulate the economy, only to balance the books – and in that balancing lies the further degradation of the economy and the budget itself.

But let's also be honest with ourselves – there is no easy way out of this.  Despite Eamon GIlmore's principles for economic recovery, it will take all the imagination, vision and political courage for the Labour Party to construct a new recovery plan; especially one based on spending and borrowing.  For even now the deficit is careering out of control with some analysts predicting it will exceed 10 percent next year.  And tax revenue will be down and the GDP will be in further decline and unemployment will be up.  So either Labour and the Left take on this challenge or we should get used to the following newspaper headlines:

Government breaks limbs patting itself on the back

In traction

Minister drinks the economy through a straw