Fergal O’Brien, senior economist in IBEC’s policy division, argues that by “frontloading” the fiscal adjustment into the 2010 Budget, the next two won’t be as harsh.
Economic activity in Ireland contracted dramatically between Autumn 2008 and Spring 2009. In terms of the prognosis for 2010 and the coming years, it is important that we distinguish between growth rates and the level of economic activity. Growth rates are likely to return to positive territory during 2010 but it is likely to be next year before Ireland records annual growth in GDP. The level of activity in the economy, however, is currently over 10 per cent below that in 2007 and as a result of deflation the nominal value of economic activity has fallen even further. It therefore is likely to be at least 2013 before the economy returns to its 2007 level.
The Irish economy has stabilised considerably over the past six months or so. The most timely indicators of this can be seen in the trends in the monthly live register and in the public finances. In January 2009 some 30,000 people joined the live register, while the average monthly increase during the last five months of the year had fallen to 1,300. The Exchequer tax returns were also more positive in the latter months of the year. Indeed, the December tax receipts were some €500 million higher than forecast in the December Budget. The Government’s target of a marginal reduction in the budget deficit in 2010 therefore appears to have a fairly solid basis.
Overall it is likely that history will judge the Government’s policy response in Budget 2010 quite favourably. The dire economic situation required them to take further immediate firm and credible action to contain the general government deficit that threatened to continue to spiral out of control. In the last 18 months, the Government had taken adjustment measures amounting to €8 billion in 2009, without which the deficit would have ballooned to 20 per cent of GDP. Despite these measures, the planned deficit for 2009 of 10.7 per cent of GDP announced in the April Supplementary Budget came in at about 11.5 per cent. At such a high level there was no choice other than to take measures to stabilise the deficit in 2010 and commence the consolidation of the public finances to bring the deficit down to below 3 per cent as stipulated by the excessive deficit procedure of the Stability and Growth Pact.
The decision by the European Commission to extend by one year the adjustment period for a reduction in the deficit to below 3 per cent of GDP to 2014 was in no way a signal to soften the pace of corrective action. On the contrary, it was a recognition that “unexpected adverse economic events with major unfavourable budgetary effects have occurred in Ireland due exclusively to a much worse than anticipated downturn.”
IBEC in its pre-budget submission had argued that Budget 2010 was a defining moment for Ireland’s economic prospects, which required government to take brave decisions to return the public finances to a sound footing. We argued for the need to frontload the fiscal consolidation process so that Budget 2010 delivers the majority of the adjustment needed, permitting less severe budgetary adjustments in subsequent years. This, we said would return the economy to trend growth much more quickly than the gradualism employed in the 1980s. Ultimately, we believe that the frontloading of the fiscal adjustment will be positive for both business and consumer confidence.
The Minister’s approach was decisive, bringing in a package of measures rightly focused on bringing the level of government spending a step closer to matching the greatly diminished quantum of tax revenue available to finance it. The Minister rejected further increases in taxation, drawing attention to the significant progressivity of the tax increases in 2009. The burden of adjustment in 2009 therefore had to fall on expenditure. By acting decisively now the further adjustments required in 2011 and 2012 will be less onerous.
Our major criticism of the Budget is that it did not do more towards keeping people in work. IBEC has repeatedly urged government that alongside restoring the functionality of the financial sector and stabilising the public finances, there is an equally important third leg in the economic recovery strategy, which is to support enterprise and employment. So far there has been only a minimalist response to the jobs crisis.
