The full extent of Ireland's painful austerity project was laid bare yesterday by the Irish Fiscal Advisory Council (IFAC). In its latest fiscal assessment report, the budgetary watchdog noted that, by the end of this year, some €32 billion in spending cuts and tax increases will have been taken out of the economy since 2008.
This equates to 20 per cent of the State’s current gross domestic product, and will be one of the most vicious fiscal adjustments attempted by a modern industrial country. Though it has brought domestic demand to its knees, Ireland’s economy is still breathing, and even generating employment.
The reason Ireland can soak up so much austerity without flatlining is because the lion's share of its economic activity is underpinned by foreign demand, and therefore unaffected by Government policy.
If Spain – the mirror image of Ireland in that 70 per cent of its economy is domestic-driven – were to attempt a similar consolidation, it would almost certainly collapse. Our dubious distinction as austerity champions is only a reflection of the Government's ability to repress the domestic economy more than other states.
Adjustment of €2bn
In a repeat of last year’s choreography, IFAC has again warned the Government against rowing back on the proposed €2 billion adjustment in October’s budget. And like last year, Minister for Finance
Michael Noonan
is almost certain to ignore the advice.
Given the political pressures facing the Coalition, which include an incoming Labour leader almost certain to walk if Ireland's austerity agenda is not changed, Noonan's stance is understandable. He believes better-than-expected tax returns and positive growth forecasts will afford Ireland the ability to implement adjustment of less than €2 billion.
However, the council is right to warn this is a gamble, given fragile domestic demand and stuttering recovery abroad.
Essentially, an unforeseen macro-economic shock could make the Government miss next year's deficit target of 3 per cent. Despite endorsing the growth forecasts underpinning the Government's budgetary process, the council believes the Department of Finance is overly optimistic about the convalescent state of domestic demand. Having said that, one of the surprising aspects of the report was its suggestion the Government was being unduly harsh in adhering to a three-year timeframe for balancing the books between 2016 and 2018.
Tight timeframe
Under the Fiscal Compact, Ireland is committed to bringing its deficit down to zero but the timeframe is not specified. The council admitted yesterday to being puzzled as to why the Government signed up to do it in three years – a move it says would place unnecessary pressure on expenditure in years to come. As if we don’t have enough already.
