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If world sinks into a depression, who will bail out Ireland from bankruptcy? - The Irish Times - Sat, Apr 11, 2009
Dan O'Brien had an excellent but pretty sobering piece in the Irish Times last Saturday. Aside from his analysis of our dependency on an international upturn he is very critical of the budget and says the government simply did not do enough in terms of curbing current expenditure.
On the one hand, tightening budgetary policy will further depress a chronically ailing economy. One the other, not tightening enough risks national bankruptcy. To date, the risk of the former has, if anything, been overstated; the risk of the latter understated.The other risk facing Ireland, and one that has been aired more frequently, is of what excessive budgetary tightening might do. There is no doubt that the economy needs stimulating, not austerity, now. But past mismanagement rules that option out.
Debate has therefore focused on how much unpalatable medicine to administer. Analogies can be helpful in communicating a complex message, but if wrongly chosen they can obscure rather than illuminate. This commonly used medical analogy is one such example.
Talk that the “medicine might kill the patient” misleads. An economy comprises of millions of people engaging in dozens of economic transactions each day. To kill an economy would require everyone to do precisely nothing. No government, no matter what action it takes, can produce such an outcome. Therefore, talk of “killing the patient” results in an overstatement of the risks of front-loading the budgetary adjustment process.
The Government’s decision to aim for a budget deficit of almost 10.75 per cent of GDP in 2009 – one of the largest such imbalances in the world – exposes Ireland if the worst happens internationally. It has clearly adjudged this risk to be of a lesser order than the effects of more budgetary tightening. It is to be sincerely hoped that the Government is correct in that judgment.On another judgment, it is almost certainly not correct. The Government has chosen to place the balance of adjustment more heavily on tax increases than expenditure reductions. This decision may have been clever politics, but it was bad economics.
Evidence internationally shows that stabilising crises in public finances is achieved by bringing spending towards revenues, not vice versa. The chances are that it will not achieve its target of 10.75 per cent of GDP.
These weaknesses have not impressed those who lend to governments. By Thursday afternoon, almost 48 hours after the emergency package of measures had been announced, the bond market had not reacted positively to the measures. Indeed, rather than seeing the rates of interest on Irish Government debt fall, as might have been expected, they have drifted upwards. This does not augur well.
