|European Central Bank President Jean-Claude Trichet (on right) welcomes Irish Finance Minister Brian Lenihan to the 10th anniversary celebration of the ECB, in Frankfurt on Monday, June 02, 2008. |
The Minister for Finance Brian Lenihan, warned on Tuesday that further cuts in public spending and tax increases may be necessary to get the Exchequer's Budget deficit under control. He conceded that what in effect would be a mini-Budget, is likely and he said that membership of the Euro system was the major cause of the Irish housing bubble.
Lenihan was in Brussels for a Eurogroup finance ministers' meeting, which coincided with the an announcement from the European Commission, that it would trigger a deficit procedure against Ireland for breaching the 3% of GDP (Gross Domestic Product) annual deficit limit.
EU Economy and Monetary Affairs Commissioner Joaquín Almunia, said that he had began the deficit procedure against Ireland because its budget deficit is expected to hit 5.5% this year and 6.5% in 2009.
Almunia said that Ireland's public finance position had "deteriorated very, very rapidly."
"There has been a very rapid deterioration in the Irish economy in the last year and the Commission have acknowledged that they have been taken by surprise by the rapidity of the deterioration. So you can't lay that at the door of the Government," said Lenihan when asked if Government policy was to blame for the housing bubble and the recession.
He said Ireland had been harder hit by the economic slowdown than any of its EU partners because it was an open economy with ties to the British and US economies.
One of the main factors fuelling the domestic housing bubble in the Republic was the low interest rate policy pursued by the European Central Bank, said Lenihan.
"I'm not blaming Europe. I'm simply drawing your attention to the objective economic factors that are there,"he said to reporters.
There is nothing new in politicians claiming credit for all good news but refusing to accept blame for bad news.
A fiscal policy where current public spending was growing year-on-year at an average of 15%, funded by temporary property tax windfalls; capital gains tax on property cut from 40% to 20%; property tax incentives massively expanded; a Central Bank that only moved beyond finger-wagging impotence, when the unstable edifice collapsed and membership of the Eurozone, which has saved Ireland from the experience of Iceland with its current benchmark interest rate at 18%, is blamed for the Irish housing bubble!!
Last September, Lenihan said on a radio programme: “You know, we’ve got to be honest about this as a people. We decided, as a people collectively, to have this housing boom. We decided not to have property taxes, to demand reductions in stamp duties, to demand interest for those who bought to-let properties, and there was no questioning in any part of the political system about that.”
Lenihan said in his comments to reporters on Tuesday:"If further action is required it will be taken up until the next budget but that doesn't necessarily mean a mini budget . . . But obviously if further expenditure control measures are required they will be adopted."
Finfacts Report: Greatest Bubble in History: Warnings ignored in US and Ireland; Vacant Irish housing units rise 150% to 350,000 in period 2002/08
Dermot O'Leary, Chief Economist of Goodbody Stockbrokers, commented on Tuesday:
EDP proceedings to be implemented... - Today, the European Commission (EC) signalled its intention to begin formal proceedings against Ireland regarding its breaching of the 3% Stability and Growth Pact limit – the so-called Excessive Deficit Procedure (EDP). In so doing, the move highlighted the difficulty that the Irish Government faces in attempting to soften the blow from the current recession by using counter-cyclical fiscal policy.
...as Irish public finances move into the red - The turnaround in the Irish public finances is dramatic by any standards: from a surplus (general government) of 0.5% in 2007, we expect a deficit of 6.2% of GDP in 2008 and above 8.5% of GDP in 2009 (see chart above). Unsurprisingly, most of this turnaround is due to the collapse in property-related tax revenues, which we estimate will fall by 75% from the 2006 peak levels by the end of 2010.
"Exceptional Circumstances"... - Under the rules of the EDP, there is provision for breaching the 3% target in cases where it is considered “exceptional and temporary”. It also takes into account “all other relevant factors” when assessing whether the breaching of the deficit is justified, such as the amount of money which is being spent on investment expenditure. In Ireland’s case, the expected contraction in GDP (which we expect to be a cumulative c.6.5%) can certainly come under the Pact’s definition of a “severe economic downturn”. This, however, does not give a member state a free rein to breach the deficit by whatever margin it may choose.
...do not cut it, according to the EC - In Ireland’s case, it can argue that capital investment of c.5% is justified as it is developing the medium-term potential of the economy, and the EC is likely to agree with that view. However, after taking all of these factors into account, Ireland will now be pressed on addressing the concerns of the EC, by coming up with proposals to reduce the deficit. As a last resort, the Commission can impose fines on Ireland, but it can also, for example, require Ireland to publish additional information before issuing bonds or securities or invite the European Investment Bank to reconsider its lending policy towards the country.
Further budget measures will be required in 2009 - If previous instances are anything to go by, it is unlikely to go past the first stage of the process, whereby the Government submits proposals to reduce the deficit. A timeline for such action, according to the Regulations, is six months. As we noted before, a mini-Budget is likely in 2009; we wonder whether such action could be taken along with some tweaks for the EC after the release of the Q1 Exchequer Returns at the beginning of April. Given the lack of innovation in the recent Budget, such an event should also concentrate on coming up with a coherent plan to address the current difficulties that the economy faces.