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News : Irish Economy Last Updated: Sep 9, 2013 - 7:29 AM


Irish Budget 2014: Former IMF official says austerity should be put on ice
By Michael Hennigan, Finfacts founder and editor
Jul 22, 2013 - 8:14 AM

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Connemara, West of Ireland. Image: ireland.com 

Irish Budget 2014: A former senior IMF official has warned that austerity could be ‘self-defeating’ for Ireland and the Government should consider putting the remaining planned three years of public spending cutbacks and tax rises on ice. He also suggested that innovative alternatives should be explored - - it could be a good thing but confronting bitter home truths was last done more than a half century ago. Given the external lifelines, the current situation is likely not yet dire enough to trigger a new Whitaker moment.

Ashoka Mody, former International Monetary Fund Ireland mission chief, who is now a visiting professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs at Princeton University, threw the cat among the pigeons in the normal pre-budget mating ritual that will continue until  the budget is announced on Tuesday, October 15, 2013.

Speaking yesterday on RTÉ's This Week programme, Prof Mody was asked if Ireland should reduce the deficit in 2014 to 5.1% of GDP (gross domestic product) or by the cash amount of €3.1bn.

He said: "If a €3.1bn reduction is planned, then that number should be considerably lowered. I would even ask the question why can we not consider the possibility for the next three years, as an experiment, there be no further fiscal consolidation".

“We have to ask ourselves why Ireland is not growing . . . It’s hard for me to believe that austerity is not contributing to this,” he added and noted that the “orthodoxy that the only way to establish market credibility” was to pursue austerity policies but five years of crisis and two recent years of no growth needed “deep thinking” on whether this was the right course of action.

“At this point it looks like, given the debt dynamics, if debt levels remain where they are and growth remains where it is, there is never going to be a reduction in the debt ratio the foreseeable future and so logically we are left with the only other option: Generating growth by abandoning the sever commitment to austerity and hoping there will be a short-term boost to growth, which not only improves growth, but brings down debt levels".

Asked about how important it was for Ireland to have legacy debt dealt with through the European Stability Mechanism, Prof Mody said: "The likelihood that legacy debt will be financed by the ESM is almost zero. At this time the politics of financing legacy debt is such that I would be astonished if that happened."

Pension fund stimulus

Michael Noonan, finance minister, will soon have the €6.4bn residue of the public pension fund available in cash  and he is reported to have asked public service departmental heads for ideas on job projects.

In the run-up to the general election in 2016, there will be lots of windy announcements on projects including wind ones, that will give an impression of action but do not confuse that with a jobs strategy.

Jobs

Of course cutting public spending and raising taxes has an impact on jobs but arguments about the wisdom of austerity should distinguish between economies such as that of the United States and small countries such as Ireland as members of a currency union, that are dependent on foreign lenders for most of their sovereign borrowing.

By the end of this year, the total debt from accumulated deficits to cover day-to-day Irish public spending (excluding bank support and interest on the public debt) in the period 2008-2013, will amount to €60bn - - equivalent to almost half the value of annual gross national product (GNP).  

Austerity has impacted a minority of the population and in 2012, €5.0bn was spent on foreign travel and €3.2bn on travel in Ireland.

We said last week that the State is supporting a half million people excluding dependents, through unemployment benefit payments and various back-to-work schemes.

Claims of adding 2,000 jobs a month in the private sector are bogus but the Government may well meet its target of increasing employment by 100,000 in the period 2012-2016 but most of the jobs will not be sustainable ones.

Prof Mody's call for “deep thinking” is laudable but it's not going to happen.

Microsoft is delusionally declared Ireland's biggest exporter after a miraculous 37% jump in its Irish booked revenues in its fiscal 2012; Dell gets a fourth spot in a fantasy league because it books the output of its Polish plant in Ireland.

Ministers claim tax-related accounting transactions at multinational firms that give an illusion of a services exports boom, is real but there is in reality as much substance to the additional economic activity as there is in a leprechaun's gold.

The flagship enterprise policy to be recognised as a 'world-class knowledge economy' by 2013 is a failure  but that is not recognised by policy makers, the dependent vested interests and out-of-their depth Oireachtas members.

Finfacts is the only media outlet, which has reported that patent applications at the Irish Patents Office in 2012 fell to the lowest level since the early 1980s - The Irish Times has a science editor.

“Ireland had a genuine growth miracle, but it had run its course by 2000. For the next decade there was a bubble which was seen as a continuation of the miracle,” Prof Mody said in his interview and questioned where Ireland’s growth would come from in the future.

However, the biggest challenge over the short term was to deliver any sort of growth.

The Government had taken “ownership and internalised” the austerity model that it was forced to accept as part of the bailout.

A key factor in developing a credible jobs strategy is to understand why direct jobs in the internationally tradeable goods and services sectors, were static in the period 2001-2007 despite an unprecedented boom.

The first step in developing a sustainable strategy is to junk the addiction to spin at ministerial level and enable an honest assessment of the challenges.

Irish Budget 2014 Page

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