Belfast Telegraph

Pressure mounts on government as the budget deficit continues to grow

By Brendan Keenan

Things took a bit of a turn in July. Unfortunately, they took a turn for the worse. The average reader or viewer might be a bit disappointed by this.

There seems to have been a lot of better news around recently, with British banks making money, Irish banks raising fresh capital, share prices rising, and so on.

But, as that list shows, little of it has much to do with the real economy of work and play.

Markets, especially foreign ones, think they see the bottom of this crash, and prices will respond to that.

No one is yet talking about serious growth.

As last week’s survey of managers in services industries showed, the Irish economy has not yet found bottom. This is still the “hard” bit. The “landing” has yet to come.

These surveys are one of the two best ways to figure out what is happening to the economy now.

Most other statistics takes months, if not years, to appear. The other good way is the monthly exchequer returns of tax revenues. These are bang up to date — and July was not good for the Republic.

Another slide in VAT receipts left the public finances €575m behind target. This, of course, is not the total gap between taxes raised and the cost of government.

That was more than €16.4bn for the first seven months of the year. It is, rather, that this figure is €575m more than the Government thought it would be even as recently as April, when the Republic’s Finance Minister Brian Lenihan brought in his emergency Budget.

It will be some weeks before we see July retail sales but it must be assumed that weak consumer spending was mainly to blame for the VAT slide.

The awful weather will not have helped in that regard. But car sales may also be worse, and house sales even more abysmal than the Department of Finance thought last April.

This would be in line with another survey — that of consumer sentiment carried out by KBC bank and the ESRI.

This found sentiment slipping last month, as compared with June.

Whatever the reasons, it presents the Irish government with even more budgetary headaches, even as the political pressures grow.

Economists, on the other hand, will generally not be surprised by the exchequer figures. Most have predicted for some time that the public finances would be worse this year than government forecasts.

In its recent quarterly review, the ESRI put total revenues at just under €34bn, compared with Budget projections of €35.2bn. That €1.2bn difference is beginning to look about right if the trends to July continue. There is little reason to see why they should change.

The dilemma is what to do about this shortfall. Should the Irish government try to make it up with yet more spending cuts or tax rises this year?

And even if it decides not to, should it try to make it up in December's draconian Budget for next year?

There is probably not much that can be done over the balance of this year, and it might be a bad idea to try.

The reason for the slippage is not government spending, which is on target, but the fact that the economy is doing even worse than feared in April.

Even though its targets have not been met, the fact is that the government has applied an astonishing €9bn fiscal correction, or 6.5% of national income (GNP) since October.

Of course this depresses the economy further. But opposition politicians, trade union leaders, commentators — and, perhaps, pharmacists — might like to note that, had it not been done, the International Monetary Fund (IMF) would be running the show by now.

However, the government's plans require that another €4.7bn be removed next year; mostly in spending cuts as outlined in the McCarthy (An Bord Snip) report. Should Mr Lenihan add another €1.5bn to that, to keep to his borrowing target of €20bn for next year?

It is a difficult question even on narrow economic grounds.

Even if the 2010 target is met, the Republic’s national debt will still rocket to around 75% of output (GDP) next year.

There is little room for slippage with that kind of figure. Yet there is a real danger of a self-defeating spiral if there is an attempt to take €6bn out of the economy next year.

The 2011 Budget, though, might have to be worse than planned.

That is getting close to election year, and the politics seem even worse than the economics.

As time goes by, resistance to spending cuts grows.

The new taxes planned for next year, on property and services like water, will be even more unpopular than raising old ones — although that will happen too.

The necessary sense of national crisis, which was never as strong as it should be, is abating.

People naturally want it all to go away, and their leaders outside government — along with some inside it — create the impression that they could make it go away.

The fact is that almost everything we do, and the way we do it, how we get paid for it, and what we pay for it, will have to be turned upside down over the next few years.

For the moment, the line is being held — just. If it breaks on any spending or tax front, the house may yet fall.

Belfast Telegraph