Belfast Telegraph

We risk being squashed by all these elephants

By Brendan Keenan

There is, we are told, another elephant in the room, with an even bigger pachyderm lumbering up from Brussels.

Fine Gael TD Simon Harris told Public Expenditure Minister Brendan Howlin that the question of increments in the public service was, given his knowledge of trunks and big grey shapes, indeed an indoors elephant.

It may be even more instructive to consider the implications when this increment elephant and the fiscal compact elephant from Brussels lock tusks.

The fiscal deal, if it goes through in anything like its current form, has profound implications. It would transcribe to the rest of the eurozone the German legal requirement that budgets should always be in balance or surplus, so that the burden of the national debt falls to insignificance over time.

Germany's national interest consists, not of controlling the rest of the eurozone, but of minimising the risk and costs to herself. The national interest of much of the rest of the zone consists of precisely the opposite - that Germany run bigger risks and higher costs.

There is an almost universal view that the eurozone will go into recession next year, and that the fiscal compact plan will deepen and prolong it.

Whatever happens, any probable changes are unlikely to make much difference to Ireland. If the fiscal compact did not exist, we would have had to invent something like it.

Its demand for a maximum budget deficit of 3% of GDP is now coupled with one that the "structural deficit," - allowing for whether an economy is growing above or below trend - should never exceed 0.5% of GDP. This is an interesting concept for Ireland. When the economy was growing at 6% a year, budget surpluses were coming in at 3% of GDP.

But if the economy's sustainable growth was just 3% a year, the surpluses should have been much higher, i.e. less spending and more taxes, to maintain long-term stability.

The unpleasant fact is that the planned deficit will still be close to 9% of GDP next year.

Since the economy is clearly under-performing at present, the structural deficit will be smaller, but most estimates still put it close to 4% of GDP.

This is where the elephants lock tusks. If the public sector increments amount to €300m next year, as has been said, they add 1.6% to the public sector pay bill. That is not consistent with either public finances or the eurozone rules.

The truth is that an increase of 2% a year or less may be all that is available for public sector wages for years to come.

This is not an emergency measure, but the kind of low inflation number the successful countries in the eurozone apply as a matter of course.

It follows that, if the increment system continues as it is, there will be little or no money left for ordinary increases in public sector pay.

And look, another elephant has popped its head round the door! The cost of covering losses at the former Anglo Irish Bank, which adds €3bn in promissory notes to the deficit.

The intense strain which Budget 2012 put on the coalition strongly suggests that it cannot survive a full term of four similar budgets. Its only hope is that it can negotiate relief from the €5bn of promissory note costs included in the €12bn correction laid out over the lifetime of this Dail.

The only card the government would appear to hold is that a significant reduction might make the difference between success in the bailout, or failure and unknown political consequences.