Opinion: an Bord Snip Nua
It's time for tough love
Alan Dukes explains why there is no escaping the pain in balancing the books and any delays will only cause more hardship.
The debate so far on the report of ‘An Bord Snip Nua' makes it appropriate to recall the paragraph headings from 
the recent IMF report on Ireland to which I referred here last month.
31. Regaining credible control over public finances will require a steady hand over several years.
32. The authorities have embarked on a substantial consolidation plan.
33. The basic approach and elements of the plan are appropriate.
34. (IMF) staff's baseline implies stronger expenditure consolidation than that are currently projected by the authorities to reach their goals.
35. Public debt would stabilise at relatively high levels.
36. Financing needs are substantial in the near term.
Many voices have deplored an alleged obsession with "balancing the books" at the expense of social or societal considerations. Others have suggested that there is nothing particularly relevant or meritorious about the EU stability and growth pact target of a 3% budget deficit (or a 60% debt to GDP ratio).
It is worth noting that the Government's target (with EU Commission agreement) is to get to the 3% deficit target by 2013: I can recall no target date for the 60% debt to GDP ratio.
In my view, it is highly improbable that we will reach the deficit target in 2013 and I consider the objective of trending down to a 60% debt to GDP ratio to be some distance in the future.
The reality is that "balancing the books" (to use the "caring" shorthand) is by far a more socially responsible and understanding approach than attempting to defer the inevitable adjustment, unpalatable as that adjustment may be.
The results of delay are abundantly clear and have been seen time after time in countries around the world, including Ireland.
- It becomes increasingly costly and difficult to finance the budgetary deficit. We already pay a significant premium on sovereign borrowing. In today's straitened international market conditions, this is a bigger problem than it was during the 1980s.
- The increasing cost of debt servicing pre-empts an increasing proportion of weakened tax revenue. It is projected that debt-servicing costs will use up some 10% of tax revenue in 2010.
For a time in the 1980s, debt servicing absorbed the equivalent of the entire "take" from income tax.
This meant, in effect, that none of the revenue from what was perceived to be a punitive level of personal taxation was available to do anything creative or socially advantageous. Thus, far from alleviating social or economic burdens, delay actually increases them.
- At some point, credit simply dries up and Government loses the capacity to fund normal ongoing activities. Debt default occurs, either as a result of a deliberate policy choice or because of simple incapacity. The economy collapses and public services grind to a halt.
Any subsequent recovery starts from a dramatically-reduced level of national income, personal income and economic output. Argentina provided a striking and relatively recent example. For a time, households there were reduced to selling their family goods and chattels for a pittance in order simply to buy basic necessities.
This bleak but inevitable scenario is what lies behind the siren song of moderation in the adjustment process. The reality is indeed daunting and a cause for indignation but, as Colm McCarthy has recently pointed out, "anger is not a policy".
It has been said that in 2010, we will be back to 2005 income levels. That will be the case no matter how many creative wheezes we come up with to palliate the difficulties we face, particularly in the area of public services.
It will be the case (for several years) no matter how we direct a severely trimmed public-capital programme into more socially useful or more employment-friendly investments, since even the most socially benign and productive investments take some time to produce tangible results.
The inescapable realities are clear.
- Our real national income is now seriously below its levels of recent years. Whether we are orthodox or creative in our policy approach, we will have to do whatever we do from a lower resource base.
- For some years to come, an increasing proportion of our reduced national income will be pre-empted by debt-servicing costs.
- The cost base of our economy is higher than that in our major markets, at a time when they too are experiencing a slowdown in economic activity and demand. This is hitting all our export sectors and the tourism sector.
These realities must inform all policy decisions in both the private and the public sector.
