Ireland Shows No Time for Half Measures

 

By Bill Wilson
In Greek mythology, Cassandra was granted the gift of prophecy by Apollo, but because she refused to be his consort, the god punished her by making it so that nobody would believe her predictions.
Today, it appears that credit rating agencies have contracted a Cassandra syndrome. They have warned profligate nations, like Greece, Ireland, and the U.S., until they are blue in the face that they are spending too much. That their national debts are unsustainable. That unless drastic actions are taken to rein in unsustainable spending, dire consequences will follow.

Alas, the governments are not listening. They do not believe the Cassandra agencies.

Ireland is a perfect example where half measures have made little difference in the nation’s fiscal outlook. Despite receiving praise when budget cuts were proposed over a year ago, the Irish government has largely not followed through with them. Its recent credit rating downgrade by S&P directly reflects the less-than-adequate cuts that have been made.

At the time, Ireland complained that S&P’s downgrade had used an “extreme estimate” to calculate the size of its bank bailout. But, since then, Ireland has had to revise upward its estimate for recapitalizing Anglo-Irish Bank, now at €50 billion, as reported by the Wall Street Journal.
This open-ended commitment amounts to bank losses being poured atop public debt. Fine Gael estimates that the bank bailouts in Ireland will eventually double the national debt. It is likely that the nation’s debt will continue to grow to over 100 percent of GDP before the decade ends.

The budget situation overall has not improved much. After its budget peaked at €56.082 billion gross expenditures in 2008, Ireland has only cut down to a proposed €54.940 billion in 2010. It foresees keeping that level of spending indefinitely.

The nation’s public pension system is largely considered to be one of its greatest accrued liabilities, at over €129 billion. But the only reforms to the public pension system thus far put forth in the 2010 budget are token ones: raising the retirement age to 66 from 65; and imposing a maximum retirement age of 70; pensions will be derived from a career average instead of final salary; and they’re considering using their Consumer Price Index to calculate post-retirement increases.

The effect has been negligible. Ireland, despite all of its rhetoric of reforming the broken pension system, remains committed to a defined benefit scheme — even for new entrants. Overall, it has only cut about €1.2 billion from the budget, but its deficit is €13.718 billion. It foresees higher deficits until 2012.

Even then, the government only expects the deficit to drop because it thinks the economy will recover and revenues will rise, not because spending would be cut. In fact, overall spending won’t be cut significantly in any upcoming budgets.

Overall, Ireland’s debt has risen from a 25 percent share of GDP at the end of 2007 to 64.5 percent of its GDP at the end of 2009 at €75.2 billion.

All told, because it has done little more than freeze spending, and on top of that committed to a tremendous bank bailout, Ireland is still facing a worsening Greece-like crisis. Unfortunately, Ireland has not managed to substantially reduce its debt-and-deficit-to-GDP ratios.

This should be instructive across the pond here in Washington.
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