The Economist: Ireland shows the rest of Europe what austerity really means

nesf

http://www.economist.com/world/europe/displaystory.cfm?story_id=15073973 (Free to read)


Also this article on Greece's problems lays stark what happens when you don't act to keep your deficit spending under control: http://www.economist.com/world/europe/displaystory.cfm?story_id=15080551

Sand

I think that whilst the budget might not be as decisive as it could have been, it is at least generating the right "buzz" internationally which will help Ireland fund its deficit whilst we act to deal with it. We might be seen as a feckless, ungrateful lot, but stories like these help combat that image and help our EU neighbours find reasons to help us as and when they can. Certainly more reasons than they have to help the Greeks who are following the Jack O Connor/David Begg model, driving straight off a cliff in a burning bus whilst arguing over whose dumb idea it was to go driving in the first place.

Lenihan could and should have done more, anyone giving him credit for leadership needs to recognise that Lenihan is not so much leading as opposed to actually recognising that the we need to borrow, and we need to keep lenders confident that we will be able to repay them in the future. He has been routinely and repeatedly wrong on major economic decisions, and his hamfisted banking guarantee and deranged NAMA plan are already proving to be disastrous.

But his fear of the bond markets is at least forcing him to do whats needed however grudgingly. Hes a terrible Finance minister, but least hes not Gilmore. If Labour was running the country, wed be in the same position Greece is in.

Thats assuming of course, that Gilmore actually believes half of what he waffles on about.

seclachi

nesf wrote: »

http://www.economist.com/world/europe/displaystory.cfm?story_id=15073973 (Free to read)


Also this article on Greece's problems lays stark what happens when you don't act to keep your deficit spending under control: http://www.economist.com/world/europe/displaystory.cfm?story_id=15080551

Greece is a different kettle of fish to Ireland in some respects, there is more corruption and social unrest, as seen in the recent riots. I can imagine those two things really stopping reform and cuts.

Mr.Micro

I think Lenihan is deluded if he thinks that this budget is going to do it for the country. Its like treading water that's is all. As usual no real plan to get the country back on its feet. Maybe hope for another boom. I am sure the Unions have not gone away. It is only when people notice the difference in their salaries that it will dawn on them. Property tax on the way and water charges etc and increases bit by bit in other areas in the next budget.

murphaph

The tax net needs some widening tbh. Too many 'lower paid' workers pay absolutely no income tax. This is crazy, every worker should pay something. A steady property tax will hit me hard, but it really needs introduction and will move us away from dependency on sporadic stamp duty receipts.

hmmm

In media terms Greece has helped us this week by showing in stark contrast the difference between the Irish & Greek approaches.

The UKs hilarious budget yesterday was also helpful, Darling has set fire to the house just before the Conservatives take it over.

thebman

murphaph wrote: »

The tax net needs some widening tbh. Too many 'lower paid' workers pay absolutely no income tax. This is crazy, every worker should pay something. A steady property tax will hit me hard, but it really needs introduction and will move us away from dependency on sporadic stamp duty receipts.

I don't understand why it wasn't introduced in this budget TBH. Maybe they feared too much backlash from too many areas but I don't agree with that point of view.

As it stands next year I can see a reduction in minimum wage and bringing more people into the tax net which both could have been done this year and they still be doing both at the same time so are bound to get some backlash.

They should have reduced minimum wage this year or brought more people into the tax net, one or the other. Now we are a year borrowing more for no reason than because the government feared backlash.

murphaph

thebman wrote: »

I don't understand why it wasn't introduced in this budget TBH. Maybe they feared too much backlash from too many areas but I don't agree with that point of view.

As it stands next year I can see a reduction in minimum wage and bringing more people into the tax net which both could have been done this year and they still be doing both at the same time so are bound to get some backlash.

They should have reduced minimum wage this year or brought more people into the tax net, one or the other. Now we are a year borrowing more for no reason than because the government feared backlash.

Same reason they didn't hit pensions, should have hit all three and property tbh this time round. Get the borrowing down and get our rating back up to AAA as quickly as possible, so any money we do borrow will at least be cheaper!

segaBOY

Mr.Micro wrote: »

I think Lenihan is deluded if he thinks that this budget is going to do it for the country. Its like treading water that's is all. As usual no real plan to get the country back on its feet. Maybe hope for another boom. I am sure the Unions have not gone away. It is only when people notice the difference in their salaries that it will dawn on them. Property tax on the way and water charges etc and increases bit by bit in other areas in the next budget.

Lenihan made specific reference to export lead growth being the key to bring us out of this recession. Ultimately cost of doing business is reducing in Ireland (NCC report) and there are already signs of manufacturing activity increasing in Ireland.

With Public Sector wages being cut this will probably lead to further reductions in private sector wages as a whole and as a result make the cost of manufacturing and exporting from Ireland cheaper.

There has also been an export stimulus of €250m and didn't Lenihan mention improving on these supports in the future in yesterday's speech or am I just imagining it?

That is the only sustainable plan as far as I can see and at least it is being developed on in some shape or form. While the media are focused on cuts in sectors which realistically don't bring any large levels of wealth into the country I think there is far more important areas to look at that may be going unnoticed.

nesf

Mr.Micro wrote: »

I think Lenihan is deluded if he thinks that this budget is going to do it for the country. Its like treading water that's is all. As usual no real plan to get the country back on its feet. Maybe hope for another boom. I am sure the Unions have not gone away. It is only when people notice the difference in their salaries that it will dawn on them. Property tax on the way and water charges etc and increases bit by bit in other areas in the next budget.

We have one path out of this mess and it's export growth. That's the only realistic way that we'll get tax revenues substantially up, which will turn around the deficit situation and will allow a strong recovery of consumer confidence to begin. I'm not the only one with this view, most economists see it this way including Paul Krugman who is something of a specialist in the economics of recession.

nesf

seclachi wrote: »

Greece is a different kettle of fish to Ireland in some respects, there is more corruption and social unrest, as seen in the recent riots. I can imagine those two things really stopping reform and cuts.

Indeed. The core problem is a Government refusing to deal with its looming deficit problems. Allowing a deficit to grow and not acknowledge the problem by taking action will mean your credit rating gets downgraded and this means it becomes more expensive to borrow meaning your deficit is even more of a problem than it was before the downgrading. It's a vicious circle, especially combined with the ECB limit on which bonds may be used as collateral with it.

nkay1985

thebman wrote: »

I don't understand why it wasn't introduced in this budget TBH. Maybe they feared too much backlash from too many areas but I don't agree with that point of view.

As it stands next year I can see a reduction in minimum wage and bringing more people into the tax net which both could have been done this year and they still be doing both at the same time so are bound to get some backlash.

They should have reduced minimum wage this year or brought more people into the tax net, one or the other. Now we are a year borrowing more for no reason than because the government feared backlash.

murphaph wrote: »

Same reason they didn't hit pensions, should have hit all three and property tbh this time round. Get the borrowing down and get our rating back up to AAA as quickly as possible, so any money we do borrow will at least be cheaper!

That's the problem with having people who seek election running the finances of the country. They can't just hit everyone and say "This is what needs to be done, now deal with it" because there would be civil unrest and their political party would be out of power for years to come.

Unfortunately, this is the way it's done, so they were never going to do all that needed to be done. I don't agree with him telling people "This is the last of the difficult budgets" because we all know that can't be true.

nesf

nkay1985 wrote: »

That's the problem with having people who seek election running the finances of the country. They can't just hit everyone and say "This is what needs to be done, now deal with it" because there would be civil unrest and their political party would be out of power for years to come.

Unfortunately, this is the way it's done, so they were never going to do all that needed to be done. I don't agree with him telling people "This is the last of the difficult budgets" because we all know that can't be true.

I think his phrasing was "the last of the really difficult budgets". Hubristic nonsense really but hope has to be offered at these times.

nkay1985

nesf wrote: »

I think his phrasing was "the last of the really difficult budgets". Hubristic nonsense really but hope has to be offered at these times.

Yeah, whatever way it was phrased, it's all just talk.

thebman

nesf wrote: »

I think his phrasing was "the last of the really difficult budgets". Hubristic nonsense really but hope has to be offered at these times.

Hardest for them because the public sector will strike and give them lip from the unions.

The rest of the budgets will be easy cuts as far as their concerned, as the unemployed and the low paid aren't as organised to fight back and employers.

nesf

thebman wrote: »

Hardest for them because the public sector will strike and give them lip from the unions.

The rest of the budgets will be easy cuts as far as their concerned, as the unemployed and the low paid aren't as organised to fight back and employers.

Or that after one "hair-shirt" budget, a second is easier to take.

jenzz

I just dont understand his logic really.
If we need to kick start the economy money needs to start moving ie people go forth & spend. But if he has taken more money off the lowest earners/ most vulnerable/parents how can they spend. They have less money in their pockets = less spent in the shops.= less vat revenue/ less retail=more unemployment when shops close = more SW being handed out = less money in pockets = less spent in shops etc etc you get the picture.Money makes the world go round supposidly but I just cant see where he was going with that one.

nesf

jenzz wrote: »

I just dont understand his logic really.
If we need to kick start the economy money needs to start moving ie people go forth & spend. But if he has taken more money off the lowest earners/ most vulnerable/parents how can they spend. They have less money in their pockets = less spent in the shops.= less vat revenue/ less retail=more unemployment when shops close = more SW being handed out = less money in pockets = less spent in shops etc etc you get the picture.Money makes the world go round supposidly but I just cant see where he was going with that one.

That logic works if and only if you ignore the problem of the deficit. If we weren't running a 12%+ deficit already it would be lunacy for Lenihan to give the Budget that he did. The issue is that we've got to tackle our deficit because if we don't the cost of repaying the debt will break the back of the economy.

Next year the cost of servicing the national debt will rise by 2 billion Euro. i.e. 2,000,000,000 Euro before we've paid for a single Garda, Nurse or Teacher. That's just from this year's borrowing! If we continued the same way in 2012 it'd be over 4,000,000,000 Euro and so on! In reality it'd be much more than 4 billion because the previous year's 2 billion would have caused a further widening of the deficit!

Now, to complicate things further there's another problem. As your deficit gets bigger, investors get more and more nervous about your ability to repay it all (for good reason!). So the interest rate you pay on borrowing money increases. Meaning that the repayment problem I outline above accelerates! As you borrow more, the money becomes more expensive to borrow, increasing how much the borrowing will cost the nation the next year, further increasing the deficit and requiring you to borrow even more money!



This is why Paul Krugman (a Noble Prize winning Economist who has done a lot of work on recessions) put it:

But there isn't much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.

We're screwed. In Economic terms all we can and should do is tighten the budget, try to minimise our borrowing and hope for growth to return to other countries quickly so our export sector can start recovering and start increasing our tax revenues and so on. All the while trying our best not to mount up so much debt that our economy will be severely hobbled by debt repayments for the next two decades. The normal fiscal stimulus recession logic doesn't work for Ireland, we can't use it. That's what's really scary right now and what people need to get into their heads, I just wish there were more "talking heads" explaining this.

nkay1985

nesf wrote: »

<snip>

This.

Every person on Boards should read this comment because so many seem to not understand what the purpose of yesterday's budget was.

It's effectively a case of us minimising the amount we have to borrow to keep the country going until we're in a position to benefit from other countries coming out of recession by making money again from our exports.

nesf

nkay1985 wrote: »

This.

Every person on Boards should read this comment because so many seem to not understand what the purpose of yesterday's budget was.

It's effectively a case of us minimising the amount we have to borrow to keep the country going until we're in a position to benefit from other countries coming out of recession by making money again from our exports.

We're caught in a trap. We can't borrow our way out of this, if we had a balanced budget right now we could indulge in fiscal stimulus, if we had a small deficit we could do it.

The logic behind fiscal stimulus is pretty much common sense these days but the problem is no one explained the limitations of it to people and the unions are publicly refusing to acknowledge it either. There is a damn good reason why all the major Opposition parties agreed that 4 billion needed to be taken out of the Budget. There was loads of disagreements about how to cut but no disagreement on whether to cut. This alone is frightening, when every political party agrees on the broad thrust of policy you know you're dealing with something inescapable.

jank

For the first time in a long long while I actually sense a bit of hope in Ireland.
Yea the PS got it bad but they had it so good for so long they cant really complain (but they will anyway such is their nature)

But I think this budget gets people to stand up and take notice that we ARE in the $hit and will be for a bit yet but the first step to get out of the $hit has been taken. There will be a few more, expect taxes to rise in the next one along with property charges, water charges etc. So the pockets will be hit again.

The first step in a long road to recovery has been taken *God I sound like a FF man*:eek::)

nkay1985

jank wrote: »

For the first time in a long long while I actally sense a bit of hope in Ireland.
Yea the PS got it bad but they had it so good for so long they cant really complain (but they will anyway such is their nature)

But I think this budget gets people to stand up and take notice that we ARE in the $hit and will be for a bit yet but the first step to get out of the $hit has been taken. There will be a few more, expect taxes to rise in the next one along with property charges, water charges etc. So the pockets will be hit again.

The first step in a long road to recovery has been taken *God I sound like a FF man*:eek::)

Yeah I know I feel all dirty saying stuff like that as I have been for the last two days!

The PS workers are always going to complain after what happened because it's not nice to have money taken out of your pockets. These pay cuts are effectively a normalisation of their salaries. But people come to expect that whatever salary you're on at a point in time, you will never be going back down from that. And that was usually right. It took a financial crisis greater than we've ever had to face to force the government to bring back down the wages!

If this whole thing is managed right, we might just come out of it ok and be better off for the lessons learned. But I can't help but think that, five or ten years into the future, when we finally have some money in the coffers again (hopefully!), whatever party is in power at the time will once again use the budget to buy elections rather than keep the country running right! Hopefully people will be wiser to it and more vocal in their opposition of it after seeing what we'll have had to go through this time!

jank

nkay1985 wrote: »

Yeah I know I feel all dirty saying stuff like that as I have been for the last two days!

The PS workers are always going to complain after what happened because it's not nice to have money taken out of your pockets. These pay cuts are effectively a normalisation of their salaries. But people come to expect that whatever salary you're on at a point in time, you will never be going back down from that. And that was usually right. It took a financial crisis greater than we've ever had to face to force the government to bring back down the wages!

If this whole thing is managed right, we might just come out of it ok and be better off for the lessons learned. But I can't help but think that, five or ten years into the future, when we finally have some money in the coffers again (hopefully!), whatever party is in power at the time will once again use the budget to buy elections rather than keep the country running right! Hopefully people will be wiser to it and more vocal in their opposition of it after seeing what we'll have had to go through this time!

I think a big thing here is that in the future we will have a generation of people that will actually run the country in a proper fashion. Mass emigration will not happen like it did before so essentially we will have to sort out our own problems for once rather than exporting our young. I think we will see a mindset change over the coming years that will be of greater benifit to the country more so than any budget or party. Out with the old in with the new? It better be!