The Department of Finance have issued an information note on the Economic and Budgetary Outlook 2011-2014 in advance of the 4 year budget adjustment plan. The document was released to coincide with the announcement that the budget adjustment for 2011 will be €6bn, most of which will come from spending cuts rather than tax increases. This is €3bn more than the proposal two months ago. It is also higher than the adjustment in 2009. It is a seriously risky strategy.
The main economic argument in favour of adjustment is that it will satisfy bond markets (investors) that Ireland has the capacity to re-pay its loans and thus deserves a lower interest rate on the bonds it issues. The second political argument is that it is the begining of a process that Ireland will reduce its general government deficit from 14 percent (32 percent if total bank bailout is included) to 3 percent by 2014.
Why then did the yield (interest rate on cost of lending to Ireland) on government bonds increase today. They increased from 7.64 to 7.77 percent. I have yet to hear any mainstream economist in Ireland provide an answer to this question. I sense it will be blamed on ‘political uncertainty’, i.e. it is the fault of the political system rather than the economics. But, I am absolutely convinced at this stage that yields are increasing because investors have an interest in making more money (and hence speculate on a Irish default) out of Ireland, that the politics of reaching 3 percent by 2014 is part of the problem not the solution and that austerity means nothing to bond markets in a context where the economy is not growing.
Thus, it gets back to the basic rule of Capitalism; a market economy can only be considered functional, healthy and operative if there is a compound rate of growth close to 3 percent or more. In the absence of this, austerity, whether it is €6bn or €25, means nothing, it simply contributes to contraction. No amount of complex mathematical modelling or Ricardian equivalence can escape this base instinct that drives those with capital to invest their money. Capital is running away from Ireland. Those who remain are simply looking to make a quick buck by speculating on a default. Given the 2014 deadline and the political-policy constraint of EMU – this is looking more likely.
To quote Eurointelligence “the Irish recovery plan is a pile of baloney, based on wishful thinking and unrealistic forecasts“. You might think the Irish public sphere might also engage in this honest analysis. Instead the state broadcaster, RTE, will bring Constantin Gurgetiev into its studio to argue Ireland needs to cut more. Can the Irish austerity brigade please stand up and admit you are wrong.