Irish budget adjustment second only to Greece
IRELAND’S BUDGET adjustment in the period 2008-2014 will be the second largest after Greece among the euro area’s bailed-out countries. In a new paper – Fiscal Consolidation: Does It Deliver? – Central Bank of Ireland economist Laura Weymes finds Ireland’s budget-tightening packages will be almost twice as large as those of Cyprus, Portugal and Spain – the other countries in bailouts by the European Union and International Monetary Fund.
On the balance between spending cuts and tax hikes, Ms Weymes says “consolidation episodes that focus on expenditure reduction appear more successful at reducing deficits in a sustainable and structural manner that is least damaging to growth”.
Ireland’s adjustment over the 2012-2014 period is accounted for by approximately two-thirds cuts and one-third tax increases.
Among the four other bailed- out countries, Portugal has focused more on expenditure cuts, while Cyprus, Greece and Spain will rely more on tax increases.
The paper also shows Ireland is cutting its capital spending budget much more heavily than any of the other four.
On the current spending side, cuts in public sector pay and numbers have been the most common measure, with all five countries implementing them.
Ireland is unique in not having frozen or cut spending on pensions, the paper finds.
Despite the large consolidation efforts introduced to date and still to come, Ireland will continue to run the largest budget deficit among the bailed-out governments each year to 2015. This is based on the governments’ budget forecasts, which Ms Weymes uses in her paper.
After Greece, Ireland will have the largest public debt as a percentage of gross domestic product (GDP) by mid-decade.
Ireland began its consolidation in 2008, earlier than the other four. Ireland’s downturn preceded the other countries’ owing to the bursting of the domestic property bubble in 2007. Other countries got into trouble owing to the bursting of the global credit bubble in late 2008. Their consolidation efforts thus began later than Ireland’s.
Ms Weymes dates the start of Portugal’s austerity period to 2009, with Greece, Spain and Cyprus introducing budget tightening in 2010.
In the 2009-2011 period, bank rescue costs added 26 percentage points to budget deficits when measured as a percentage of GDP. This dwarfs the other rescued countries. Over the same period, Portugal’s cumulative deficit increased by 2 percentage points owing to bank rescue costs and Greece’s by 1 per cent. In the case of both Spain and Cyprus, the increase was less than one half of one per cent. That, however, is likely to change as further recapitalisation is required in Mediterranean countries.
Ms Weymes notes that despite the writing down of €198 billion of Greek public debt earlier this year, it is still envisaged that debt will peak at 167 per cent GDP in 2013.
The impact of the write-down is muted on account of inclusion of some €50 billion (25 per cent GDP) in ongoing and future bank recapitalisation and other factors, she says.