State will have more policy freedom than Greece
ANALYSIS:IRELAND’S BAILOUT conditions and a timetable for their implementation were published yesterday.
The terms, set out in a document known as a Memorandum of Understanding, lay down the scheduling of reforms on a quarterly basis until the end of 2013
In March, June, September and December, in each of the next three years, the Government will be assessed by the rescuing troika of institutions – the European Commission, ECB and IMF – on its compliance with the conditions set out for the previous three-month period. If targets and commitments are not met “additional action will be taken”, the memorandum states bluntly. The release of bailout cash to cover public spending in the following three months will be dependent on meeting targets and taking those additional measures, if they are deemed necessary.
However humiliating it may be for a sovereign Government to be reduced to such indignities, some solace may be taken from the fact that the Irish memorandum is, in most respects, less prescriptive and detailed than that of Greece.
This should give the Irish authorities greater freedom in economic policymaking over the next three years than their Greek counterparts will enjoy.
Ireland’s conditions are heavily frontloaded. Most must be implemented in 2011, with far fewer conditions in 2012. By 2013, if all goes to plan (a big if) the outside institutions will be more overseers than overlords.
There are four broad policy headings contained in the bailout package: balancing the books; bank restructuring, re-regulation and reform; longer-term structural reforms designed to enhance economic growth potential and the modernisation of the public budgeting process.
Of most immediate concern for most people are the cuts and tax increases to be introduced in the 2011 budget. The memorandum does not contain much beyond the broad parameters set out in last weeks four-year plan. Most of the detail will not be revealed until Minister for Finance Brian Lenihan’s budget speech next Tuesday.
Ireland’s memorandum makes only one reference to the public sector. The Greek version is stuffed with conditions designed to stem the haemorrhaging of taxpayers’ money that the public sector causes in that country. This suggests that the rescuing troika do not see the Irish public sector as being nearly as problematic as its Greek counterpart.
In the July-September period next year, however, the document states that “Government will consider an appropriate adjustment, including in the overall public service wage bill, to compensate for potential shortfalls in projected savings arising from administrative efficiencies and public service number reductions”.
That can be interpreted in only one way: the Croke Park deal has nine months to deliver. If it does not, the troika will look for a rethink on reform. Further pay cuts and involuntary layoffs may rear their heads.
On the second broad policy area – the banks – the memorandum again does not contain much that was not already known. An onslaught will take place in the first three months of 2011. Targets for each bank’s loan-to-deposit ratio out to 2013 are to be set out in consultation with the troika. A revised plan to deal with Anglo Irish and Irish Nationwide banks is to be drafted with the IMF. All the banks’ remaining property loans (amounting to €16 billion) are to be ditched on Nama by “end-March”. And a Bill to give great powers to Government to deal with bust banks is to be pushed into the legislative grinder.
“Structural” economic reforms make up the third broad area of conditionality in the bailout. Of these, shaking up labour market policy gets most attention. Legislation to cut the minimum wage by €1 is to be enacted by May next year and there will be a cut in spending on jobless benefits of €750 million in 2011 (from an estimated total welfare spend of €20.9 billion in 2010).
The Government will also be obliged to change the structure of the jobless benefit system in the new year. It is to be brought into line with those of most other European countries. The memorandum hints that benefits are likely to be cut automatically after a certain period of time in order to “provide incentives for an early exit from unemployment”.
Also slated for early 2011: more profiling of the unemployed, to help match those out of work with available jobs; more monitoring of claimants to prevent fraud and abuse and the introduction of sanctions for those found not to be seeking work.
By the end of March, a review of sectoral wage agreements is to be started under the supervision of the European Commission. These agreements became superfluous when a national minimum wage was introduced a decade ago, so their days may be numbered. In reform-minded countries a review is a precursor to reform, not an excuse to delay, as it is here so often.
Non-labour market structural reforms will await a fresh legislative push in the third quarter (this suggests that TDs may be obliged to return to their law-making business much earlier than their usual extended summer recess traditionally demands).
New laws will be enacted to allow for a shake-up of the legal and medical professions, and to give more powers to judges and the competition authority to sanction those who rip off consumers. In the final quarter of 2011, the European Commission will get stuck into the electricity and gas sectors to see how price-squashing competition can be enhanced. In the same quarter, a Bill reforming the “personal debt regime” will have to go to the Oireachtas.
The fourth and final economic policy area covered in the memorandum is the budgetary framework. It is the least controversial in that it involves the implementation of what is now standard international practice. Had the institutions and measures to be put in place now been in place during the boom, they might have prevented the Government falling asleep at the wheel and crashing the finances.
In the first quarter of next year an independent budgetary advisory council is to be established. This will assess the Governments budgetary positions and forecasts on an ongoing basis.
By the final quarter of next year, a “Fiscal Responsibility Law” will have to be put on the statute book. It is designed to take the budgeting process out of the dark ages. It includes such basics as multi-annual budgeting for all expenditure and worked-out, medium-term ceilings on spending to help politicians resist the temptation to splash taxpayer money when they get a chance.
Under the terms of the bailout, the Department of Finance will have to raise its game on the width and timeliness of its data. Most welcome will be the requirement to publish monthly numbers on the broadest, and EU-harmonised measure of Government revenues and spending. It may sound dull, but transparency is a vital aspect of sound public fiscal management.
Had there been more of it in the past we might not be where we are now.