Fiscal issues as well as glasses should be raised at Paddy's Day knees-up


AMERICA: It wouldn’t hurt for Congress to consult the Irish on repairing a country’s finances

US president Barack Obama may have picked up the tab for his dinner party with Republican Senators on Wednesday night in a new charm offensive to win them over to his budgetary plans. But despite the calorie-heavy fare of crab risotto, beef and lobster thermidor, his rivals are still stuck on tightening federal belts.

As the St Patrick’s Day festivities and dinners approach, when Ireland has unprecedented access in Washington for one day of the year, the White House and Congress would be advised to consult the Irish on repairing a country’s finances, rather than simply raising glasses to the close bonds between the two countries.

The debate on how much you raise taxes or slash government spending in an effort to fix an economy was thrashed out in the corridors of Merrion Street long before it became a divisive topic on Capitol Hill.

Ireland, clearly, has nothing like the US’s monetary firepower to trade its way out of economic difficulty; the value of Irish economic output or GDP is roughly similar to that of the state of Wisconsin. It is also hard to imagine Europe’s central bank buying 90 per cent of all net new sovereign and mortgage-backed debt in a country that size, as the US Federal Reserve is doing in unprecedented stimulus for the US economy.

Strong medicine

The Irish Government squeezed €27.5 billion of a fiscal adjustment out of the State between 2008 and 2012, a correction equal to 17 per cent of the State’s economic output or GDP. That’s pretty strong medicine, as Irish taxpayers well know.

If the same fiscal tonic Ireland took over the past five years were spooned out here – based on US GDP of roughly $15 trillion (€11 trillion) – the US deficit of $900 billion would become a surplus of more than $1.6 trillion. That’s plenty to keep the shipyards of Virginia full of new aircraft carriers and submarines for years to come.

But just look at the scrap between the Democratic White House and congressional Republicans over $85 billion (€65 billion) of ad-hoc spending cuts known as “the sequester” that Obama signed into effect on March 1st, blaming them on Congress for failing to budge from its “no tax increases” stand. Those cuts, albeit the start of $1.2 trillion over 10 years, amounted to less than one-tenth of the annual deficit.

That bitterly fought partisan episode shows the scale of the mountain to climb in the US’s fiscal crisis if government debts of $16.4 trillion are to be reduced. This may be why Obama has started schmoozing Republicans. If he has any chance of repairing the federal finances, he has to find compromise. So the way to a Republican’s mind may well be through his stomach.

Again, take the example of how the Irish Government adjusted fiscally – between 2008 and 2012, for every €1 of taxes raised, there was about €1.70 of Government spending cuts. Obama squeezed $600 billion of tax increases on the richest Americans (families earning more than $450,000 a year) out of the Republicans as part of the deal to avoid the “fiscal cliff” in December.

That amounts to about 4 per cent of US GDP. Ireland’s tax hikes amounted to more than 6 per cent of GDP.

Obama wants to target specific tax revenues, closing loopholes for the richest Americans and corporations, while identifying particular areas of government spending to trim. Republicans maintain that the president has secured all the tax increases he is going to get from them and they want him to slash high-cost federal entitlement programmes.

In Ireland the bias has been towards spending cuts so the Government’s approach to fiscal correction has been far more Republican than Democrat in nature.

Ideological battle

Washington’s struggle is not really fiscal, but a battle of political ideology. Where the Irish Government parties occupy more of a middle ground – Fine Gael, slightly right of centre, and Labour, not that far to the left – there are few, if any, Republicans and Democrats in that territory.

There were plenty of conservative and moderate Democrats from the south and liberal-to-moderate Republicans from the northeast 30 years ago, but they are largely gone and polarisation on Capitol Hill is at the top of the gauge.

“The most liberal of Republicans is still more conservative than the most conservative of Democrats,” says Allan Lichtman, history professor at the American University in Washington. “The two parties open up as complete scissors with virtually no overlap. That is unprecedented in the recent history of the country.”

Come the Paddy’s Day knees-up (marked in Washington on March 19th), White House staffers and members of Congress would do well to quiz Enda Kenny and Eamon Gilmore about the sharp Irish budgetary shifts of recent years as Democrats and Republicans stop slugging it out, for another meal at least, to celebrate Ireland’s national day. They may even get a few ideas.