Cantillon

Inside the world of business

Bruton's fuzzy efforts to encourage spending

A SIGNIFICANT decline in domestic demand was an unavoidable consequence of the austerity-led restructuring plan cooked up for Ireland by our “external partners”.

The calculus was that growth would come from the export sector and it would be enough to offset the shrinkage in the domestic economy. While the overall plan seems to be working, there are ominous signs that exports may be faltering along with the global economy and the damage to domestic demand may be greater than expected.

There is nothing the Government can do about the former and precious little about the latter. Rising unemployment and the prospect of further tax hikes and spending cuts in the coming budget will continue to take the wind out of consumer sales. The consistent underperformance of VAT is just one of the manifestations of this.

To date the Government’s policy response has been exhortations to consumers to spend more, with reference being made to the need to unlock billions in savings that Irish households are said to have squirrelled away.

Yesterday’s enthusiastic endorsement of the Guaranteed Irish initiative by Richard Bruton falls into this category of hyperbole.

While the argument is superficially compelling – an extra €4 a week spend on Irish goods by every household would create 6,200 jobs – one suspects the maths are fuzzy at best.

A more productive initiative on the part of the Minister might be to ensure that if – as many now predict – the ECB signals that interest rates are coming down or at least not going up for the foreseeable future, the benefits of such are passed on to Irish borrowers without delay.

ESRI keeps the positives to itself

AN ARTICLE published on the ESRI website today by economists John FitzGerald and Ide Kearney paints a brightish picture, drawing a possible path out of debt for Ireland.

But while it cautions that a new economic shock, such as a fresh world recession, could substantially worsen Ireland’s economic performance, jeopardising its forecasts, the article is also notable for omitting from its underlying assumptions potential “positives” that could lessen the burden.

Firstly, there is the banking side of the equation. The final cost of recapitalising Anglo Irish Bank may come in lower than expected earlier in the year, as chief executive Mike Aynsley indicated last month. In addition, when the time comes for the State to sell its banking assets, it may actually fetch something for them. But because of the uncertainty about the timing and outcome of any future sale, FitzGerald and Kearney don’t include it in their calculations, although they consider it worthy of mention.

Secondly, FitzGerald anticipates that future clarity with regard to the rules of the new EU funding mechanism will “almost guarantee” Ireland’s access to financial markets at the necessary hour.

These rules would allow the proposed mechanism to provide additional funding to countries making progress on their deficits without imposing losses on existing bondholders. However, “until it [the proposal] is in law, the markets aren’t going to believe it”, he says.

Thirdly, FitzGerald believes the National Treasury Management Agency could ease its interest repayments by reducing the amount it is projected to hold in liquid assets, which “seems very high”.

The NTMA may want to keep this sum high in order to make life easier in 2014, when the EU-IMF funding will have ended and there is a large bond repayment due, he concedes. On the other hand, using more of the liquid assets to fund the deficit over the period to 2014 would have the advantage of reducing the interest bill.

Finally, it is likely that the European Council’s July agreement could be beneficial for Ireland through more than just lower interest rates. Its suggested lengthening of the maturity profile of all EU lending would make the 2014-2016 period substantially less hairy for the NTMA, allowing it to enjoy a particularly “calm” 2015.

TODAY

The finance ministers of Germany, the Netherlands and Finland will meet to discuss the issue of collateral for loans to Greece, as the French parliament votes on a budget amendment to include approval of French contribution.

ONLINE

You can get the latest news each business day at irishtimes.com/business or by following us on Twitter at twitter.com/IrishTimesBiz. We also have a Facebook page at facebook.com/IrishTimesBiz where you can read the latest business headlines, blog posts and reader polls.