Front-loading the pain would give us leeway if the global economy is weaker than expected

HOW BRUTAL must the budget be? The size and composition of the 2012 budgetary package of cuts and new taxes has been subject to considerable public debate, and would have been subject to much more had it not been for the presidential election – the human drama of a head-to-head contest will always trump the humdrum of policy, even when pockets and purses are effected.

But for all the hustings headline-grabbing, dull budgetary matters still manage to attract attention. Yesterday, the Government and its bureaucrats expressed contentment with the exchequer figures they published for the first three-quarters of the year. But they had much less to say about the painful budgetary decisions to be taken in the weeks ahead and implemented after budget day in December.

Economists at the Central of Bank of Ireland were more forthcoming. Earlier in the day they repeated their view – somewhat more trepidatiously than in July – that the Government should go beyond the smallest budget adjustment permissible under the EU-IMF bailout if it wants to hit its main fiscal target next year – a deficit of 8.6 per cent of GDP.

Reflecting the views of head office in Frankfurt, if in much less forthright terms, the Central Bank sees a bigger adjustment as the most effective way of putting the public finances on a firmer footing. Moreover, its dismalists gave short shrift to arguments that doing so would wallop the economy back onto the canvas just as it shows signs of staggering to its feet.

This will cause more head-shaking despair among those who oppose front-loading the cuts. They say that the economy needs more public spending to boost aggregate demand as the private sector spends less at a time when it is paying down debt. There is much to this view, but the stimulators overstate the impact of fiscal policy. The 2011 auterity package was bigger than in either 2009 or 2010. Despite this, the economy will grow this year. It shrank last year, and suffered a depression-like contraction in 2009.

This is not proof that austerity is effective, but it certainly supports the position of the front-loaders who won the debate before it started anyway. And the reason it didn’t start seriously was because the State never had access to the cash that could pay for stimulus. Nor will it have – in a month of Sundays. The other euro zone member states have no intention of giving even more money to Ireland so that it can try to stimulate its way back to sustainable growth. In short, the probability of the key players – including Germany and the European Central Bank – ever converting to Keynesism is as close to zero as makes no difference.

Realistically, then, the debate has been and will continue to be about whether the 2012 budget adjustment should be the smallest permissible (€3.6 billion) or whether it should be bigger; and if so, how much bigger.

One argument in favour of front-loading the pain is to signal seriousness to the bond market. This argument no longer cuts much mustard. The bond market, along with anyone else who has been paying attention to the euro zone debt crisis, does not need convincing that Ireland can do austerity.

Just as the view around Europe has taken hold that the Greeks are incorrigible rule-breakers, the view on the Irish is that we take the medicine without kicking up (although opinions differ on whether this is because we are stoics or submissives). Moreover, given the near miraculous rally in the Irish Government bond market since the end of July, it is very hard to make the case that investors will transform their view of the Irish State’s creditworthiness if it ramped up the adjustment.

Wisely, the central bankers did not give this as a reason to raise the size of the adjustment in 2012. Rather, they said the Government should give itself leeway in the event that the international economy is weaker than expected. That would push down Irish GDP (via lower exports), thus making the deficit higher when expressed as a percentage of GDP. The 8.6 per cent target could be missed even if the money-size of the deficit were achieved.

Along with reasons of prudence, the central bankers say doing more sooner will cost less over the long term, so best get on with it. They are probably right.