Choices on fiscal stance for a State that is broke still limited in the extreme

COMMENT:THE DEBATE internationally on fiscal policy rages unabated. At one extreme are the stimulators. At the other are the "austerians". They are at each others throats, but share an entirely unwarranted certitude in the correctness of their respective positions.

Being bust, as the Irish State is, means choices have been limited in the extreme with regards the fiscal stance.

Here, apart from the bailout rejectionists, the debate has been on how much austerity should be imposed, its composition, and how it should be sequenced. The terms of the EU-International Monetary Fund bailout require an adjustment in the 2012 budget of €3.6 billion.

Over the past week, two of the pillar organisations involved in the (much discredited) social partnership structures – the biggest representative bodies of bosses and workers – have been putting forward their ideas on how to stimulate the economy.

Employers’ group Ibec and union Siptu have both said they do not support a budget adjustment beyond the minimum that must be delivered under the terms of the bailout.

In other words, both groups do not advocate breaching the terms, but neither goes along with those who argue for more front-loading of the adjustment by implementing an adjustment of more than €3.6 billion. They also recognise the limits any government faces in trying to boost the domestic economy, which, incidentally, was less weak in the first half of the year than might have been expected.

More evidence of consensus between business and labour is to to be found in the shared view of both bodies that capital spending should not be cut any further.

They believe public investment creates jobs and boosts the long-term potential of the economy to grow. While the former is correct, the latter assertion depends on the quality of the investment. Neither body broaches the issue of poor value for money in the capital budget, or which low-yielding projects could be scaled back or cut so the resources could be allocated to projects generating higher returns.

To have done so would have given both organisations’ proposals more credibility.

Even more evidence of a blossoming of partnership-era consensus is to be found in the two organisations’ views on private pension funds as a source of new investment. Siptu puts the value of these funds at €78 billion, while Ibec calculates a smaller figure of €70 billion. Whichever way you measure it, there are huge sums amounting to about 50 per cent of gross domestic product invested in pension funds.

Both organisations lament the collective decision of fund managers to put most of this money to work abroad instead of ploughing it into the domestic economy. (Contributors, however, are very glad their fund managers did diversify portfolios, because if Irish assets had dominated, pension funds would now be in a much worse position than they are, given that Irish asset prices have fallen much more sharply than the average elsewhere in the euro zone.)

That said, if attractive investment opportunities in Ireland exist, there is no reason why pension funds would not size them up.

Investment in infrastructure projects may be the most likely place for repatriated pension funds to go.

Yesterday’s announcement of the setting up of a Strategic Investment Fund within the National Treasury Management Agency may well be the vehicle to facilitate this.