Europe's different take is worrying

EU scepticism of Government projections shows it’s time to admit the need to raise taxes. writes GARRET FITZGERALD.

EU scepticism of Government projections shows it's time to admit the need to raise taxes. writes GARRET FITZGERALD.

LAST TUESDAY the European Commission published its opinion on the Department of Finance’s January revision of its October 2008 Budget projection. This important report must have been based upon the commission’s most recent interim forecast of overall EU growth, published a month ago, in which it projected a fall in euro zone output of almost 2 per cent this year, followed, however, by a recovery starting in the last quarter.

The commission may, of course, be wrong in believing that a European economic recovery would start in seven or eight months’ time, for many independent economists are pessimistic about such a rosy prospect, some even believing that we may be on the verge of a prolonged slump, comparable to that of the 1930s.

On the other hand, if the commission proves to be correct about an early European recovery, its estimate of euro zone growth in 2011 – and by implication immediately thereafter – would probably be too low. Over a period of half a century, it has been my experience that in periods both of growth and decline economists tend to underestimate the scale of likely changes.

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And, given the amount of spare capacity that the hard-hit Irish economy will by next year have available, an early European recovery could yield an Irish post-crisis growth rate much higher than the 2.7 per cent projected by the Department of Finance for 2011-2013.

Tantalisingly, therefore, Europe’s economic situation, and ours in Ireland, could work out either enormously worse, or alternatively rather better, than the European Commission is currently projecting. The trouble is that at this time no one anywhere in Europe knows which of these two directions events are likely to take.

As pointed out by Jamie Smyth in his report from Brussels in Wednesday’s Irish Times, in relation to next year’s Irish borrowing rate there is a very striking, and worrying, divergence between the views of our Department of Finance and the commission. For some reason this development does not appear to have been taken on board during the past few days by any of our domestic commentators.

The commission believes that next year our public spending will be over €5 billion, or 8 per cent, higher than that projected by our Department of Finance.

Part of this quite astonishing difference may be attributable to the over-emphasis that the Government has until recently felt it necessary to place upon the role of spending cuts as the principal answer to our financial problems. I suspect that the commission may have shared my scepticism about the Government’s stated view that so much of the reduction in our borrowing level would be achieved by means of such cuts.

At the same time Brussels may also have become discouraged by the Government’s persistent refusal to face up to the urgent need to replace some of our projected €10 billion lost revenue – representing a drop of at least 22 per cent between 2007 and 2009.

Such reactions by the commission may help to explain its apparent belief that our borrowing rate could rise to 13 per cent of GDP next year – a horrifying €23.5 billion, or almost half as much again as the department’s already very worrying estimate of €16 billion.

I think it would be important that the Government aim to reduce the scale of this disturbing divergence between the positions of the commission and the department on next year’s Irish borrowing rate. Even on grounds of internal consistency, both may in fact need revision.

The Government must now start to come clean about the roles it expects spending cuts and tax increases to play in the resolution of our borrowing crisis. To be fair, the Opposition parties have been playing similar games with this issue. While the political parties and the trade union movement have come up with useful criticisms, and positive suggestions of ways in which money could be saved, the Opposition has been even more reticent than the Government about the urgent need to supplement with major increases in tax revenue whatever savings may be yielded spending cuts.

There is, of course, ample room for political debate about spending cuts, and perhaps also about the handling of the banking crisis. But until Government and Opposition both stop fudging this taxation issue, we will remain mired in serious financial trouble. We desperately need some agreed approach on this matter, without which our politicians could indefinitely stymie each other, and in so doing block the resolution of our financial crisis. To be blunt about it, this is much too serious a problem to be left to party politics.

At this stage everyone in public life and in the public service must know – even if none of them may want to be the first to be seen to admit it – that a combination of income tax increases, property taxes, and, perhaps, carbon taxation is needed as a major element in the resolution of our crisis. Agreement between the parties on this is now very urgent.

In this crisis, to wait for another seven or eight months to be told this self-evident truth by the Commission on Taxation makes no kind of sense. All that the delay on this issue has done to date is to create unnecessary, and indeed socially dangerous, tensions with workers in the public service, by creating among them a sense of resentment arising from the absence of tax reforms that alone could restore any sense of equity.