Wednesday's IMF warning about the vulnerability of the Irish economy to the kind of US downturn now under way - a 1 per cent drop in US growth translating into a 1.75 per cent drop in ours - highlights the importance of our Government having the capacity in the period ahead to stimulate growth by budgetary action, writes Garret FitzGerald.
Unhappily, that capacity is now quite severely limited as a result of the Government's unwise and untimely over-stimulation of the economy in the budget of December 2006.
In its quarterly economic commentary, published in the aftermath of that budget, the ESRI was critical of the fact that, at a time when the economy was already overheating, because growing at a rate in excess of its capacity, it injected an additional €2.2 billion into the economy, boosting the growth of private consumption to almost 8 per cent.
That injection had the effect of halving the emerging budget surplus, reducing it to a level that in the ESRI's view was "well below what would be considered prudent", thus leaving "the public finances exposed to a dramatic slowdown in revenue when the property market slows".
The result of this has been that, instead of being able to plan for a small surplus in the current year, thus keeping something in hand in case the 2008 Budget forecasts turn out to be over-optimistic, (which already seems likely) we now face a probable general Government deficit of at least €2.5 billion at the end of this year.
That would represent a borrowing rate of more than 1.5 per cent for 2008, and on the basis of the Government's own budget projection of a further financial deterioration in 2009, that leaves disturbingly little room for stimulatory action in 2009, given the 3 per cent borrowing limit for euro zone states.
For a State whose budgetary situation a mere 15 months ago offered a better prospect than that enjoyed by almost any other European state of being able to spend its way out of a recession, this is a thoroughly depressing outcome. Not for the first time electoral considerations have been allowed to distort our economy in a way that threatens our economic prospects.
When I wrote in this column about the budget of December 2006, I remarked that only 1 per cent of the space devoted to that budget by those who chose to comment on it in the following day's Irish Timesaddressed its likely impact on the economy in 2007.
This 1 per cent consisted of two very brief reports on comments made by the ESRI and Ibec. No less than 99 per cent of the space was devoted to reactions to marginal changes in taxation or spending.
However, as we face the downstream consequences for our economy of what was badly done 14 months ago, a variety of Sunday newspaper journalists started to tell us last weekend what economic measures the Government should now take in a belated effort to retrieve the situation.
However, it is notable that none of these comments address the constraint imposed on possible Government action by the dissipation in 2006, for political purposes, of the resources that should have been held in reserve for this kind of situation.
One of these bright ideas as to how the economy might be stimulated was that the Government should abolish stamp duties on housing and commercial property - which account for two-thirds of the €3 billion receipts expected from stamp duties this year. To that €2 billion tax cut this journalist also proposed a halving of VAT on an unspecified number of goods and services, and as well as a reduction in the top rate of income tax. He also publicised a proposal by a private economist that the lower rate of tax be cut by 1 per cent - at the cost of a further €500-550 million.
In addition, we were to increase spending on the capital programme and persuade the European Central Bank, for Ireland's sake, to reduce interest rates. Another journalist in the same paper also called on Brian Cowen "to make noise" on this interest rate issue - whatever good such noise might do us!
A third journalist in that same paper offered to "help out . . . well-paid-officials" by outlining to them "what they need to be doing". They were "to cut taxes" because "the total abolition of stamp duty was always a moral imperative . . . So is cutting the top and bottom rates of income taxation!" Moreover, "the Government needs to bring the rate of VAT down from 21 to 15 per cent". Cost not mentioned, of course, but I estimate that, on its own, this last proposal would reduce tax revenue by a further €3 billion.
Admitting that there is a valid question as to how we could pay for these tax cuts and still provide public services, this journalist's simple answer was "to cut the public service pay bill down to size". However, he accepted that "teachers and lower-paid civil servants are justified under the forthcoming pay round" and that "firing public servants is out of the question". The billions needed for these massive tax cuts should, therefore, be found simply by "refusing to fill redundant posts when their occupants retire".
However, with the number of children at school rising by about 4,000 to 5,000 a year, retiring teachers are not redundant and must surely be replaced. And even if all retiring civil servants and half the health workers were to be regarded as redundant - a somewhat extreme view - that process would reduce the number of people on the public payroll by only 2,500 a year - or barely one-half of 1 per cent. This would yield about €100 million a year to pay for the many billions of tax cuts these writers propose.
The fact is that because of the €10 billion combination of current spending increases and tax cuts implemented during 2007-2008, the Government has very little leeway to stimulate the economy next year within the euro zone 3 per cent borrowing limit.
By failing to provide for the current downturn in the economy, the Government has boxed itself in and will need a lot of luck to get through the next two years without the economy suffering a much worse domestic recession than need have been the case.