Friday, February 5, 2010

They Like Us. They Really Like Us. But why?

The Economist carries a piece that considers the fiscal crises facing many eurozone countries.  They put particular emphasis on Greece and in doing so provide a contrast to the Irish situation.
The planned cuts to the public-sector wage bill look small when set against such a large budget deficit. They also look timid when compared with the much bolder action taken in Ireland, another cash-strapped euro member. In December the Irish government announced big reductions in civil servants’ pay, only months after it had introduced a “pension levy” that cut public-sector wages by 7%. Its courage has been rewarded with lower borrowing costs.
There is also this.
Ireland is small, too, but its government has shown itself willing to take unpopular decisions to right its public finances. The Irish economy is more flexible so its medium-term prospects seem brighter. The economy grew slightly in the third quarter of last year. There are even signs that tax revenues are recovering.
So everything must be hunky dory so.  Not so I'm afraid. 

The Exchequer returns to January show that tax revenues in this first month of this year were 17.7% down on tax revenue in the same month last year.  Every tax head is down.  See this table.  

Here's a graph of monthly tax revenues for the Exchequer since January 2006 with a quartic polynomial trend line included. The trend since the middle of 2007 has been down. Tax revenues for January in each year are marked in red. Click to enlarge.

To see what the Department of Finance predicts will happen to tax revenues in the next 11 months see this graph.  It is clear that they are ignoring the current trend and are predicting tax revenues to "turn the corner" for the rest of the year.

Nouriel Roubini also thinks things are getting rosy in the Irish garden in a recent piece in The Financial Times.
A credible austerity plan would restore solidarity with EU countries that are adjusting, improve the rhetoric of the European Central Bank and key member states, and bring Greek bond spreads back to earth. This approach is working in Ireland - spreads exploded as public debt ballooned to save its banks, but came back in as public spending was cut by 20 per cent. But it is no cakewalk: Portugal has been deflating to boost competitiveness for a decade. Harsh medicine is best ingested quickly.
Net current expenditure by the Irish government in 2009 was €45.5 billion.  The Department of Finance forecast for 2010 is €47.1 billion.  Not quite a 20% decrease. How are we getting away with this?

Update: Not everyone has been bought in by the spin.  Writing in The Guardian Larry Elliot gives an alternative perspective.
Unlike Britain, the United States, France, Germany, China and the rest of the G20, Ireland has not rediscovered Keynes. It has spurned counter-cyclical budgetary policy and instead has been raising taxes and cutting spending in a series of budgets and mini-budgets that have sucked demand out of the ­economy. Lenihan has cut child benefit by 10%, public-sector pay by up to 15%, and raised prescription charges by 50%.

 One eighth of the working population has no job, yet unemployment benefit is being cut by 4.1%. For the young ­unemployed, the measures are even more draconian: the dole has been slashed by 50%.

The consensus view in the markets is that Ireland will be rewarded for its prudence. Bond yields will come down because investors will grow less anxious about a default. The ratings agencies will think again about downgrading ­Ireland's credit rating.

This, though, is by no means guaranteed. Ireland has experienced near-depression conditions over the past 18 months, and the expectation that budget cuts will lead to spontaneous recovery through which the private sector will compensate for the retreat of the public sector is unproved. Indeed, there is a considerable risk that removing spending power from the economy will lead to more companies going bust and deter the survivors from investing more.
Of course he's not right either as the spin has caught him.  Tax revenue is falling and current expenditure is rising.  Aren't falling taxes and rising expenditure exactly what Keynes would have proposed?

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