Posted on 05/10/2011 4:10:16 PM PDT by Murtyo
The cabinet feels powerless, with its every decision overseen by Brussels, Washington and Frankfurt, and the government is under pressure to squeeze more and more cash out of the people
The Irish political system may be in a state of flux, but the dividing lines in the 31st Dáil are becoming clearer. So are the tasks facing the new government.
Though the general election returned a more fractured and disparate Dáil than ever before, recent events and debates have displayed that there are essentially two competing analyses of Ireland’s current fate, and two suggested responses.
The first is the grin-and-bear-it school, and is attended by Fianna Fáil, Fine Gael, Labour and the entire apparatus of the state, including the Central Bank and the Department of Finance. It advocates sticking largely to the programme of austerity, paying for the banks, and bringing the public finances into balance in accordance with European demands.
The second is the give-it-a-lash school, and is supported by Sinn Fe¤ in, the independents from right and left, and some high-profile economists. It advocates defaulting on the debts of the state and/or the banks, in various forms.
Some advocates of the give-it-a-lash school deny the basics of economic and political reality. Others are more realistic.
Newly-elected independent TD Stephen Donnelly, a former management consultant, gave a concise summary of the best case for the GIAL school last week in the Dáil, during statements of the revised EU/ IMF deal.
‘‘We can assemble a team and go out to Ireland and abroad and get some of the finest academic, economic and financial minds together to help the minister. We can get some of the finest negotiators and assemble a world class team rather than rely on the same policy advisers who advised the previous government which got us into this position. We can call the Europeans out on their threats . . .
‘‘We can agree we will pay back the €35 billion, but not for ten years, because we do not have the money because the Irish people are bleeding and scared and there is no cash to pay. If the Europeans threaten to increase the cost of funding to the banks should we not pay them back, which we understand from Professor Honohan they are doing, we can call them on that.
‘‘We can tell them to go ahead because we are prepared to let some of the banks fail. The core European countries do not want any European banks to fail. Therefore, we should all deal with the issue together. We should not just leave it to the Irish people to deal with it.
‘‘We can communicate with the French and German public. They believe that they are bailing us out and their politicians are acting accordingly. We can explain to them that the reverse is true and that it is the Irish people who are bailing out their investors and banks."
Some of these aspirations were even part of the Fine Gael and Labour election platforms, though they have been left behind since they came into office. No government could take the risk of unilateral action, they now say.
On one level, of course, our government can do what it likes. Default. Burn the bondholders. Seize the assets of Irish citizens or foreign companies. Sell the Aran Islands.
Declare war on North Korea. Whatever. But with all those courses of action come consequences, and the government and the country would have to live with whatever those consequences are.
For better or worse, the government has decided that the consequences of a unilateral imposition of loss-sharing on the creditors of even the most rotten Irish banks would be worse than the reality of continuing to pay them.
Several - indeed, probably most -ministers are deeply unhappy about the situation, and privately rail against the unfairness of it. Conversations with a number of cabinet ministers and persons within the cabinet loop in recent weeks confirm the extent to which the government feels bullied by the ECB on this. But the government has concluded there is no alternative to accepting the situation and trying to make the best of it.
For ministers who now see their every departmental decision being constrained by the oversight of Brussels, Washington and Frankfurt, it’s a frustrating vista. There is, says one administration figure, a ‘‘sense of powerlessness’’ among them.
Hands are tied
The updated loan agreement documents between Ireland and the EU/IMF/ECB troika published last week demonstrate again the extent to which the freedom of movement Irish governments have traditionally had on policy, particularly economic policy, has been taken out of this government’s hands.
The documents published last week contain - as did the initial agreement, published in December in the immediate wake of the bail-out - a series of policies to be implemented and deadlines for achieving them. These are hammered out in meetings between the troika and Irish officials.
According to sources who have attended these meetings, it is a slow process of negotiation and compromise. There were, for instance, significant differences on the question of the privatisation of state assets.
But what is particularly important for the Irish side in these early stages is to build trust with the troika - in other words, once the Irish government has committed to implementing something, it must do it. It must show it’s not Greece. This is how Ireland is now governed.
So we know that - despite election promises and the Programme for Government - the budget to be delivered at the end of this year will see tax bands and credits reduced (it’s on page 32 of the document), increasing the slice of each person’s income the state takes in tax; a reduction in pension tax reliefs; a property tax; changes in capital gains tax; an increase in carbon tax combined with cuts in social welfare and other spending which will raise ‘‘at least €3.6 billion’’.
The following year’s budget (for 2013, delivered at the end of 2012)) will see an increase in the property tax, and will raise between tax increases and cuts, at least €3.1 billion. These are not just general targets. The programme sets out in detail actions the government must take and deadlines by which it must take them.
So, for immediate example, here’s what the government must have completed by the end of this month:
* Introduce measures ‘‘to offset in full the estimated fiscal costs of new measures in the 2011 jobs initiative’’. The government must consult the troika on these measures.
* Submit a plan for the €3 billion in contingent capital going into the banks. This must be done by May 15.
* Central Bank to release estimates of loan losses in Anglo and Nationwide. ‘‘Remedial action’’ will be taken if necessary.
* Alternative deleveraging plans for AIB and Bank of Ireland (ie asset sales) to account for non-transfer of sub-€20 million loans to Nama.
* Complete a plan to underpin ‘‘solvency and viability’’ of undercapitalised credit unions.
* Establish a Commission on Credit Unions to devise a new plan for the sector.
This is all to be done by the end of May. Several other deadlines are set for the end of June - the end of the second quarter – while work is also ongoing to meet targets set by the troika for future examinations.
All this may seem pretty technical and dull. But the work of government is usually technical and dull. It’s just that it’s now being either directed by someone else, or is subject to approval by someone else. This is what the loss of sovereignty means.
What does this mean in practice? Last week, one minister ruefully confided: ‘‘I could do a lot of really useful and productive things on jobs if I could spend €500 million."
Instead, the entire jobs package will hardly amount to spending half a billion across all of government. This is not Mickey Mouse money. But it will not make much of a dent in the unemployment figures.
The constraints on the government in terms of spending were perhaps best illustrated when Michael Noonan, according to a source at the table, told the cabinet recently: ‘‘I want lots of good ideas on jobs from everyone - as long as they don’t cost any money."
Politics before policy
This shackling of the government on policymaking has one very important consequence. With so little room for manoeuvre on policy, the politics will become more important for the government than ever.
Communicating, presenting, winning public consent for the agreed programme of austerity - these, more than the formulation and implementation of policy will be the key tasks of the coalition government.
Nothing is more important in politics than communication. The last government lost any ability to talk to the Irish public, and Fianna Fáil and the Green Party suffered the consequences at the general election.
The new government has a window of goodwill and public support in which it can establish a new model of talking to the people - but, as several senior figures acknowledge, that window won’t stay open for ever.
The unspoken ambition of the present government is to win a second term. To be in a position where that is feasible, the government will have to figure out a way of talking to the Irish people and of retaining their confidence when the rest of the unpleasant measures in the grin-and-bear-it package begin to bite.
‘‘Will people continue to accept this?" asked an American investor who was in Dublin last week to meet political and financial figures. ‘‘Well, I guess you’re gonna find out."
What’s in the revised agreement
Under the agreement between the Irish government and the EU/IMF/ECB (‘the troika’), the loans to Ireland, which are remitted on a quarterly basis, are subject to quarterly review.
These reviews – the first of which has recently concluded – will examine if the government has achieved the targets agreed with the troika. However, they also revise the programme itself, in accordance with changing circumstances and the government’s political priorities.
The golden rule is that, if the government wants to make amendments to the agreed plans, it must show that it can do so either in a revenue and expenditure neutral way (official-speak for not costing any money), or that it will take complementary measures to cover the cost of any new initiatives.
Everything must be agreed with the troika in advance.
So this week’s jobs initiative/ budget is clearly provided for in the revised memo of agreement between the new government and the troika, a draft of which was published by the Department of Finance last week. However, the agreement is clear about the terms under which the jobs initiative has been approved:
"[The] government will introduce the necessary measures to offset in full the estimated fiscal costs of new measures in the ‘2011 Jobs Initiative’ in 2011 and over the period to 2014 . . . The government commits to consult with the European Commission, the ECB and the IMF on these measures."
The detail provided in the memo allows us to get a pretty firm fix on economic and fiscal policy over the next two years. For instance, the shape of next December’s budget is in the ‘‘actions to be completed by the end of Q4-2011’’.
The overall budget package of tax increases and spending cuts, the document reveals, will be ‘‘at least €3.6 billion. Tax increases will account for €1.5 billion and spending cuts will amount to €2.1 billion."
Among the tax increases will be the following:
* a lowering of personal income tax bands and credits
* a reduction in private pension tax reliefs
* a reduction in general tax expenditures (ie tax reliefs such as mortgage interest relief);
* a property tax
* a reform of capital gains tax and capita; acquisitions tax and
*an increase in the carbon tax.
The cuts in spending are summarised in more general terms. They include:
* social expenditure reductions;
* reduction of public service numbers and public service pension adjustments; and
* other programme expenditure, and reductions in capital expenditure.
Many of these provisions are repeated in the section of the document entitled ‘‘actions to be completed by end Q4-2012’’ – the section which deals with the budget for December 2012, though the overall total to be raised on that occasion is some €3.1 billion.
The picture of spending cuts and tax increases for the next two years – at least – is an unrelenting one.
* a lowering of personal income tax bands and credits
* a reduction in private pension tax reliefs
* a reduction in general tax expenditures (ie tax reliefs such as mortgage interest relief);
* a property tax
* a reform of capital gains tax and capita; acquisitions tax and
*an increase in the carbon tax.
Jumped right out at me.
This is a great example of why people should stop thinking that banks or bankers are our friends, or that supporting the banks is acting in the interest of a “free market.”
Ireland is now screwed. They’ve handed over their economic future to Brussels, who has wanted Ireland to raise taxes for years.
An increase in the carbon tax. Nothing like impoverishment in support of a fantasy. When will the street make decisions for the Irish government and the EU?
Sad that so much blood was spilled by past generations to buy Ireland’s independence only to have the current generation sell their birthright just so they could have play mon€y for their currency.
Utterly predictable how this will play out.
The population will become angry and frustrated, they’ll rebel and toss the entire Government out on its ear. Then they will elect people who will renege on the deal with Brussels, leaving the Euros standing around with their ——— in their hands. Just like the Greeks have done.
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