Ireland’s Budget: living under Draco?

by niamh on December 13, 2010

Budget 2011 which is before the Irish parliament now is widely described as draconian. This is the first instalment in the four-year plan to bring the budget deficit to below 3% by 2014. The adjustment is front-loaded to take out €6bn in spending cuts and tax increases in 2011. The total retrenchment will come to €15bn, under the terms of the recent IMF-ECB rescue plan.

The scale of the effort required is massive. The reason is not because the government deficit is so high – by itself, this would be painful but manageable – but because, as part of the loan agreement, no renegotiation of bank debts is possible. The large private deficits in the financial sector have been, in effect, socialized. There is no real distinction any more between the sovereign debt and bank debt. As a result, the government deficit this year stands at 32% of GDP.

Ireland thus becomes an international showcase for a new kind of politics. What happens to a country swallowing the political poison of internal deflation, and trying to grow its way out of trouble when it can neither gain competitive advantage by devaluing, nor inflate away the distributive conflicts that must ensue? Suppose the interest rate payable on its large loan is 5.7%, growth estimates of 2% are deemed too ambitious, and the immediate consequence of the stabilization plan is to be awarded a downgrade by the international bond ratings agencies? Note that national per capita income is already 20% lower in 2010 than it was in 2007. Add in the facts that the ruling coalition is deeply unpopular, the smaller party has declared its plan to withdraw soon, and the slim government majority relies on the votes of two often fractious independent deputies. How might this grim scenario unfold?

Anger is certainly one response. Irish people do not take to the streets as readily as, for example, the Greeks, who will soon hold their seventh general strike this year. Still, the Irish Congress of Trade Unions brought out up to 100,000 people (from a population of some 4.5 million) in a peaceful and largely good-humoured Saturday street protest. But the Irish people are biding their time for the election which will certainly take place in February or March 2011.

Recent polls make devastating reading for the dominant nationalist-populist Fianna Fáil party. It is used to commanding around 40% of the popular vote, more or less evenly spread across all social classes. It rating now stands at 17% (or even 13%) and the personal score of Taoiseach Brian Cowen is in single figures. Instead of being the largest single party, Fianna Fáil’s seat share risks trailing in fourth behind Fine Gael, Labour, and even Sinn Féin. The minority party in the governing coalition, the Greens, face total annihilation as reward for their time in office.

But will Irish citizens take the pain that is promised? The next government will almost certainly be formed by a coalition of Fine Gael and Labour, and both these parties have also signed up to the inevitability of the €15bn adjustment programme. All that is left to argue about is the distributive consequences of the mix of tax increases and spending cuts, and the composition of both. But big cuts have large consequences, so these debates do matter.  Evidence suggests that voters may be willing to endure sizeable spending cuts and tax increases if they believe they are both necessary and fair.

Necessary? Although people flail in despair at the pass we have reached, the main parties are instinctively cautious about assuming responsibility for destabilizing the Euro and risking the reputational damage of unilateral debt default. Besides, they would immediately have to fix the annual fiscal deficit of €19bn, and live without the enormous and recurrent short-term borrowing facility from the ECB to keep the broken Irish banks going which they depended on prior to the structured loan deal.

In the medium term, there is a widely shared awareness that any change in Ireland’s prospects depends on the outcome of the slow crisis unfolding at European level. Ireland is only at the start of the process of implementing the conditions of the IMF-ECB loan agreement. As time goes on, Irish people may become less willing to bear the costs imposed on them by the piecemeal approach to resolving Europe’s wider fiscal and financial crisis. The European Commission, the Eurozone group, the ECB, and the German government continue to tussle over a framework for permanent and orderly default mechanisms to be implemented after 2013. But in the markets, as they say, the future is now; in politics too, people have a limited tolerance for being treated as eggs to ensure the future supply of omelettes.

Fair? The laws of the ancient Athenian Draco became a byword for harsh and merciless practices. Early opinion on Budget 2011 is mixed. Economic modellers argue that the impact is broadly progressive in aggregate, imposing a net average cut of €100 a month per household. Other headlines anticipate monthly cuts of €300. The effects of cutting the hourly minimum wage by €1 to €7.65, to increase low-end labour market flexibility, are contested.  There is no evidence that the old rate had adverse effects on competitiveness. But then again, the rate at which it was set also lacked a clear evidence base.

There will certainly be big increases in most forms of taxation. The income tax net will widen to cover an extra 300,000 people, bringing the total from 45% to 60% of the workforce. During the boom, income tax rates were lowered and many low-paid people were exempted altogether. This was held to be both equitable and efficient as it facilitated labour market flexibility while increasing disposable income at the low end. This particular efficiency-equity trade-off was also ideologically consistent with the wider business-friendly, low-tax, market-conforming orientation Fianna Fáil had adopted since 1997. But the tax base was eroded to such a degree that rapid back-tracking is now essential.

Spending cuts affect almost every programme. This is where most of the political debate is focused, and the opposition parties have zoned in on some strikingly inegalitarian outcomes. Most welfare recipients face cuts of about €8 a week, affecting those who are unemployed, blind, disabled, lone parents, widowed, or carers. In a welfare system that is notably weak on service provision and mainly reliant on cash transfers, this is particularly harsh. Child benefit is cut for everyone regardless of means. Budgets for ongoing vital functions such as road maintenance and landfill remediation are all but abolished. The combined effects of all these cuts and snips will take time to be seen, but they will be real.

This is played out against the backdrop of a political and administrative class ever ready to protect its own interests. Evidently with an eye to gaining some moral credit, top politicians are taking a pay cut of up to €14,000. But since this merely reduces the Taoiseach’s salary to €214,000, he will now be only slightly less well paid than Angela Merkel and Nicolas Sarkozy, and is still considerably better paid than David Cameron, not counting generous pension and other entitlements. Enda Kenny, leader of Fine Gael, remarked in the Dáil that the Budget changes mean that while the Taoiseach used to get 13 times the minimum wage, now he will get 14 times. Some potent veto players remain untouched, such as old age pensioners, whose street protests about medical entitlements frightened the government in 2008. Public sector incomes, subject to direct cuts in 2009, will be up for review again in May 2011, when they will be the next government’s problem.

As if all this were not bad enough, the bankers, who seem to specialize in bad timing to maximize embarrassment to democratic politicians, are in the spotlight again for not mending their bad old remuneration practices. And following a court case, AIB is required to pay out bonuses totalling €40m for 2008. Promises of a super-tax for all new bonuses will do little to counter the bad press.

While all this is going on, the markets have largely lost interest in Ireland: it is ‘done and dusted’, and the action has moved on to Portugal and Spain. Ireland has been parked. Although this and future budgets may not be written in blood, the effects will be severe and will be more palpable as time goes on. Draco’s laws in ancient Athens were eventually repealed and replaced by the proverbially just rule of Solon. But they were in effect for over twenty years. Irish people will be devoutly hoping that a more benign European fiscal regime will not be so long in coming.



Steve LaBonne 12.13.10 at 3:24 pm


Anderson 12.13.10 at 3:51 pm

How long until there’s a far-right Irish party blaming the bank debts, and assumption thereof, on the Jews?


hix 12.13.10 at 3:59 pm

Why blame Jews for homemade mistakes, when you can blame Germans?


mpowell 12.13.10 at 4:03 pm

How long until we get an Irish political party demanding liquidation? How can you go to the EU negotiating table without default being a plausible threat? The Irish voters deserve better. Either the ECB extends them long term credit at 2 or 3 percent or they default. There is no reason for the Irish to suffer additional years of austerity before realizing the inevitable. Even if the government can’t borrow at all post default, they could increase non-debt servicing spending and still run a surplus compared to today’s budget outlook. I despair of the US political process, but the Irish one is apparently even worse.


Anderson 12.13.10 at 4:36 pm

Why blame Jews for homemade mistakes, when you can blame Germans?

Conspiracy theorists like to stick with the classics. But the Jews can be controlling the Germans. The absence of proof is damning evidence.


roger 12.13.10 at 4:39 pm

mpowell – yes!
Ireland should never have guaranteed, of all things, the bank bondholders. And it should try a little bank capitalism – that is, bringing in other banks, like Satander, on the principle that the irish people could withdraw from the titanics and bank with reliable banks, thus allowing the titanics to sink. And surely Ireland has the cards – for who, after all, is on the hook for the loans from the German banks? The Germans.

There was a brilliant LeMonde article by Frédéric Lordon – don’t destroy the banks – seize them – which, I thought, summed up the situation in the EU and, actually, the U.S. very well. It is here:

Lordon captures the paradox of the bank/bond sales nexus. The papers tend to segregate them – oh, the Irish banks are here, and then these mysterious sellers of state bonds are over here. Well, of course, they are two wings of the same body. It is as if the state were the ventriloquist and the banks were the evil dummy in that old movie, Magic. The state supports the banks, which loan money to the state, and raise the interest rates as the money loaned to the state is loaned to the banks.

This is a sort of plutocrats virtuous circle, ending in the pilfering of the population.
If nothing else, this shows the problem that ‘deregulating’ the flow of capital has led to – an insane system, built outside of any thought of the business cycle, that amplifies all bad things in the cycle – the highs and the lows.


Chris Bertram 12.13.10 at 5:05 pm

With these consequences, Ireland should surely default. This would have the added bonus of scuppering Deutsche Bank, requiring Merkel to bail it out directly rather then via an indirect face-saving route that tortures other people.


Walt 12.13.10 at 5:21 pm

hix, let’s try Ireland defaulting, and see how Germany does then?


Kevin Donoghue 12.13.10 at 5:33 pm

With these consequences, Ireland should surely default.

From what I understand of the arithmetic, it seems almost inevitable that Ireland will eventually default in one way or another. Of course it won’t be called default, it hardly ever is. But there is always an argument for postponing such drastic action. Give it a few months and other Eurozone countries may be deeper in the shit, making it easier to argue that an Irish default is not adding to Europe’s problems, merely facing up to them. Or a major EU bank may topple under the weight of other doubtful assets besides Irish debt. Obviously it would be better if a solution to Ireland’s problem was part of a solution to the wider Eurozone problem.

Also, there’s more than one way to default and when you choose one you really need to be sure you won’t have to repeat the process. The most radical step would be to reintroduce our own money, redenominating most liabilities in New Punts in the process. That might also be the best move, but it’s undeniably very drastic and I can’t see us getting a government which has the guts any time soon.


christian_h 12.13.10 at 6:02 pm

So what does lowering the minimum wage have to do with cutting budget deficits?


zhava 12.13.10 at 6:04 pm

hix: “Why blame Jews for homemade mistakes, when you can blame Germans?”

Nah, it’s the leprechaun’s fault. The pot-o-gold underground economy.


ejh 12.13.10 at 6:22 pm

But the Irish people are biding their time for the election which will certainly take place in February or March 2011.

Certainly? (Via)


Barry 12.13.10 at 7:12 pm

christian_h 12.13.10 at 6:02 pm

“So what does lowering the minimum wage have to do with cutting budget deficits”

Budget deficits are an excuse for squeezing the bottom 90% of the population.


P O'Neill 12.13.10 at 10:01 pm

One complication on who to blame is that the Germans blame the Irish for sticking with them with the cost of Depfa Bank, which was an Irish bank up until 2007 when it was taken over by German bank Hypo, whereupon Depfa’s massive post-Lehman balance sheet hole became a German problem. Without that takeover, the 2nd worst in history (after RBS-ABN), Depfa would have been on the Irish tab.

Which perhaps could have been a “the worse, the better” situation since all Ireland’s problems plus Depfa would have been clearly unsustainable a long time ago.


CMK 12.13.10 at 10:03 pm

“christian_h 12.13.10 at 6:02 pm

So what does lowering the minimum wage have to do with cutting budget deficits?”

Nothing. It serves two purposes. Firstly, it’s something to throw to the baying neo-liberal mob; AKA the Irish Media, and the business and employers’ organisations. Nobody who counts, and the unions don’t count despite the propaganda to the contrary, will take up the cause of the 70,000 or so workers on the minimum wage. They cut it because they could.

Its second purpose is to cover up the government’s impotence and paralysis by being ‘seen to be doing something’ while the default precipice approaches at a leisurely but steady pace.


christian_h 12.13.10 at 10:13 pm

Thanks Barry, CMK, I know… the question was rhetorical, posed since I’m all out of constructive remarks that are short of “one solution, revolution”. (Which I believe to be true, but currently not in the cards.)


CMK 12.13.10 at 10:20 pm


I think the scope for the liberal-democratic paradigm of ‘politics as usual’ to contain this crisis is negligible to non-existent. So, I think ‘one solution, revolution’ might start to make more political sense sooner than we think.


jon livesey 12.14.10 at 12:48 am

Hobsbawm once wrote that the reason the deflation of the 19th century was followed by the inflation of the 20th was because of changes in power relationships.

In the 19th century, national legislatures were dominated by the rich, and if it became necessary to impose deflation – for example following a loss of Gold – then deflation was imposed, wages were cut, and that was that. Workers had no remedies available to them except acquiescence, emigration or violent revolt.

In the late 19th and early 20th Century, however, Labour Unions emerged and the franchise became much wider, so most national legislatures no longer had the power to impose deflation and wage cuts, and in response several Western nations, including the UK, left Gold and began to inflate and devalue to solve their problems.

And I think we are seeing the same distinction emerging today. The UK and US are devaluing and will inflate in due time. And the recent violence in the UK that people are making such a meal of, isn’t labour violence; it’s violence by students plus a sprinkling of anarchists. And that makes sense, because the US and UK are not imposing deflation and wage cuts. The Unions don’t have common cause with the students.

Meanwhile, in countries like Greece and Ireland, the voters have been effectively disenfranchised and deflation has been imposed on them without their consent. They might as well be back in the days of absolute Monarchy, where the King decrees wage cuts, and it is so. Once again, their choices boil down to taking it lying down, emigrating, or revolting. Voting doesn’t work any more.

I’m beginning to wonder if the end-game for the Euro will involve social as well as financial actions. In other words, Merkel and company may delay and obfuscate, but I think they risk being taken by surprise by some pretty nasty events in the street.


christian_h 12.14.10 at 1:53 am

Uhm Jon, seriously? How you would get the idea that there is no wage deflation in the US, or that UK workers don’t have common cause with students regarding across the board cuts that of course amount to wage deflation is beyond me.


Ginger Yellow 12.14.10 at 2:18 pm

One complication on who to blame is that the Germans blame the Irish for sticking with them with the cost of Depfa Bank, which was an Irish bank up until 2007 when it was taken over by German bank Hypo, whereupon Depfa’s massive post-Lehman balance sheet hole became a German problem. Without that takeover, the 2nd worst in history (after RBS-ABN), Depfa would have been on the Irish tab.

Depfa was only nominally (and taxably) an Irish bank. Depfa, after all, was originally short for Deutsche Pfandbriefbank. Its business model, even after the HQ move to Dublin, was quintessentially German – loan money to the public sector (Germany’s public sector being by far the largest recipient of its lending) and fund those loans in the covered bond market.


Norwegian Guy 12.14.10 at 4:42 pm

How long until there’s a far-right Irish party blaming the bank debts, and assumption thereof, on the Jews?

That’s far too old-fashioned. These days the far right loves the Jews. It’s the Muslims that they like to blame for everything.


IM 12.16.10 at 10:10 pm

Depfa was only nominally (and taxably) an Irish bank.

But being a tax haven was at the core of the irish model or not? And if depfa is not really a irish bank, then all the rumored expose of german banks to Ireland does not really exist either. After you factor Depfa and HRE, what is left?


Monex 12.17.10 at 5:55 am

It thus follows that Irish and many other R1b will be considerably younger than the maximum age of 18 000 years. There is no people under the sun that doth love equal and indifferent impartial justice better than the Irish or will rest better satisfied with the execution thereof although it be against themselves as they may have the protection and benefit of the law upon which just cause they do desire it.

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