Saturday, October 06, 2012

IRELAND: BAILOUT

The Irish Policymakers Argue that the Country’s Economic Fundamentals are still better than That of Greece, Manish K. Pandey Analyses how Poor are they in Finalising the Rationale Behind Their Arguments 

Though it is expected that the government budget, which is due to be announced in one week, to an extent will scale up the investor confidence (the government announced last week that it plans to reduce the budget deficit by $8.20 billion in 2011 and by a further $12.31 billion over the following three years), investors are yet to be convinced that Ireland can rectify its dire financial situation. In fact, considering the present situation, the government’s aim of bringing the deficit in line with EU fiscal rules of 3% by 2014, from 32% this year, still looks illogically optimistic. Further complicating the situation is the weak economic outlook. In fact, GDP growth is not expected to return to near the rates of the Celtic Tiger years, even in the longer term. As per Moody’s Analytics, Irish GDP is expected to clock an average growth of 2.6% during 2014-2019, way below the 5.5% average reported during 2001-2007. This might force the Irish policymakers to announce even more austere measures in the 2011 budget than previously planned for, which in turn could weigh heavy on the economy’s recovery. Melanie Bowler, London based economist at Moody’s Analytics, too agrees to the fact as she tells B&E, “Higher yields on government bonds will drag on growth by crowding out private consumption and investment. At the same time, it will raise interest payments on government debt, adding to the burden on public finances and limiting other government spending.”

Housing too is likely leave a permanent scar. In fact, much of the surge in unemployment (unemployment rate in Ireland is hovering at a record 13.9%) has come from housing, which before the recession accounted for about 10% of GDP and employed over 10% of the total Irish labour force. These figures have now contracted by over 33%, with residential building shrinking by a whopping 50%.

But the current 90 bn pound bailout package would require the government to impose further spending cuts and tax increases, which means Ireland’s 12.5% corporate tax rate, which is among the lowest in Europe, will be raised. And that’s the first thing we believe Ireland should never do as this will weigh heavy on foreign investment and, in turn, exports, two of the only few factors driving the recovery in Ireland at present. In short, if Ireland were to take the bailout, leave the tax rate untouched, yet work on minimising expenses through other methods, then the current issue might resolve itself in the next half decade, no less.


Source : IIPM Editorial, 2012.

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