From a link to Credit Suisse comment in the LFF piece:

Mr Lenihan plans to reduce the deficit to 3pc of GDP by 2014 to meet a European Commission deadline

They don’t have much choice.

Of course they have been screwed by Euro membership – completely screwed.
Rates were too low for them during the boom.
Now they are trapped with an overvalued currency, unlike us.
Meanwhile the only buyer of Irish debt is effectively the ECB.
But that cannot go on forever – hence the pressure they are under.

This guy has lots of good stuff on the Irish economy (and forecast their bust a year or so in advance).

http://www.davidmcwilliams.ie

The Tories have been praising Irish attempts to reduce their spending, without acknowledging the deep shit Ireland is in as a result.

Are you suggesting that Ireland is in deep shit as a result of the budget that they have been forced to enact? That’s beautifully and precisely the wrong way round. They have enacted this budget as a result of the deep shit they’re in.

cjcj @1

‘Stephanomics’ also covers the ECB stuff, with reference to Greece but applicable to Ireland. See http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/12/exit_closed.html (though I suspect you already have).

Nice article Sunny

One key problem for New Labour is that the progressive things it has done it hasn’t really trumpeted and lodged in the public conciousness. If there’s no clear water between Laboour and the Conservatives and no USP why bother voting for them.

Ireland is interesting, as is Spain, both are suffering from unbalanced economies which have had humongous property bubbles. They have big, big problems though at least they are in the enviable position of not having to worry about their currencies going to the pan unlike us.

@1,2 – Sunny’s point is slightly off here. The real issue is that Ireland has no alternatives to a hideous-pain strategy, because it can’t devalue its currency or find buyers for its bonds. The UK can do both without any trouble (gbp-denominated UK bonds are still selling well on international markets, highlighting the fact that the people who think we’re bust are know-nothing blowhards), and so the only reason to go for a hideous-pain strategy is out of ideological hatred of government spending and/or the poor.

@4 it doesn’t matter if our ‘currency goes down the pan’, that just means fewer holidays in Europe and people paying gbp6 instead of gbp5 for sweatshop trousers. Which is irrelevant, compared to mass unemployment, massive spending cuts and declining nominal wages.

They don’t have much choice.

Of course they have been screwed by Euro membership – completely screwed.

But the ECB is the one imposing the tight constraints on the budget that Tories such as you want. Are you against the constraints or against the ECB and the constraints at the same time, while being against the Labour approach (which would be completely contradictory but not beyond you).

‘They have big, big problems though at least they are in the enviable position of not having to worry about their currencies going to the pan unlike us.’

Don’t worry – I saw Spooks last night and they sorted it.

What difference does it make whether people get paid less in a “deflated” currency (i.e. with more spending power), or more in an inflated currency? Ok, I realise people like seeing bigger numbers on their PAYE forms than smaller ones, but that effect doesn’t last all that long.

@9 actually, empirically it does – nominal deflation has massive negative real-economy impacts due to its effect on purchasing behaviour (people don’t buy stuff because it’ll be cheaper in a few months’ time) and on employment markets (people won’t take nominal pay cuts, so unemployment persists).

That might not be entirely rational of people, but it’s the case.

7 – I suspect that cjcjc is referring to interest rates and currency levels.

5 – Well, UK fund managers and overseas investors are both net sellers of UK gilts this year. The only net buyers have been HMG (through QE) and UK banks. Our difficulties in selling are much much less severe than Irelands, but, by way of comparison, CD spreads on gilts are now nearly four times higher than on German sovereign debt.

Lets wait until QE is ended before we get too cocky about our ability to increase our borrowing.

I’m just pointing out the constraints which are forcing them to act as they are.

Even I would not suggest going down that road – not quite as rapidly anyway!

cjcjc

To be fair – the problems for Ireland that you list are exacerbations – not causes. Hence so many EU countries, despite their own booms, are not suffering similarly.

The reason for Ireland being so hard hit is at least in part domestic. Ireland followed a strongly thatcherite attitude to growing wealth, and so competed on price by cutting taxes to incentivise inward investment and corporate growth.

This always leaves countries prone to sharp declines in employment when the economy turns south, since other parts of the world can compete on price, and the firms drawn in tend to be those who can find and quickly train staff anywhere.

The UK on the other hand took a (I guess we”ll have to call it this for sake of differentiation) Blairite approach – which rather than cut taxes significantly, spent money skills and assistance to firms to move up the value chain.

This could never match the high rates of growth seen in Ireland (the Tories used to criticise Labour for not matching Ireland’s growth rates – and the SNP used Ireland as an example of how rich Scotland would be if it were independent). But it means firms in the UK are less able and inclined to find equivelent staffing and infrastructure abroad, or to shed jobs for the short term that will still be valuable in the long term.

This may explain why Ireland’s unemployment has jumped back up to its historically high levels, while the UK has seen unemployment stay well below other rich countries.

“The Tories have been praising Irish attempts to reduce their spending, without acknowledging the deep shit Ireland is in as a result”

This statement on the Irish situation is COMPLETELY AND UTTLERLY FALSE.

The Irish economy was in freefall LONG before spending cuts were first even considered, let alone implemented – GDP plummeted by 7.1% p.a. in the last two quarters of 2008 – yet the severe spending cuts are only being implemented now. So this entire piece is based on a completely false premise.

The problem is that many on the left don’t appreciate that there is simply a limit to how much money a government can spend before a broken economy completely collapses. And many western economies, including our own, are at or beyond the limit which has shrunk under the accumulation of many years of deficits.

Our deficit is now about the same as Ireland’s (as % of GDP) yet the rating agencies were quicker and less cautious in downgrading their smaller economy. Lenihan has been forced to cut spending because the government cannot see how a default by the nation in 2010 is otherwise avoidable.

You are dreaming if you think that similarly harsh spending cuts can be avoided here. If a Labour government is elected in May and doesnt face this reality and cut then it will simply be down to the IMF to force them to do make even more severe cuts when international investors abandon the Gilts market in due course.

MfE @ 13

“This may explain why Ireland’s unemployment has jumped back up to its historically high levels, while the UK has seen unemployment stay well below other rich countries.”

I wonder if the British (and EU in general) unemployment has had a knock on effect in Ireland? Given that the Irish are exporters of labour. I wonder if our building trade downturn has meant that there is less incentive for young Irish people to come here at the moment?

Could the Irish budget cuts ‘force’ Irish people out of Ireland and back to the eventually recovering UK? Such a shift in population is not exactly without precedent, is it?

I know where Sunny is coming from.
And yet hysterical reaction from the right-wing is one step short from calling it bolshevism on British soil.

The Mail and the Telegraph’s warped notion of what middle classes are is a cross between baffling, depressing and pathetic.

To make the narrative stick the government has to be bold and consistent. Instead, all we got was a PBR that, as the Guardian summed up, soaked the rich and the rest of us too. What kind of a clear dividing line is that?

One that says: we may be bad, but the Opposition will be worse. Having set out an aim of halving the deficit in four years, the trap waiting for the Tories is to play ‘Name That Tune’ by cutting it further in a shorter time. Either Osborne fails to explain how much bigger the cuts would be to achieve such a target, or he’s forced to start naming targets, at which point Brown goes ‘Gotcha!’ Throw in the chance of at least one quarter’s positive growth between now and the election, and you have some idea of the strategy. Waiting for New Labour to be ‘bold’ is a mug’s game.

Jim

Are the Irish still net exporters of labour? Historically they have been – but in recent years they took to importing Labour on much larger levels.

That said – yes, I would imagine that given we have open borders with them, a recession and high unemployment in Ireland is likely to trigger some migration to the UK if our labour market continues to fair better.

Andy Jarm

With respect – there is in effect no limit on what the UK can borrow.

I know that sounds counter-intuitive – since people don’t understand national debt – and don’t understand big numbers – but that makes it no less true.

Compare our levels of debt to the years over which Japan and Italy have had over 100% accumulated debt – and the prospect of us defaulting, being downgraded, or running out of institutions willing to buy our debt is negligibly small.

eventually high debt levels like those of today would lead to an Iceland style bailout. But we have a large tax base against which to borrow much larger sums than we do at present – and a recent past of paying down debt.

Nick@9 – The really big problem comes with debt, your paycheck will drop but your mortgage will stay the same. There is also the potential knock on effect of mortgage defaults and also the risk of falling consumer spending.

#1 cjcjc

Oh that winderfully stable Irish economy – just what Alex Salmond says Scotland will be like after breaking away from the Union. Methinks there should be a “once in a generation” vote on Scottish independence right now.

Margin4Error

There is most definately a limit to how much we can borrow.

Japan’s debt is issued almost exclusively to domestic buyers who have been forced and encouraged to soak up vast amounts through regulation and the carrot of a ‘risk-free’ carry trade provided by the central bank whereby the banks borrow overnight at low rates to fund long term government debt holdings at a higher yield.

Japan is almost unique in being able to get away with this because of its huge current account surplus (as one of the worlds leading manufacturing and exporting nations) which provides the domestic economy with the capital to fund the government. Even so, this has completely warped the economy to the extent that credit is barely available in Japan as banks main asset is government debt and the same is true of pension funds etc. Now their ageing economy needs real retirement funds, the debt is being sold leading to a rise in yields which threatens a spiralling borrowing cost for the government and debt expected to reach 230% of GDP next year. Many of the major hedge funds now have significant capital betting on a Japanese sovereign default in the next two years.

The UK is a huge net importer (of practically everything including food and fuel) and runs a massive current account deficit. The above strategy would wipe us out within a very short space of time as we could not begin to fund our deficit domestically for anything like that duration. Over the last year we have been printing money and buying Gilts – but not nearly in the same amount as we have issued them – but in the same period foreign ownership of Gilts has actually declined as our debt has multiplied. That is staggering and implies a deep lack of faith in our debt by foreign investors.

Quantitative Easing (money printing) is due to end in February at which point we will be completely dependent on foreign investors to fund our deficit. There is then nowhere near sufficient capacity domestically to fund it. This situation is deeply worrying and means we will be exposed as a nation to the yields that these foreign investors are willing to lend at (which should be acceptable, if we have a credible budget and plan for deficit-reduction). Money printing is only an option the markets will tolerate when used as a weapon against severe deflationary onsets of the sort we saw last year – the markets will now not tolerate further printing as this would be seen as monetisation of debt and could cause a substantial fall in sterling (followed by inflation as our imports shot up in price).

So unlike Japan we are dependent on the wilingness of foreign investors to fund our lifestyle and government spending. They will only fund is if they think we are a good credit, will repay the debt, will not print money to weaken the currency they invest in and will not risk inflation that would devalue their investment.

So as a huge importer there is a huge constraint on how much money we can borrow or print. The markets are already very nervous about this, trust me, just read the financial press and you will appreciate this is no longer seen as paranoia but in the wake of Dubai, Ireland and Greece as a real risk. If Darling increases his borrowing requirement much beyond his projections, a run on sterling and the Gilts market is quite likely.

Oh and in terms of our ability to fund our deficit through taxation – forget it. HM Treasury projects that next year we will spend more on the Welfare Deficit alone (that excludes the NHS) than the aggregate income tax receipts from every worker in the country.

That is the situation that makes us completely dependent on the willingness of foreign investors to lend our government money. We had better hope that they weren’t too frightened by what Darling had to say.

Citibank research on the UK out today (their analyst is highly regarded and was very positive on the UK until this week) :-

-The lasting legacy of the current government may well be the loss of the UK’s
AAA sovereign credit rating
-We think the UK’s debt affordability and reversibility look set to deteriorate
rapidly
-Rising yields pose a significant challenge to the affordability of the debt burden
-The end of QE will significantly weaken demand for Gilts and the financeability
of the government’s debt
-The necessary political consensus to deal with the burgeoning fiscal problem
seems to be absent

Whatever you think the UK can afford to spend, the foreign investors wont let us…..

The UK can do both without any trouble (gbp-denominated UK bonds are still selling well on international markets, highlighting the fact that the people who think we’re bust are know-nothing blowhards),

That would not be true if people did think that Britain was about to devalue its currency.

Anyway, that would only reduce the real value of the existing debt, it would do nothing to reduce the real problem, which is the deficit.

Keep in mind that most voters won’t pay any attention to the PBR, let alone sit there and discuss its ramifications like much of the media and blogosphere has done.

Then what is the point of a political PBR?

Then what is the point of a political PBR?

The point is – unless there differences are stark then voters won’t notice or take care.

27. Sunny H . That well known right wing rag ” The Indy ” said today . p3. ” The next budget Mr Darling delivers may be written by the IMF”. “As the economy is concerned , the verdict on Mr Darlings packages is simple : too little, too late”.

Charlie2@28 – That’s a comment piece by Sean O’Grady, expressing concerns about the deficit and the national debt has been a rrunning theme in his columns. In terms of coverage, it’s nothing new

The Indy is indeed a right-wing rag these days… apart from a few lefty journalists left in its ranks.

Left with only the Mirror to hold the torch for the Government. Sad really.

Who said the Labour govt was left-wing? It’s not about who is holding the torch for Labour… it’s more that the left doesn’t really have a national newspaper other than the Mirror to reflect its values.

Hence why internet spaces are so important.

What about the Guardian, and the biggest supplier of news online is the BBC.
The labour government is socially left wing, economically right wing(ish), ultimately that’s what screwed them up, a marriage of convenience, with a messy divorce due to irreconcilable differences.

Sunny, if all these papers that have supported Labour for so many years seem to be concerned about the deficit, perhaps that is a sign that the deficit is something to be concerned about.

BTW – consider the Guardians latest editorial:

http://www.guardian.co.uk/commentisfree/2009/dec/11/public-spending-cuts-to-come

I think Sunny is underestimating the intelligence of the average voter. You don’t need to be an economist to realise than a country cannot live on credit indefinately, any more than a person can. IIRC 20% of current Government spending is currently debt repayments, a figure that will rise (and keep rising unless spending is controlled) for the forseeable future. At some point the bullet has to be bitten, and the only thing I would take from the PBR is that labour know they are not going to win the next election, they will not therefore have to take the pain and have, quite logically, not set out any plans to do so.

Sad to say, the writing was already on the wall for those who closely follow the fiscal news. An unpalatable fact is that the IFS warned back in 2001:

“Labour’s pledges to tackle poverty and drag Britain’s underfunded NHS up to European levels have opened up a £17bn black hole in the government’s finances that will have to be plugged by higher taxes, the UK’s leading financial experts said last night.

“The Institute for Fiscal Studies (IFS), an independent thinktank, said it would cost the equivalent of 6p on the basic rate of income tax for Labour to match the average European Union health spending, introduce new tax breaks for the working poor and repair the damage to the public finances caused by economic slowdown.”
http://www.guardian.co.uk/politics/2001/nov/29/uk.budget2002

In today’s news about the NHS and spending cuts:

“The National Health Service can make the £15bn to £20bn of savings needed during the next three years without damaging the quantity or quality of care – indeed while even improving the latter – according to David Nicholson, the NHS chief executive.”
http://www.ft.com/cms/s/0/6fba7dfe-e683-11de-98b1-00144feab49a.html

The present NHS budget is c. £104 billion. How come as much as £15bn to £20bn can be saved without damaging the quantity or quality of services – according to the NHS chief executive? That really doesn’t say anything reassuring about productivity in the NHS. The big question is how far much of the same can be said of other public spending?

The NHS could save millions if they stopped advertsing, (telling people to phone an ambulance if someone has a stroke being the latest assinine example) spedning money on PR would be questionable at the best of times but when it increases demand for an already struggling public service it’s just mad. Ditto the millions wasted on the public funded sales drive for tamiflu. The NHS needs to go back to providing a reactive health service, rather than trying to promote the governments idea of health.