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The deficit in 2009 was largely caused by a huge hole in our tax take created by the property bust.  The Government had become very dependent on stamp duties and capital gains taxes levied on property transactions and when that market cratered, so did the tax take.  In addition the "feel good factor" previously created by rising house values (and shares) and a buoyant jobs market suddenly disappeared and consumer confidence and expenditure dived - also effecting the more general tax take.

Now, of course, all these factors are compounded by the Government having to introduce swinging capital and ongoing expenditure reductions to try and rein in the deficit.

Basically the whole edifice had been built on the assumption of ever rising property prices with, at most, a "soft landing" or mild correction every now and then.  As you know, the "market is always right".

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 05:55:05 AM EST
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Now, of course, all these factors are compounded by the Government having choosing to introduce swinging capital and ongoing expenditure reductions to try and rein in the deficit.

Fixed that for you.

by Colman (colman at eurotrib.com) on Mon Apr 12th, 2010 at 06:04:36 AM EST
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I don't think budget deficits equivalent to 12%+ of GDP are sustainable except in an emergency and for a relatively short period.  Not only do you have the increased servicing cost, but the interest rates demanded by sovereign debt markets become unsustainable - as in the case of Greece.

It is, of course, arguable that the Government should have gone down the Greek route and kept incurring that level of borrowing in the hope that a quicker recovery in the economy and tax take would have enabled us to reduce the deficit at less social cost in due course.

However my point is that we should never have nationalised private debts in the first place.  We need a functioning banking system, but that need did not have to be fulfilled through bailing out existing bondholders in exiting banks.  The banks, especially Anglo - should have been allowed go bust on a Friday evening and reconstituted as new entities the following Monday.  

As David McWilliams has argued, banks go bust all the time, debts are restructured all the time, and there is no reason why such defaults should have had any longer term effect on Ireland's Sovereign debt rating.

Indeed, as we started out from a relatively low level of National debt (c. 28% of GDP at its lowest) 12% budget deficits would have been sustainable for a few years if we hadn't invented NAMA or bailed out the private banks.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 07:07:31 AM EST
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No, but fixing the budget deficit requires fixing the tax system, not cutting our already low levels of public spending as prescribed by the Dublin Consensus. It's not obvious that the cuts they've instituted will make more than a very small difference to the deficit (according to ESRI figures interpreted by the progressiveeconomy people) because of the knock-on effects on tax income and the general effect on the economy of speeding deflation. It's not about deficit reduction, it's about looking good to the markets.
by Colman (colman at eurotrib.com) on Mon Apr 12th, 2010 at 07:27:40 AM EST
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Colman:
It's not about deficit reduction, it's about looking good to the markets.

Agreed

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 07:47:56 AM EST
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Shorter Dublin (Washington, London, Athens...) Consensus

Markets: Help! We're broke!

Governments: Here's a bailout...

Markets: Oooh - just look at all the new public debt. We're not having that. You might default on us.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 12th, 2010 at 07:40:00 AM EST
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Which is a delicious irony given that it was market driven private entities which threatened failure and (alledgedly) necessitated bail-out in the first place.

I cannot help feeling that "the market" is looking on in shopcked bemusement that we are bailing out the banks in the first place.  "We can't trust people who are that stupid now can we"?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 07:50:18 AM EST
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Coming from Complexity/Emergence disciplines, I'd usually dismiss such inferences at face value, the market being an emergent environment by excellence.

But when it is ok to run 50% deficits at one side of the Atlantic but it is not ok to run 12% deficits at the other end, I must concede that something's wrong...

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Apr 12th, 2010 at 04:24:05 PM EST
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Who is running a current budget deficit equivalent to 50% of GDP?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 04:54:33 PM EST
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12% deficits refers to annual deficit, no?

50% refers to total debt to GDP.

by Upstate NY on Mon Apr 12th, 2010 at 09:11:29 PM EST
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I don't think budget deficits equivalent to 12%+ of GDP are sustainable except in an emergency and for a relatively short period.  Not only do you have the increased servicing cost, but the interest rates demanded by sovereign debt markets become unsustainable - as in the case of Greece.

Frank this is objectively true in our case in the Eurogroup. But for a state with its own currency such deficits can be run for "long" periods without defaulting. First of all you have to continuously depreciate your currency so that rolling over debt doesn't kill you. Secondly, you set up some sweet rates on government bonds to seduce local investors, keep the debt in borders. Watch the US closely for something along these lines.

There's an obviously problem, at some point the folk may become nervous about an ever depreciating currency. After that it's game over.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Apr 12th, 2010 at 04:20:57 PM EST
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How much debt is Ireland taking on from the banks again? And what is the % to GDP?
by Upstate NY on Mon Apr 12th, 2010 at 09:09:34 PM EST
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A state with its own currency doesn't even need to issue debt. Running a large unfunded deficit probably has some drawbacks, but I suspect they are similar in nature to the unconstrained money creation by the financial sector that prevailed before the crisis.
by generic on Tue Apr 13th, 2010 at 04:45:34 AM EST
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