Monday, November 29, 2010

Irish Austerity Measures Offer Preview For U.S.

Ireland has managed to negotiate a €85 billion ($115 billion) EU/IMF bailout to save itself from bankruptcy. In addition, the Irish government plans to slash €15 billion from its deficits over the next four years, with the harshest cuts and tax hikes slated for the next budget, which will be published December 7.

The pain of such cuts — or so-called 'austerity measures'— will be widespread and they will lower the standards of living of almost the entire Irish population, some 4.5 million people.

There will be cuts to welfare, pensions, and other public programs. The government has no choice; it's 2010 deficit is 32 percent of GDP, the highest in Europe since World War II.

Prime Minister Brian Cowen is proposing €4.5 billion in spending cuts and raising an extra €1.5 billion in taxes. That will put a tremendous burden on Irish citizens.

What's more, the bailout only raises the possibility of a future default since the banking sector’s losses will be transferred to the state. That means the Irish people are now fully responsible.

Like all European governments, the Irish austerity measures will only undermine growth, thereby lowering tax revenues. That in turn will just lead to further deficits. Think of it as a cycle of indebtedness.

Receiving an €85 billion ($115 billion) bailout will significantly increase Ireland’s debt-to-GDP ratio. Irish debt will equal 50% of its GDP.

Irish media report that the EU-IMF fund could charge interest rates of up to 6.7 percent, higher than the 5.2 percent that applied to Greece's €110 billion bailout in May.

This bailout is not a solution. It is a path to perpetual indebtedness. This plan only pushes Irish debt further off into the future, while making it even larger due to added interest payments. Such a bailout is not a plan for retiring Irish debt. It is merely a plan for delaying and enlarging it, making the current situation even worse.

If you're wondering why this matters to you, it's because these sorts of austerity measures will soon be coming to America.

Though projected to be lower than anticipated, the fiscal 2011 budget deficit will once again exceed $1 trillion, largely due to shrinking revenues. With fewer people working and millions earning less than in previous years, there is less tax money being collected by the government.

When you add the costs of two unfunded wars, absolutely massive additional defense expenditures, and expanding entitlements, you have a recipe for disaster. Current deficits and the mounting debt are simply unsustainable.

The National Commission on Fiscal Responsibility and Reform, better known as the debt or deficit commission, has proposed making nearly $4 trillion in cuts over the next decade.

The plan has already infuriated nearly everyone cross the political spectrum. That's because the proposed cuts will be quite painful and are sure to offend or outrage just about everyone.

All of the sacred cows have been put on the chopping block, including defense, Social Security, Medicare, and assorted tax breaks and deductions.

Entitlement cuts won't just piss off grandma and grandpa either; they'll outrage anyone over 50, or anyone who's been paying into the system for 20 years or more. And those folks vote.

So as we witness protests, marches, strikes and even violence across the European continent, it will be interesting to see how Americans react when they eventually realize that their taxes are going to be raised and their services reduced.

The politicians have so far avoided these eventualities, and they fear enacting them for political reasons. Tax hikes and budget cuts aren't exactly vote getters. But the longer Congress puts them off, the worse the problems — and their eventual outcomes — become.

As it stands, the debt commission projects that the interest on the debt could reach $1 trillion by 2020 if Congress doesn't act immediately.

But in America, political expediency has always trumped the bitter reality of sound, yet painful, decision-making. How soon will Congress have the courage and conviction to do what Ireland and the rest of Europe are already doing?

Tax hikes and budget cuts will amount to some very bitter medicine because they will constrict the economy and further shrink GDP.

There are no good choices; just ugly ones.

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