Gap widens between British and Irish fortunes – for now

Not only is the Republic suffering from the worst of all possible worlds but there appears to be a yawing gap between Irish and British handling of the crisis. Gordon Brown and Alistair Darling are so far refusing to sue the “R “ word and promising to spend their way out of recess….-sorry negative growth.

“How will all these projects be paid for if taxes do not go up and there are no cuts in state spending totals? Inevitably, by borrowing more, the Chancellor confirms, justifying this by pointing to debt reductions in the 10 years from 1997, when Labour came to power. ”

Ernst and Young “the only forecasters to use the Treasury model” say “it should be a relatively short and shallow downturn… but the Chancellor will be forced to borrow almost £100bn next year…
Inflation will fall, allowing the Bank’s Monetary Policy Committee to reduce rates to 3pc by next summer. As a result, the pound will fall against the euro and dollar, reaching a low of $1.65 by end-2009.”.

Of course the contrast may turn out to more apparent than real, a matter of timing than good economic management, where the similarities are greater than it appears on the surface. The Irish were unfortunate in having their Budget scheduled for the height of the crisis. In the UK, Darling can hardly hold the line against increasing taxes when he delivers the pre-Budget report in a few weeks’ time.

  • niall

    Brian,

    The plight of UK plc is not good and for the mandarins in London the problems of the celtic tiger drying out having drank to deeply at the well of credit is no real concern or help.

    I think the UK economy is an oil tanker, the irish one more of small yacht. Both are in stormy seas but the sheer scale of the problem with UK plc is such that it’s going to be much harder to turn around in my view.

    Even if the government now go on a borrowing spree as they claim to have planned all along there are going to be huge deficits in tax receipts from the city, housing and the general economy. Also of course falling revenues from petrol, a factor when you consider the recent reticence to reduce this levy when being lobbied to do so.

    My problem with all this is the basic lack of affordability of life. I make decent money but yet as I head toward my late 20s and I thank heaven to have remained mortgageless I worry about my job, i worry about the increased taxes, I worry about increased rents, I worry that the ovt will come up with a way of skewing the housing market again to reward the banks.

    I worry about these things and as a result I’m saving and getting pissed of with this government who shafted me with student loans they never had, who have devalued a UK education, who opened the job market to so many foreign graduates who were not saddled with loans and could happily work for less, who preside over inflation at 5.4% minimum and who have allowed wholesale mortgage fraud force me into considering at times loans several times my salary for a mean little house.

    So brown and the darling can make comparisons with Dublin to persuade me they are doing well but I aint buying it.

    Our generation will come to power one day, will be the historians who right the story of the aftermath of the present powers that be and will attribute blame where it falls.

    It is little comfort that the Celtic credit binge has to renew itself at the same time.

  • The situations of the two Nations are so different, such a head-to-head contrast of economic policy is the drunken freshers-bar Saturday night quibble: “Which would win a fight between a polar bear and a great white shark?”

    Above all, one economy is in the Euro strait-jacket (which is why last week’s Lenihan budget was so BDSM, particularly because he threw everything against an up-tick in Corporation Tax) and the other can go for the Keynesian model of a deficit budget.

    If the down-side is that sterling declines 10% or 7% against the dollar, so what? A few fewer BMWs and Porsches on the road. The ladies who lunch will re-activate their Selfridges and Harvey Knickers accounts rather than take the weekend flip on Virgin Atlantic to Saks and Bloomingdales. As long as the oil-price stays down, that’s a double gain in export markets and balance-of-payments.

    Meanwhile, any bets on which way the sterling-euro ratio will go? Particularly when, not if, the East European economies hit the wall.

    Those who have been paying attention may have noticed how shrill, to the point of desperation, the Cameron and self-basting Salmond have been in recent days, knocking Brown and Darling. I wonder why.

  • Mack

    Malcom Redfellow –
    “If the down-side is that sterling declines 10% or 7% against the dollar, so what?”

    That’s not necessarily a rosy outcome – what happens if the dollar collapses? Hyper-inflation is a real medium term possibility as a result of the scale of the measures that need to be undertaken to attempt to reflate in the face strong deflationary pressures.

    Ireland is much more constrained in what it can attempt (itself) in terms of fighting credit destruction within it’s own economy. With the German fear of inflation permeating the ECB (raising rates as recently as July), and with Irish banks perhaps zombied Japanese-style deflation may be a greater long term threat in Ireland while Britain may face high inflation.

  • George

    Brian,
    The Irish were unfortunate in having their Budget scheduled for the height of the crisis. In the UK, Darling can hardly hold the line against increasing taxes when he delivers the pre-Budget report in a few weeks’ time.

    Not the case. The Irish government actually moved its budget forward two months because of the crisis.

    It usually takes place in December but the way the country’s public finances were going south because of ever decreasing tax revenues they decided to move the date.

  • Mack @ 11:04 AM:

    what happens if the dollar collapses?

    The great imponderable.

    By standing agreement, there needs to be a world major currency. Gold went by the board a long while back: anyway, it disappears into and onto the chests of Asia. Then, briefly and once upon a time it was sterling. All my life it has been the dollar. Would anyone have any faith in the rupee or the renminbi/yuan? Hmm: thought not, not yet a while, anyway.

    What does that leave us with? Well, despite the righteous Germans, there’s too many cooks at the broth. If anyone can screw the €, it’s got to be the olive-oilers: the Italians, with passing assistant Greeks and Spaniards. Then there’s on-going dodginess with the adopting countries (Romania ?) as a potential further destabilising influence. No, not the € for the foreseeable future.

    Which returns us to the greenback — and it hasn’t done badly out of the present turmoils. Yes, the deficit is terrifying (and either incomer to the White House is going to be well-and-truly strapped to carry out those expensive “pledges”). However, the recession/downturn/crunch will wind down the imports, particularly so if alternative energies can be brought on stream: that trims the adverse trade balance.

    So, bottom line: I agree with your premises, but don’t write off the US Treasury yet. On the other hand, surely Chairman Bernanke’s term of employment is not likely greatly to exceed that of the US Treasury Secretary Paulson, whoever sits in the Oval Office.

    I come back, finally, to the thought that at $2/£ (which kept me in Apple gear and Brooks Brothers, while it lasted) sterling was grossly overvalued. As per usual, it will undershoot the natural level, but what’s adrift with $1.60-ish? Similarly, the € must be due for a dip: hope some of the gilt rubs off the geld before I have to consort with the Huns in December.

  • Brian Walker

    Niall, A very salutary statement on behalf of your age group.. well worth wider circulation..

    “I worry about these things and as a result I’m saving and getting pissed of with this government who shafted me with student loans they never had, who have devalued a UK education, who opened the job market to so many foreign graduates who were not saddled with loans and could happily work for less, who preside over inflation at 5.4% minimum and who have allowed wholesale mortgage fraud force me into considering at times loans several times my salary for a mean little house.”

    George, thanks for the correction about Budget timing.. It doesn’t totally devalue my point though as the Irish Budget was imminent anyway and not like the UK Budget due in late March or April. Although there’s a pre-Budget report soon, there’s no hint of an emergency Budget.

    Others… I’m enjoying the supertanker and the yacht, the polar bear and the great white shark..

    Of course there can be no direct comparison between the two economies, I’m just looking at it as an individual who could be living in either jurisdiction..

  • George

    Brian,
    I agree it doesn’t change the substance although it does seem to back up the yacht versus supertanker view.

    No hint of an emergency budget from our neighbours just yet but figures released today show the UK’s budget deficit is already at 37.6 billion after six months, 75% higher than at this time last year.

    Just like the Republic, revenues from stamp duty, corporation tax, national insurance and excise duties were all weak.

    It seems Alistair Darling will have to borrow closer to 60 billion for this tax year, compared to the planned 43 billion.

    Some say this could be up to 120 billion within three years.

    At the moment, the only thing you can say about the two economies is that one is looking to spend its way out of the recession, the other is putting the brakes on spending, raising taxes and hoping that it doesn’t send the economy further into negative growth.

    If the UK spends too much, they will be in trouble for a long time to come, if the Republic reins in spending too much, the economy could stall even further.

    Ireland has tried to spend its way out of trouble before with terrible results so just like the Germans panic at the first sign of inflation after Weimar, we’re very wary of a large national debt.

  • Mack

    @Malcom Redfellow

    For sure such a cataclysmic event remains unlikely, but it is now entering the realm of possibility (at least I’m seeing it mentioned quite a bit these days).

    I think if the dollar does fall, it will not be because it has held it’s value and the the holders of US securities have found a better option. I only see it happening if the increase in the supply of dollars begins to seriously outpace the supply of goods and services purchasable with those dollars. Will the US government borrow from foreign creditors to fund it’s growing deficit, or will it turn on the printing press? Either way, the long run effect may be the same. If the value of each dollar begins to head south rapidly, would you bet against the nationalistic and proud Chinese acting to protect their reserves? (The Chinese and Japanese hold almost half US Treasuries in foreign hands).

    http://www.treas.gov/tic/mfh.txt

  • Duncan Shipley Dalton

    Seriously stop crying about student loans. They are small in the UK in comparison to the USA. If you want worry try graduating with the equivalent of the average mortgage in student loans. I would point out that a degree is a benefit to you anyway as you will most likely earn more over your lifetime with a degree than you would without. All you need is 10 years at 2000 a year more than you would get without a degree and you have paid it off easily. It would be worth more but in our rush to extend a university education to everyone (except most of the DUP front/back bench of course)the course have been so dumbed down as to make it almost not worth it.

  • niall

    Duncan,

    Stop crying about the price of property in Florida, in Belfast it would cost you 5x that condo’s price for a shoebox. Comparing like with like?

    The point,and admittedly not complaint to get us outside parliament, is that we pay student loans, many in power do not. Graduate from Scotland or the Republic or many places in Europe do not have loans to pay off. In the EU their status is more relevant than that of the Ivy Leaguers? In fact we’ll never have the Ivy Leaguers with their mortgage like loans compete for jobs in NI because they couldn’t pay back on the salaries offered.

    Also as you say a third level education is much reduced in value from a generation ago.

    Also the value of the return on investment in the US is not easily compared with the UK.

    Graduate salaries in NI are terible for a few years after graduation, and there is the lack of quantity too which you’d imagine will be a bigger problem in the next few years. Who is hiring the class of 2008 and 2009?

    Also in a time when we talk of a credit binge we must say for many the Student Loans Company owned by the govt started the easy credit ball rolling.

    Education is a very important industry in NI, probably one of the biggest in Belfast. Most people there don’t even think of education as an industry and thats another minor scary thing about NI plc.

  • runciter

    Also in a time when we talk of a credit binge we must say for many the Student Loans Company owned by the govt started the easy credit ball rolling.

    Good point. Any system that encourages personal debt will rightly be treated with grave suspicion in the future.