*Irish* bank guarantee is killing economic growth…

It goes without saying that no one in the Republic would want to start from where they are now. But Garrett FitzGerald returns to a favourite theme of his, that the tax settings were too low in the past and that, despite having a national debt of less than 25% of GDP, it is now lurching towards an open ended economic crisis as predicted economic growth rates fail to materialise.

But Fianna Fail government is sticking with its steady as she goes routine. Today the Republic’s Minister for Enterprise, Trade and Innovation, Batt O’Keeffe, launched a broadside against Richard Bruton for suggesting that the government’s guarantee for the Irish bank’s bond holders was dragging the country down further:

‘Although the quarterly figures this week were weaker than expected, exports performed better than expected – and our recovery will be export-led.

‘This week’s Quarterly National Household Survey shows the decline in the number of people in work was the smallest since the recession began.

‘And the strong demand for bonds shows that investors have confidence in Ireland’s ability to meet our funding requirements.

Hmmm… As the FT points out, this demand comes at a hell of a price in interest repayments.

At a debt auction on Tuesday, Ireland was forced to pay a yield of 4.76 per cent for four year bonds – about what it would pay were it to access the European Financial Stability Facility. Weakening growth has pushed the country off-track in its fiscal consolidation.

And here, according to the FT, is Ireland’s dilemma:

Mr Cowen should cut the umbilical chord to the banking system by making it credible that bondholders will no longer be protected against all losses. This could only be done after enacting a special resolution regime such as the one the UK has adopted. It might mean an Irish banking system with fewer liabilities and more foreign ownership. But it would cut sovereign yields and set the deficit on a sustainable path. [emphasis added]

And it notes that “gross public debt may reach up to 136 per cent in 2014, once Dublin’s guarantees and estimated losses are added to its sovereign borrowings.” Eeek…

Last word to FitzGerald who notes that in the medium term the whole Irish political class faces a dilemma in how it informs the Irish state just under taxed it is, and how they are going to have to pay more:

It is obvious that, as we run ever shorter of further feasible spending cuts, whatever government is in power will have no choice but to turn to overdue tax increases to achieve our financial targets. However, an inevitable move towards normal levels of income taxation for a developed country will have to be gradual, spread over a number of years.

Finally, it is time to break the irresponsible silence – worthy of the Mafia’s omertà – that has enveloped this subject of Irish undertaxation, which media and politicians, business and unions, and even most academic economists – I exempt Prof Philip Lane in TCD – have preserved for so long.

If the public are left under the delusion that they are overtaxed, rather than grossly undertaxed, their reaction as taxes inevitably start to rise could be dangerously volatile.

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