That financial orthodoxy…and a small argument on the economic right.

An enjoyable piece from Karl Whelan over on Irish Economy which takes to task some of the assertions made by Pat McArdle in the Irish Times this week and in particular the notion that there is no connection between the monies pumped into the banks and the budgetary crisis. I like Whelan’s stuff. He’s honest and although not on our side of the ideological divide (last week he had an interesting piece on flat taxes, but… it was on flat taxes) there’s usually something worth reading.

McArdle argues that:

If the exchequer were to inject another €4 billion capital into Anglo Irish Bank in the morning, this would increase the EBR by an equivalent amount but would have no impact whatsoever on the GGD.
This is because the international rules treat such capitalisation as a “below the line” transaction, i.e. investment in a commercial State body which is outside the government sector, rather than current expenditure which affects the deficit.

Whelan disagrees. Not least because Anglo ‘is no longer a commercial operation and the government will get back none of the €4bn that was put in this year, nor is likely to get back what it will put in next year’.

It’s funny, I was reading McArdle’s piece on Thursday morning and thinking, hmmmm… that can’t be right – particularly when he started to argue that General Government Deficit was the ‘critical measure’ of fiscal policy rather than the Exchequer Borrowing Requirement, but wasn’t quite certain as to whether it was my own bias that was informing me or something a little bit more grounded. Good to see it wasn’t just me for Whelan dismisses this too. And telling to note that a year ago I probably wouldn’t have recognised that something was slightly amiss. Them’s the times we live in.

But important too to note that McArdle’s piece fits into a discourse of There is No Alternative. His overall point was to argue that:

The €4 billion of “cuts” is required to stabilise the GGD in 2010 at the alarmingly high level of 12 per cent of GDP; without them, the deficit would rise to 14 per cent, the highest in the euro zone. It is unlikely that this would be tolerated by either the markets or the EU.
And that:

The estimates given in the April budget, namely €4 billion for the scale of the action needed to prevent the 2010 GGD worsening, stand, irrespective of whether or not the banks are bailed out or the pension fund terminated.
Unfortunately, there is no easy way out of the current fiscal dilemma; fortunately, this seems now to be increasingly realised inside the Dáil. However, the communication of this message to the public at large remains a challenge.

In this case because there is a core of dissenters on one aspect of fiscal policy, that being NAMA, there is an immediate critique, not from the left but the economic right, to point out that his analysis is arguably incorrect and that, as Whelan notes, the capital injected into the banking sector has a direct impact upon the broader budgetary crisis. It is perhaps a sign of how dominant the economic orthodoxy is that it takes IE to provide this critique.

Pat McArdle writes economic commentaries for The Irish Times . He is a former chief economist with Ulster Bank. This is the first of a number of pieces he will write between now and budget day, teasing out the options facing the Government and their implications.

A continuing series? It looks like we can expect entertaining times ahead. At least on that front.