In Ireland's deep budget cuts, an omen for a heavily indebted United States?
Tuesday, December 22, 2009
DUBLIN -- Is this the ghost of America's future?
Like other heavily indebted nations around the world, Ireland is borrowing vast sums from foreign investors to plug its budget deficit. Fearing that the country will buckle under the weight of so much debt, the Irish have an answer: Put the government on a diet.
More than $4 billion in cuts coming into effect after New Year's Day will slash salaries for 400,000 government workers while making painful reductions in benefits for such groups as widows and single mothers to the blind and disabled children. A tax targeting rich Irish nationals living overseas -- dubbed the "Bono Tax" in the Irish press -- will help restock empty coffers at home. Even Prime Minister Brian Cowen, who earns about as much as President Obama, is taking a 20 percent pay cut.
Such drastic steps have put Ireland on the front lines of a global battle against runaway government spending and exploding budget deficits in the wake of the financial crisis. The world's richest nations, according to the Organization for Economic Cooperation and Development, are more indebted than at any time in at least the past 50 years.
Budget deficits in the world's industrialized nations have more than tripled during the financial crisis. Nations have injected huge amounts into bank bailouts and stimulus packages, even as tax collection has collapsed. With borrowing still soaring, the OECD projects that by 2011, wealthy nations could owe investors more than the value of their gross domestic product.
"Stopping the rot is clearly necessary and will call for fiscal consolidation that is substantial in most cases and drastic in some," the OECD said in a recent report.
The Irish solution illustrates the tough choices ahead for countries in debt, particularly smaller, troubled nations such as Greece where analysts fear the eruption of a payments crisis if difficult steps aren't taken to control government spending. But in the longer term, analysts warn, even larger, wealthier countries now borrowing record amounts -- most notably the United States -- may impose difficult cuts to bring deficits back down to already high pre-crisis levels.
Although ramped-up spending is credited with helping spark the global recovery, failure to draw down that spending -- starting as early as late 2010 in some countries, analysts say -- risks triggering higher interest rates and the tipping of economies back into recession. The timing of cuts is among the most contentious issues dividing Democrats and Republicans on Capitol Hill; fiscal conservatives support swift reductions, and proponents of spending argue that moving too quickly could derail the economic recovery.
Eventually, however, Americans will probably feel the sting of cuts, even if they are phased in more gradually than the pull-the-Band-Aid-off-fast method being rolled out in Ireland.
"The U.S. government, like the U.K. government, the Greeks and the Irish, is going to need to draw down fiscal stimulus, pare expenditures, raise revenues and probably take a look at [cuts] in their entitlement programs" such as Social Security, said John Chambers, chairman of Standard & Poor's sovereign rating committee in New York.
A difficult reversal
The Irish offer a glimpse into just how hard that rollback can be for citizens who have come to count on government help, particularly as public assistance funds soared in many nations during the boom years.
In Saggart Abbey, a suburban village outside Dublin, Susan Byrne and her husband spend most available time indoors, caring for their two teenage daughters. Both girls are severely autistic; one is virtually mute. The couple this year received about $32,000 in government assistance, largely through special caregiver benefits. That sum is about to be reduced by about $1,700 a year.