This is not the UK, in fact, but Ireland, the subject yesterday of a rating downgrade from Moody's. But given all the parallels between us and our neighbours across the Irish Sea, might not the Irish experience be instructive?
In fact, the mood music coming out of Moody's and its fellow agencies regarding the UK has, of late, been a little more soothing, reflecting the more aggressive promises the coalition Government has made on the public finances than its Labour predecessor. The Irish lesson, however, is not so much that the UK might be heading, after all, for that dreaded downgrade, but that cutting spending and raising taxation levels is only one half of the public finances juggling act.
Indeed, Ireland's austerity budgets have been much more aggressive than anything seen in the UK so far, with larger spending cuts, bigger tax rises and a far greater willingness to confront sacred cows such as public-sector pensions. It is not Ireland's efforts to cut the deficit that concern Moody's but its dwindling tax revenues. The more the Irish government has cut, the weaker these revenues have been. For this reason, despite all that austerity, Ireland now finds its debts more unaffordable than ever before.
This is exactly the scenario that haunts the nightmares of those who believe the UK is pulling the plug on fiscal stimulus measures too early. If you strangle the recovery by doing so, they fear, the total tax take will fall faster than you can cut spending or raise tax rates. Ever seen a dog chasing its own tail?
Like the UK, the forecasts in Ireland are for only a tiny pick-up in growth this year, with better prospects for 2011 onwards. But as here, the country must build its recovery on more broadly based footings, with no prospect of property and finance regaining their engine-room status.
The worry for both countries is that the rest of the private sector is not capable of stepping up to the plate. And if our experiences continue to converge, Ireland may be offering a taste of what is to come in this country.
Pension protection at quite a price
This is not the first time that I have asked this question, but in the absence of a satisfactory answer so far from the watchdog, which does not comment on individual cases, I will pose it again. What does the Pensions Regulator achieve by protecting pension-scheme members so aggressively that it risks doing for their jobs?
Uniq, the food producer, now looks to be in serious danger of suffering the same fate as Reader's Digest UK, where the owners of the company placed it into administration after the Pensions Regulator rejected its plans for dealing with the pension-scheme deficit. Uniq warned yesterday that it may be heading for a similar showdown with the watchdog, with a rejection of its plans for deficit reduction likely to lead to a wind-up of the pension scheme and then the demise of the company.
These cases are fraught with difficulties. Uniq, struggling to survive, thought it had come to a deal with its pension-scheme trustees, under which it would suspend its contributions until 2013 and then begin handing over as much as a third of its earnings each year to start getting on top of the £436m funding deficit.
From the point of view of the company, this deal gives it a bit of breathing space, a greater chance of long-term survival. But while the trustees, representing pension-scheme members, appear to be supportive, the Pensions Regulator's role is to ensure Uniq's pension commitments do not end up falling to the Pension Protection Fund – and with the company not certain to be saved even by its pension deal, the watchdog will be concerned that a contributions holiday might lead to an even larger liability eventually ending up with the compensation scheme.
Both positions are reasonable ones to take. But active members of the Uniq pension scheme, the 2,000 or so workers employed by the company, are caught in the middle of a disagreement that, as the regulator is more powerful than their employer, could see them lose their jobs in the name of pension security. Forgive them if they complain that this is an odd sort of regulation.
Savers are under attack yet again
It is another body blow for savers, who are already suffering like never before during this continuing period of interest rates at an unprecedented low. The decision of National Savings & Investments to withdraw its popular index-linked products from sale removes yet another source of decent interest from the market.
Since NS&I is a government-backed savings bank, one can see why many savers are blaming the government for what appears to be a low blow. The problem, however, is that very government backing. The fact that the taxpayer stands 100 per cent behind deposits made with NS&I, unlike with private-sector banks and building societies, has given it an unfair advantage in its industry. When Northern Rock was nationalised, that advantage was exposed more clearly than ever, and all the state-backed institutions were forced to make commitments about not being too competitive with their private-sector rivals.
In NS&I's case, it has committed itself to a zero-funding target this year – that is, it has promised to take in no more money than savers withdraw. The index-linked accounts were jeopardising that promise so they had to go. Savers, like Uniq's pension-scheme members, are the innocent victims of a tough situation.
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