‘Austerity’ should not be confused with pragmatism
Sticking to budgetary adjustment plans has been the key to restoring international credibility
In the current global debate, advocates of less fiscal restraint have portrayed their opponents as advocates of “austerity”. True, there are some ideologues who find virtue in a frugal approach to economic policy on the national level, but for the most part, the real policy debate is more technical. The question for economies such as the US, UK and Germany really is whether spending a little more now will boost economic activity now by enough to compensate for the drag that additional debt could impose in the future.
For Ireland today, working (as Britain was in 1945) close to the limits of available borrowing, the question is a bit different again. By accessing long-term low interest loans from foreign official sources, Ireland has managed to maintain a higher level of domestic spending over the past three years than would otherwise have been possible.
This is not the “austerity” Keynes was castigating, but mirrors the middle-ground solution that he fell back on, when his appeals for charity fell on deaf ears. Rather than to any ideology of austerity, it is to pragmatism that we should look in planning the pace of spending and tax adjustments. There is a limited margin of manoeuvre with regard to overall borrowing (I do not speak here about the balance of different spending programme and tax choices within the overall adjustment).
Scale of adjustment
But within that margin, should the adjustment be slowed? This question needs to be answered by reference to the likely impact on both the level of future private spending and on the available volume and cost of future government borrowing.
Private consumer spending has been deterred not only by the compression in household disposable incomes, but also by uncertainty about the duration of the fiscal contraction and about where it will hit. The sooner the fiscal adjustment is completed, the sooner these elements of uncertainty will be removed, paving the way for reduced private saving and increased consumer demand flowing into the local economy.
Likewise, the steady course charted both by Irish governments since 2008 in sticking to their budgetary adjustment plans has been the key to restoring international lender credibility, allowing the adjustment to be accomplished more gradually than has been required of other stressed countries.
Current budgetary policy should not be seen as reflecting pursuit of an ideological agenda of “austerity” externally imposed. On the contrary, Ireland has shown pragmatically that it can regain full autonomy and control over its public finances. The faster this is done, the sooner we can get back to steady growth in employment and output. It makes sense.
* Benn Steil, The Battle of Bretton Woods, Princeton University Press, 2013.
Patrick Honohan is governor of the Central Bank