Growth is key to ending vicious circle of austerity

Opinion: The task is to reduce the deficit over time without harming recovery or causing long-term social damage

Participants in the anti-austerity march in Dublin in February organised by the Irish Congress of Trade Unions. Photographer: Dara Mac Dónaill

Participants in the anti-austerity march in Dublin in February organised by the Irish Congress of Trade Unions. Photographer: Dara Mac Dónaill


Writing in The Irish Times on Thursday, May 9th, Donal Donovan challenged critics of austerity to provide credible alternatives, “otherwise, their views remain assertions, insufficiently supported by analytical reasoning . . . ”.

Everyone agrees that government deficits need to be reduced over time. The crucial question is how and when.

The challenge is to reduce the deficit without harming economic recovery and causing long-term social damage. This point has been taken up by a number of commentators, including President Michael D Higgins and European Commission head José Manuel Barroso. Reducing the deficit is a much more complex business than that of budget accountancy where “savings” are assumed to equal “cuts”.

If “savings” actually equal “cuts” then Ireland might be running a government surplus. Instead, after €28 billion of fiscal “effort” the underlying government deficit (excluding bank bailouts and bank levies paid to government) has fallen from 11.5 per cent to just 8.6 per cent in four years. There has been a huge degree of pain for relatively little gain.

A recent proposal for an additional “saving” of €1 billion in the public sector pay bill has been projected by the Nevin Economic Research Institute (Neri) to reduce the government deficit by just €250 million in a full year. This is because most of the “savings” on the Government spending side in the case of this specific proposal are lost either directly through income tax, universal social contribution and other State deductions or through falling retail sale taxes and loss of jobs in the private sector.

More generally, because “your spending is my income and your income is my spending” across the economy as a whole, measures to cut capital spending, social welfare and pay – in private and public sectors – serve to depress the economy.

The alternative is to minimise further harm by focusing the fiscal consolidation on job creation, income distribution and maintenance of priority public services – all of which have been undermined as a result of five years of consecutive austerity budgets.

Rising incomes
The key to deficit reduction is growth. Growth is generated by a combination of measures including rising incomes, higher consumer spending, export growth, cost control, innovation and investment in Ireland’s infrastructural deficits.

The Government has some space to reach the 3 per cent government deficit target by reducing the size of the fiscal consolidation and compensating for this fiscal slack by means of an accelerated investment stimulus. The promissory note deal in February was meant to afford €1 billion of fiscal easing in 2014-2015. This has been dropped, as new data from the Department of Finance indicates no relief whatsoever in the scale and timing of consolidation in 2014 and in 2015.

Neri has already proposed a targeted, frontloaded, strategic and temporary investment of €15 billion over five years with funds coming from a mix of three sources: public, private and European/international sources. The recent improvements in the cost of commercial borrowing, along with initiatives by the European Investment Bank to increase lending to small and medium-sized enterprises, along with the increase in cash balances in the course of 2012, have improved conditions for investment.

At least some progress should be possible through use of the proceeds of the sales of Bank or Ireland and Irish Life equity/bonds to bring forward an investment initiative in late 2013/early 2014. The main bulk of a five-year stimulus could be phased in gradually as projects are carefully evaluated and subjected to cost-benefit analysis.

An immediate start could be made by taking 1 per cent of exchequer and National Treasury Management Agency cash balances to fast-forward track investment in 2013.

On the revenue side emergency legislation could be enacted to bring forward some of the pension cap measures announced for 2014 in the 2013 budget. The average or effective tax rate, which remains below 40 per cent, could be raised further by terminating or curbing tax breaks which serve limited economic or social purpose.

In a paper presented to the Dublin Economics Workshop in October 2012 Neri presented the results of macroeconomic modelling which projected a deficit of under 3 per cent of GDP in 2015, based on:

A total consolidation of €2.7 billion instead of €3.5 billion in Budget 2013, of which 85 per cent would be in revenue measures targeted at high-income and high-wealth households; and
An annual average additional capital spending injection of 1.5

per cent of GDP over a six-year period.

A tax-based consolidation allied to an investment stimulus could return Ireland to fiscal stability far sooner and be less destructive in terms of GDP growth and employment.

Under an alternative fiscal strategy for the period 2014-2017 it could be possible to peg public spending at close to EU (and not Nordic) levels, together with a graduated increase in the share of general government revenue in GDP.

A combination of these measures could see a quicker return to growth than under the current front-loaded austerity policy and could see Ireland reach a government deficit target of 3 per cent or lower in 2015, even on the basis of a slow international recovery.

By reducing the deficit through growth measures there is no necessary addition to overall debt levels if the additional investment is funded “off balance sheet”.

Adjustment period
However, if growth proves lower than expected and especially if international conditions deteriorate sharply there is every good reason for EU member states like Ireland to seek an extension in the adjustment period.

There are more economically sound and more socially just ways to “balance our books” without adding to the burden of debt. The choice is ours.

Dr Tom Healy is director of the Nevin Economic Research Institute

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Screen Name Selection


Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.