Is austerity the best policy?

Sat, Jan 28, 2012, 00:00

In a letter to ‘The Irish Times’ last week, 60 prominent figures in public life argued that the current programme is not working. Are they right? FIONA REDDANcanvasses opinion at home, and DEREK SCALLYasks some experts at the World Economic Forum, in Davos


Research professor at the Economic and Social Research Institute, currently on secondment to Trinity College Dublin, and member of the Irish Fiscal Advisory Council

Is austerity working?It’s not clear yet that it’s not working, but neither is it clear what the choices are. Clearly we are working in the context where we are being funded by the [ECB/IMF/EU] troika. If we were to say we don’t like this austerity, they could say, ‘Fine’ – and withdraw the funding. Back in early 2011, austerity was working, as the economy was growing. Now the international climate has changed. Austerity hasn’t been given the place to work because of these other difficulties.

Could there be an alternative through increased public spending?If we were to reverse our policies and go on a spending splurge, it’s not clear that the troika would say, ‘That’s fine.’ We thought Ireland’s best way out was through external demand. Traditionally it has always been the route for growth in Ireland, and this could spill into the domestic sector. What you need is an increase in demand. There is a very limited alternative: the only debate is around the speed of adjustment of austerity, which is a pretty difficult judgment exercise.


Head of policy with the Irish National Organisation of the Unemployed

Is austerity working?No. If we keep deflating the economy, we’re not going to get the growth that in time will lead to jobs growth. Export-led growth does not have the same kickback to job creation. Unless we start to generate economic activity, unemployment will not be coming down.

Why not?We have an extraordinary number of people who are still unemployed. Austerity leads to a downward spiral: things won’t bounce back in two years. We need to start looking at alternatives.

What might an alternative be?Could the money we are paying back now be invested in our future to generate greater income to pay back our debts? We still have skills gaps, so we need to look at investing in training. If we seriously invest in job creation, we will have the right skill sets to access the jobs that will be created, developed and maintained. I have great concerns that it’s not being done now.


Head of European interest-rate strategy at Société Générale in Paris

Is austerity working?I would refer to it as deficit reduction. It’s about getting the deficit down and engaging in belt-tightening. The overall impact on the economy is negative, but only in the short term. It’s a very big project that will take years and has many building blocks. The NTMA’s bond exchange on Wednesday was just one more building block in that process – one positive element of it. Getting the bond exchanged from 2014 to 2015 gives Ireland another year’s grace and is a sign of normalisation.

Could an alternative be a stimulus package in tandem with deficit reduction?Given that Ireland is a small open economy, a large stimulus could flow abroad to UK and European economies.

What about holding back on bond repayments?Virtually all of the banks’ bonds have now been socialised. Repayment of the remainder supports Ireland’s reputation for relatively small amounts, thus allowing the NTMA to engage in the exchange operation seen on Wednesday. It would damage Ireland’s reputation for a very small amount. Although satisfying in terms of principle, it’s not worthwhile fighting over it any more.


Senior economist at Roubini Global Economics, London

Is austerity working?It is and it isn’t. It’s working in that we’re getting some gains in competitiveness in Ireland, but this has meant that all of Ireland’s economic growth has to come from exports, with the domestic economy lagging. This was okay as long as the global environment seemed reasonably buoyant, but that’s already turned. With no growth, the debt burden is unsustainable.

Then why should Ireland keep taking the medicine if the medicine isn’t curing the patient?More important to Ireland is its relationship with the EU: Ireland needs to do whatever it can to sustain that. If Ireland thinks about a growth story, it will need to rely on exports – and on multinationals to generate them.

Is there any alternative?[Ireland] could renege on its debts, and the Government could say it won’t pay. But this would have very big consequences at EU level. While it seems reasonable that Ireland might get some sort of debt relief, the troika has held Ireland up as a model student. So if it is to say, “Okay, maybe this isn’t actually working and Ireland does need some assistance,” then it’s saying its own policy is wrong. It’s a good sign that Government bond yields have fallen below 7 per cent for the first time in ages, but I don’t think debt-servicing costs will come down to a sustainable level. If Ireland has to return to the markets in 2013, it is likely to seek a bailout or bail-in [debt reduction]. There is a fighting chance that Ireland can eventually grow its way out of it – but I think the time is too short for Ireland to turn it around.


Chief executive of Eneclann, a history and heritage company based in Trinity College Dublin, and signatory to last week’s letter

Is austerity working?No. From a business perspective it’s a disaster, and it’s depressing a recovery because consumers can’t buy and are in no position to buy. An austerity programme on top of a recession is disastrous. The intelligent thing for a government to be engaged in right now is to support consumer confidence by spending money. But it’s stuffed because it’s in a position where it has assumed responsibility for a debt that’s not of its own making. The problem is that we have socialised debt, and the financial institutions that invested that money are refusing to take responsibility for their own errors of judgment. If any rational small or medium-sized business makes an investment that goes badly wrong, no one bails it out. It makes no sense.

Is there an alternative?We should repudiate any responsibility for bank debt and use the money to try and kickstart the economy. Any company raises investments to lay down a plan for the future. What is the benefit of being the poster child of debt? We’re not at school here: we’re trying to run the economy. You don’t end up being bullied into a position. You can’t be stupid and mortgage your entire country’s future on financial institutions’ speculative investments. Personally, I find it obscene that taxpayers are responsible for private speculative debt. It’s like a stockbroker gambling on the market and turning around to the Government and saying, “Bail me out.”


Global strategist with Davy stockbrokers

Is austerity working?Austerity is a process that takes time for the benefits to be seen. You take the pain before you get the gain. There’s pain from austerity but there is gain: economically in export markets and financially in bond markets. Ireland has been obliged to take the pain of significant fiscal adjustment since 2008, and we’re not finished yet. But, looking at the situation in 2011, €6 billion was taken out of the economy, representing 4 per cent of GDP, and yet our expectation is that you will see calendar growth of 1.2 per cent in 2011.

Could defaulting on debt be an alternative?Default is no alternative. We would be left high and dry with no one prepared to fund us.

Will austerity see Ireland getting back to the markets in 2013?Ireland was already back to the market on Wednesday in the NTMA €12 billion bond exchange. The perception of austerity is felt more rapidly in financial markets than in the real economy. If the markets see the integrity of austerity being sustained they are more than willing to reward that, by rerating the bonds of that country. Already our borrowing costs are in a 5-7 per cent zone, compared to those of Portugal at about 15-19 per cent. We have the ability to recover more quickly and dynamically than Portugal.


Professor of economics at University College Dublin

Is austerity working?The Government is spending a lot more money than it is taking in, and austerity could be defined as trying to close that gap. Is there room for a stated policy where we want to widen that gap? Anyone who proposes that is duty-bound to say where we would get the money. Austerity has had negative effects on the economy, but just because it hasn’t led to the progress we might have liked in terms of reducing the deficit, that doesn’t mean that doing it 100 per cent differently would be any better.

Is there any alternative?There is a question of whether or not there could be a set of one-off initiatives of spending money on something labour-intensive to try and counter the underlying process. But our levels of debt are so high that it’s not clear that we have enough wriggle room to spend any money. Some people suggest closing the deficit by taxing the rich, assuming there is a big pot of gold out there from the rich. But the vast majority of money comes from the big middle.


Professor of economics at the National University of Ireland, Galway

What’s wrong with austerity?The central problem is that when you’re in a recession, inadequate amounts of spending plus an austerity programme simply deepen the recession. The last thing the Government should be pursuing is a policy of drastically reducing spending.

But will austerity not succeed in reducing the deficit?In periods of recession or depression the only way to bring debt down is to kickstart growth. Admittedly the troika does put a limit on the Government’s options, but it needs to be much more agressive in negotiations. The only way debt has ever been paid down historically is through regeneration of growth. If the Government cuts back on spending, it slows the economy and leads to a direct hit on its revenue. We will be very lucky if the current low domestic demand and high unemployment don’t get worse. Continued stagnation is really the best scenario we’re looking at.

A view from Davos: 'Raising taxes in a deep recession is always a bad idea'


Professor of economics at the Stern school of business at New York University, and cofounder and chairman of Roubini Global Economics

Ireland shouldn’t be an experiment and should get debt relief. You socialised all the private losses of private banks and now your debt is more than 100 per cent of GDP. Ireland needs debt relief.

Austerity is going to lead to even more recession because raising taxes and capping government spending at a time of deep recession is always a bad idea. We need more growth and less austerity in Europe.

Without growth, eventually the social and political backlash against austerity will become overwhelming. You try to stabilise debt to GDP, but if GDP keeps collapsing, the debt ratio goes through the roof.

Ireland and the euro zone need less austerity and more growth. We need massive monetary easing from the European Central Bank.

A view from Davos: 'Why should you have to give up health and education to make good on a bank?'


Nobel laureate and economics professor at Columbia University, New York

There have been almost no instances of successful austerity. The question is, is there any similarity between the one or two instances when it did work and Irelands situation? The answer is no. The only times they worked tended to be when there was a weak country with a strong trading partner, and typically with a flexible exchange rate. You have a fixed exchange rate and a Europe in recession. The prospect of austerity working in Ireland is very bleak. The list of countries where it failed is long; the probability of failure is huge.

So why do it? There’s going to be peer pressure from the creditors, who say if you don’t do it all hell will break loose. But, whenever it’s tested, it’s never true. Russia defaulted and was back in the market a short time later, and that was a government defaulting. This is socialised debt from an unsecured creditor.

I’m very sympathetic to the Irish people. Anti-European feeling is emerging in all countries on the periphery where other measures are going on. They value being part of Europe but they resent this.

[Anglo] was a private bank, so why should taxpayers have to give up health and education to make good on a private bank?

A view from Davos: 'Where is the investment in the future?'


Catholic Archbishop of Dublin

In Ireland we’re facing a single value now, and that is austerity. Single issues never work. Dealing with the future of Ireland through austerity alone is a very blunt instrument.

We hear a lot of talk about growth with equity, but what does it mean? How do you ensure that the equity reaches the right people? I visited a school in Dublin last year in a deprived area where, for the first time, no child was absent for more than 15 days between summer and Christmas. But now the school-parent liaison officer that made that happen has been let go. To get equity alongside growth you have to find focus.

The money has to be spent properly and that means cutting back; there’s no way around that. But one has to constantly measure what are the real effects and who are the cuts affecting. Where is the investment in the future, in employment? Investment in education was the key to growth in the past.

Everybody knows growth with equity is better than growth that creates imbalances or instability, but where are the economists writing about this? Is this only to be done at moments of crisis? I’d argue that it cannot be done.

What the Department of Finance says

The Government is committed to putting our economy and public finances on a sustainable basis. Assisting the private sector to create jobs is our primary goal. We are broadening our tax base to ensure that we have the available funds to pay for the high-quality public services our citizens require.

Since the last review the 2011 exchequer returns confirmed that we comfortably met the deficit targets in the programme, and we have introduced a budget that continues this sustainable path for our deficit.

The Department of Finance is speedily implementing the budget measures that are targeted at key growth sectors within our economy. The Government will be shortly setting out additional measures under the Pathways to Work initiative and the Action Plan for Jobs.

At the end of 2011, excluding the banking-related measures, the exchequer deficit – that is, the gap between income and expenditure – was more than €15.3 billion, down from just over €18 billion in 2010. By end 2012 the gap will be reduced to €13.65 billion.

The programme of support is providing the country with the space to reduce this gap over time, rather than in one year, and ensures that we are in a position to provide public services, pay pensions and provide social-welfare payments.

The Government strategy to reduce this gap is set out clearly in the medium-term fiscal statement, and under the plan we will make a budgetary adjustment amounting to a total of €12.4 billion over four years, reducing our deficit to under 3 per cent in 2015, in line with our commitments.