Austerity without growth a guarantee of stagnation

OPINION: IN MARCH 2010, writing in The Irish Times, 28 economists, social scientists and economic analysts – including many …

OPINION:IN MARCH 2010, writing in The Irish Times, 28 economists, social scientists and economic analysts – including many of these writers – warned that an economic approach based on spending cuts combined with tax increases on low and average earners would bring about a low-growth, high-debt and high-unemployment future.

Instead, they argued for an investment strategy designed to generate employment in the short term, while addressing Irelands serious economic and social deficits in the medium term. This, they argued, would help bring about a job-rich recovery and fiscal stability.

Two years and two austerity budgets later, the economy is still stagnating, employment is still falling while debt is still rising. Ill-considered cuts are further degrading our social and economic infrastructure. The policy response to the unemployment crisis has been inadequate.

The Government forecasts that more than one in 10 of the workforce will be unemployed in 2015. The trend in long-term unemployment is particularly worrying as is the increase in income inequality. Nearly one in four now suffers various forms of deprivation. Yet, Ireland still remains unlikely to achieve its 2015 deficit target.

At a European level, instead of addressing the roots of the crisis – continuing instability in the financial sectors, unsustainable debt burdens and the flawed design of the euro zone itself – policy focuses on enshrining austerity through the proposed fiscal compact. The oppressive structural deficit target, in particular, will further depress growth in the euro zone and, in Ireland’s case, trigger continuous austerity until at least 2018.

The evidence is clear: contractionary fiscal policy does indeed restrict economic activity and employment.

The austerity-focused policies being pursued in Europe and in Ireland will continue to drive down employment and living standards, while embedding high levels of long-term unemployment in the economy.

Instead, we need to embed growth and jobs into the economy. This will require a fundamental change of policy at the European and Irish levels. Recent job creation initiatives, while welcome, only deal with the supply side of the problem, with virtually no additional measures aimed at the other side of the problem – increasing the demand for labour through investment which will in turn provide a much needed boost to the domestic economy.

Sustainable jobs-rich growth requires investment to increase the productive and innovative capacity of the economy. Education, labour skills and infrastructure must form the focus of such a recovery-centred investment programme. Pre-primary education, upskilling, next generation broadband, research and development and renewable energies – these types of productive investment can result in new economic opportunities, enhanced social equity and environmental sustainability.

These are also the areas where we continue to lag behind many of our European Union neighbours. They offer opportunities to genuinely enhance the economy’s competitiveness, which is about much more than labour costs.

Such investment must be accompanied by policies that support the incomes of low earners and reduce poverty – thus helping boost the domestic demand on which businesses rely.

The remaining money in the National Pension Reserve Fund (€5.4 billion) should be used to fund such investments, and we should proactively lobby at European level for a dramatic expansion in the lending capacity of the European Investment Bank. Private pension funds are also a potential source of financing commercial-return investment. Consideration should also be given to utilising a portion of the €15 billion held by the Government in cash and other assets.

We can also employ the strength of our combined public enterprises – their off-balance sheet borrowing and investment capacity – to invest in our infrastructure and create new indigenous enterprises, both public and private. This will require a new approach to our state assets – utilising them as strategic components of a 21st century industrial policy rather than as assets to be sold off for short-sighted once-off benefit.

Such an investment programme must be accompanied by “smart” fiscal consolidation, focusing on the least contractionary forms of fiscal adjustment. This requires progressive and equality-proofed taxation targeting high-income groups, property assets, unproductive activity and passive income, as well as environmental measures.

In the medium term, we should explore the potential of social insurance and local taxation to broaden the tax base while providing real benefits in return. PRSI can be expanded and combined with general taxation to provide free universal healthcare and earnings-related pensions. Stronger local taxation has the potential to be more accountable while providing investment in services responsive to local needs.

On the expenditure side, there needs to be a continued focus on increasing productivity and efficiencies in the public sector. Other countries have shown the contribution that employee-driven innovation (in public and private sectors) and flexibility can make to reducing costs and increasing output – and how much more effective this is than crude top-down measures.

Current policy and actions are compounding the problems engendered by the fiscal crisis. Neither the Irish nor the European economies can afford to continue along this failed path.

We need sophisticated strategies which will embed growth rather than stagnation and decline into the economy. We must pursue evidence-based fiscal consolidation while ensuring that all share in the fruits of recovery.


Prof Bernadette Andreosso, Dr Sheila Killian, Prof Peadar Kirby, Dr Michelle O’Sullivan, Joseph Wallace, University of Limerick; Dr John Barry, Queen’s University Belfast; Brendan Bartley, Dr Proinnsias Breathnach, Prof Rob Kitchin, Dr Mary Gilmartin, Dr Mary P Murphy, Prof Seán Ó Riain, NUI Maynooth; Michael Burke, economic consultant, London; Dr Tom Healy, Dr Michéal Collins, Dr Rory OFarrel, Nevin Economic Research Institute; Prof Gerard Hughes, Peter Connell, Dr Jim Stewart, Prof James Wickham, TCD; Dr Sheelah Connolly, Prof Terrence McDonough, NUI Galway; John Corcoran, Limerick Institute of Technology; Dr Daryl D’Art, DCU Business School and UL; Dr Roland Erne, UCD; Prof David Jacobson, Patrick Kinsella, DCU; Dr Nat O’Connor, Tom McDonnell, Sinéad Pentony, Tasc; Tony Moriarty, Michael Taft, Unite; Dr Tom O’Connor, Cork Institute of Technology; Dr Colm O’Doherty, Tralee Institute of Technology; Dr Michael O’Sullivan, author; Odran Reid; Paul Sweeney, Ictu; Prof A Dale Tussing, Syracuse University (US); Colin Whitston, National College of Ireland