Government policy risks severe deflationary shock


OPINION:A short, sharp correction is too simplistic and could collapse not just public service provision but the whole economy, writes DAVID BEGG

IN THE current discourse about the economy we must never forget that real people are suffering, especially those who have lost their jobs. There are now 428,000 people on the live register. The corrosive effect of this – the risk of long-term unemployment and the pressure on the public finances – emphasises the need for a holistic approach to the crisis.

Simplistic solutions like the short, sharp correction don’t cut it at all. Jobs, their protection and creation, must be at the heart of everything we do. It is important to realise that finding a way out of our current crisis is not just an economic challenge. A country is much more than an economy and it is this point of departure that motivated Ictu to launch the Get Up Stand Up campaign.

This is a political-economy challenge of the first order. The National Economic and Social Council has rightly identified five sub-crises – economic, fiscal, banking, social and reputational – which cannot be dealt with in a partial or sequential way. Our Better, Fairer Way document offers an alternative solution on these lines.

The response of most governments to the global recession is to try to compensate for a decline in private sector activity by means of a public stimulus. Because of the unique failure of the banking-developer nexus, and the imprudent reliance on property-related transaction taxes, a large segment of our tax base has evaporated. Thus we have not reacted with a stimulus in response to unemployment as other countries have. In fact, public policy is focused on reducing the public sector.

From recent discussions it is clear that these problems are viewed through different prisms by Government and Ictu. In a nutshell the Government intends to cut €4 billion from public expenditure in the forthcoming budget. This is a major change in policy since April, when the stated intention was to achieve this adjustment through a combination of tax increases and expenditure cuts. The intention is also to restore public borrowing to a level of 3 per cent of GDP by 2013. This is highly unrealistic and potentially catastrophic. It runs the risk of imparting a severe deflationary shock to the economy which could precipitate a prolonged slump, as happened in Japan during the “lost decade” of the 1990s.

There is an alternative; it will not prevent pain and hardship, but it is better and fairer.

There is no iron rule which says that the adjustment has to be completed by 2013. Whatever other problems Ireland has, it has at least entered this recession with the lowest debt-to-GDP ratio in Europe. The Bruges Group, a centre-right policy body, recently published a paper forecasting that the average debt-to-GDP ratio in the EU would rise to 90 per cent and that several countries would exceed that. So we have some headroom to temporarily increase borrowing. The Bruges paper suggests the desirability of a co-ordinated EU effort to get the average figure down to 75 per cent again by 2020. This is an even longer timescale than we would suggest.

I do think it is instructive to look at how Britain is handling a similar challenge, although one larger in scope because they have to achieve an adjustment of £100 billion. Current treasury policy is to make the adjustment over eight years. Both the Economist and the Financial Times have opined that fiscal tightening (cuts) should not begin until the economy has started to recover. This is the context in which we have proposed elongating our adjustment period until 2017. To force a quicker pace runs the risk of not just collapsing public service provision in key areas, but of collapsing the economy. The Government is playing for very high stakes here, and they are playing with our chips!

The Better, Fairer Wayalso involves progressive taxation. It is believed there is currently €1.8 billion out there in uncollected taxes. Moreover, the huge windfall gains made during the boom cannot all have evaporated. It stretches credulity to suggest that they have. It is also worth noting that Britain is introducing a 50 per cent rate of tax for very high earners. Nothing, except ideological blinkers, stops us from doing the same here.

We cannot see this process solely as an economic issue; in fact, the social dimension is far more important. We need to create space for ourselves as a society to engage with the crushing problems of unemployment, home repossessions and the collapse of private sector pensions. The Better, Fairer Way has proposals on these, including keeping people in jobs by means of Government-supported worksharing. Germany has successfully pioneered this approach and has kept 1.4 million people in employment, a fact that played no small part in getting Angela Merkel re-elected.

There is no pain-free way out of our difficulties, whether in the private or public sectors. But what we can do is ensure that the heaviest burden is borne by those with the broadest shoulders.

David Begg is general secretary of the Irish Congress of Trade Unions. He is also a governor of the Irish Times Trust, proprietor of The Irish Times

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