Tuesday, 24 March 2009


1 One of the key arguments against a stimulus package in Ireland is that additional public spending will leak out through imports. In other words additional consumption and investment by the State will suck in more imports and will have little impact on the economy. This argument is made quite apart from other considerations including the critical level of national debt, Maastricht rules etc.

2 The nature of Ireland's small open economy is said to be a break on any home-grown Keynesian stimulus response to the current collapse in consumer confidence. Sometimes, commentators refer to something in the order of 80% of GDP being accounted for by exports. This is misleading. GDP is the value of output in all sectors of the economy where output is measured as 'value-added' = final gross value minus inputs of labour, capital etc. In dividing exports by GDP we are not comparing clike with like. Exports need to be adjusted for factor input like GDP.

3 The CSO recently published Input-Output tables. In Table 5 of the tables (referring to 2005), the 'direct and indirect' import content of each sector can be seen. In many of the manufacturing sectors, the direct and indirect import content amounts to 40-60% of the value of output, or even higher in some cases. But the corresponding figures are a good deal lower in construction (26.5%) and in many of the service sectors - e.g. public administration and defence (12.7%), education (8.7%), health and social work services (16.2%). (There would also be further imports arising from the spending of the employees in these sectors, but these types of figures do indicate which sectors have relatively high or relatively low import content.)

4 Hence, any package aimed at boosting domestic consumption - especially if it is targetted at sectors such as education, health and social work services (exactly those areas of public spending most trenchantly criticised and earmarked for cuts) - can still have a significant impact on employment and consumption. A focused investment programme in labour intensive-infrastructure allied to upskilling would strengthen our human capital base in preparation for a recovery as help stimulate employment and, ultimately, tax revenue.

5 However, a stimulus in a small open economy does not work on its own. Crucially, intervention at the international level is an urgent necessity. Hence, the key to any 'New Deal' is:

  • international - especially European - coordination

  • targetting on areas of high social need (health, education, housing) and relatively low import content

  • prioritising labour-intensive projects in the Public Capital Programme

1 comment:

Michael Taft said...

This is a key argument in vindication of a stimulus programe - identifying those sectors with limited import density in which we can invest in. Another aspect would be to cross-link this with the domestic multiplier output which would show how much downstream activity is created by investment in any particular sector.

As to what people do with their money - there is the gross (and misleading) generalisation that people would spend their higher disposable income on cars, holidays in St. Tropez and rolex watches; all of which would be money spent outside the state. The fact is that one of the biggest increases in private consumption since 2000 occured in the personal, educational and rereational services (making up over a third of the total increase in non-housing consumption). This is money spent on domestic labour-intensive sectors, providing a health multiplier effect.