Peter Connell: The mini-budget that we can look forward to in three weeks time will, I’m sure we’ll be told, ‘constitute a necessary first step on the road to economic recovery’. It will ‘position the economy to take advantage of the global upturn when it happens’. Apparently, the budget will ‘give us a renewed confidence in our ability to see out the recession’ and encourage us to go out and spend for Ireland. But wait, isn’t it also supposed to extract €4 billion out of the economy in the form of taxes rises and public expenditure cuts? And this is on top of the €2 billion in cuts already in place. So how will this piece of magic work? You take €6 billion out of people’s pockets but, somehow, they’ll feel more confident about the future and start spending their money.
The answer is – it’s all down to expansionary fiscal contraction. The theory is that cuts in public spending will lead citizens to believe that taxes will also fall and, on that basis, private spending will increase. In the current Irish context, given that there is a commitment to raise taxes, the most we can say is that consumers will belief that taxes will rise less than they might otherwise do if public spending were not cut. Some economists argue that expansionary fiscal contraction helps to explain the turn around in the Irish economy after 1987 when net government borrowing fell as a percentage of GDP from 10.4% in 1983-86 to 4.2% in 1987-90. Average GDP growth rose from 1.9% in the first period to 5.7% in 1987-90. QED. Well, maybe not. It’s now generally accepted the post 1987 recovery had a lot to do with external factors including falling international interest rates and an upturn in the global economy.
The point is that we need to be as clear as possible about the impact of a combined €6 billion cut in public expenditure and rise in taxation. Has anyone done the sums yet on the impact on government revenue? On how many businesses will be forced to close that otherwise might survive? On the damage that will be inflicted on the productive capacity of the economy? To what extent will the provisions of the mini budget deepen the real crisis which is in the real economy? The government appears to have made an absolute commitment to keep the deficit in 2009 below 10% of GDP, hence the mini budget. Across much of the media the need to stick to this figure is accepted without question. Given the likely impact of that budget in three weeks time on all our futures the public discourse needs to move to another level.