Deflationary Threat is Real and will lead us into deeper mire.

Paul Sweeney06/08/2009

Paul Sweeney: The revenue shortfall in last night’s tax revenue figures to the end of July is a hefty €575 million greater than the Department of Finance had forecast only three months ago. If this deflationary tax revenue trend continues, the Government will not meet its projection of €34.4 billion in tax revenues this year. Even more cuts will then be proposed by most economists and the commentariat. Deflation will really take off then.

The exchequer deficit has now grown to a staggering €16.4 billion at the end of July, up from €14.7 billion at the end of June. The deficit is almost €10 billion higher than it was this time last year. It includes €6 billion in payments to bail out failed private sector banks, in borrowed funds which will ultimately be from our tax Euros.

Consumers are holding back on spending – with a fall in VAT the main reason for the fall in taxes, followed by the income tax take falling, as people lose their jobs or see their total incomes curbed, with less demand.

Capital gains tax revenues are less than a third of what they were this time in 2008, while the stamp duty yield has dropped 64 per cent since last July. It had already fallen then, with the collapse in the Government-tax-incentive-driven and bank-driven property boom. This is the result of the utter folly of the government’s shift from income taxes and corporation taxes to consumption and property related taxes from the late 1990s onwards. It should be remembered that this shift was cheered by economists arguing against progressive taxes, i.e. those advocating low taxes on incomes and corporations, and high taxes on consumption.

With the huge borrowing requirement for both day to day and investment spending, it is not possible for Ireland to borrow more for a “Stimulus Package” as some believe, as a wide open economy.

But, on the other hand, the government could make economic deflation worse by massive cuts in public spending, especially for the vulnerable and low-paid, combined with increased taxes. Many of McCarthy’s recommended cuts should be rejected, particularly those which are especially regressive and those which have a deflationary impact.

Overall, the resolution of Ireland’s economic crisis will be especially difficult. It will be particularly difficult if many policy wonks neglect deflation, which - as yesterday’s figures demonstrate - is already with us. Economists who are now openly advocating deflation as an economic strategy are seriously misguided. If they win out, further deflation will lead us in to even deeper crisis.

Posted in: Banking and financeEconomicsFiscal policy

Tagged with: exchequer returnsbankingDeflation

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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