Friday, 7 August 2009

Reaction to Jim O'Leary

Jim O'Leary's article in today's Irish Times, arguing that "given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some reductions in public spending, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter", has generated quite a debate in the blogosphere. Michael Taft, of Notes on the Front and Progressive Economy, parses Mr. O'Leary's piece here, and it is also being debated on Irish Economy here.


Slí Eile said...

The Dublin Consenus admits no hostages. You have to sign up to spending cuts since There-Is-No-Alternative (words of Minister Harney yesterday morning on RTE1.

Jim O'Leary goes on to echo another claim that cutting public spending is less contractionary than raising taxes. He writes:

"Here the research suggests that adjustments that rely more heavily on spending cuts than tax increases, and where the spending cuts are concentrated on pay and welfare payments rather than capital spending, are not only more likely to be successful in stabilising public finance positions, but may also be expansionary of overall economic activity."

This conflicts with other important findings:
Cuts in public sector pay (as one major component of public spending) has minimal impact on borrowing. Recall that empirical work by the ESRI (April 2009) indicated a total reduction of 0.6% of GDP in borrowing in 2015 arising from a 5% nominal wage cut (other things constant) and only 0.2% in 2015 arising from a 5% cut in public sector wages. The data are summarised in Table 9 showing the impact of different policy measures. In the long-run the negative impact on GDP and borrowing is not much different as between tax increases and cuts in government investment or reductions in public sector employment or reductions in public sector pay (the negative impact of cutting investment is less in the long-run according to the ESRI results). These results are based on detailed multi-variate modelling using data over a long period in the past.

The dangers inherent in buying into the must-cut framework of thinking is that we would accept as self-evident the following:

* Total public spending as a % of national income is too high in Ireland (we need to move further towards Boston at least as long as we are in the present fiscal crunch)

* Some parts of public spending must be cut in the interests of some greater good -fiscal solvency, market standing and rules-based accounting

* Some parts of public spending represent poor value for money.

It is extraordinary how little firm evidence is produced to support the above - with the exception of the last point where, for example, Sara Burke has rightly pointed out that savings in some areas of the Health Sector (to take just component of spending) are possible and highly desirable - but not with a view to reducing overall spending on health but to divert it to other areas in a way that enhances access and overall quality of service.

WorldbyStorm said...

That's a key point you make there in your last paragraph. I have little doubt that in any entity, commercial or otherwise, it is possible to find savings. But to what purpose? Socially directed savings (and here, naturally, we have to be very careful that discussions aren't pushed down non-progressive routes) should be paramount.

Slí Eile said...

I agree. The bigger picture is this:
what level (or % of national income) of taxation is warranted in a society to provide a decent level of public service and income to its citizens given the overall size of its national income?
if revenues fall short of spending what level of borrowing is feasible and desirable over what period of time?
what political consensus is required to make this happen?