Michael Taft: Over the next few days there will be considerable analysis of the ESRI’s current quarterly review (password required). I’d like to highlight just one projection – the rising annual deficit.
There are two things to remember: the one and only goal of Government fiscal strategy has been to contain the deficit. They have set no targets for job creation / retention, investment, consumer spending or even a timeline on shortening and lessening the impact of the recessionary dive. The exclusive objective of fiscal policy has been to contain the deficit.
In keeping with this strategy, the Government brought in the supplementary April budget out of fear that the deficit would rise to -12.75 percent. Only weeks earlier, they had published the Addendum where they had set a 2009 deficit target of -9.5 percent (this itself was a downward revision of a target they had set, yet again, only weeks previously in the October Budget – a target of -6.5 percent).
The April budget’s measures, combined with the earlier pension levy, was intended to contain the annual deficit at 10.75 percent for this year and next year – winding down to the Maastricht threshold of -3 percent by 2013.
So what is the ESRI projecting for this year and next? In 2009, they project the annual deficit to be -12.9 percent. That is considerably above the Government’s target for this year. In 2010, the deficit will remain pretty much the same, -12.8 percent.
While we may debate the benefits of varying fiscal approaches, there is one thing that stands out: the Government has failed to achieve the one and only target it has set for itself. It has failed – by a wide margin – to control the deficit. Simply put, its fiscal strategy is not working.
This has significant implications going forward. Government strategy has been to hold the deficit this year and next at 10.75 percent. Over the following three years they intended to reduce this deficit to -3 percent – closing the deficit by 7.75 percent. This was always going to be a big ask. However, if the Government persists with their failed strategy, they will be starting from a worse position. If the ESRI projection holds, the Government will have a -9.8 percent gap to close in three years. With the deficit going in the wrong direction – what chances of reaching the Maastricht guideline by 2013?
ICTU’s David Begg received a lot of criticism for suggesting the target date for Maastricht compliance be postponed a few years. Whatever about the desirability of this proposal (and I believe it is highly desirable), the fact is this is going to happen anyway on current trends. To attack someone for espousing a common sense position shows the extent of denial that is at work in Government circles and among certain commentators.
Perversely, though they won’t admit this, the ESRI vindicates the progressive critique of the Government’s fiscal policy. The ESRI supports the continuation of further fiscal correction. In their projections they have factored in a €4 billion correction – made up of tax increases combined with current and capital expenditure cuts (they acknowledge that now the burden will fall more on spending cuts). What is the result of this €4 billion cut in spending and people’s disposable incomes?
In 2010, the annual deficit will be reduced by 0.1 percent, or nominally by €550 million. €4 billion in cuts to achieve a reduction of €550 million only proves the old adage: pursuing deflationary policies in a recession is like running in quicksand – you use up a lot of energy, you tire yourself out, but you still keep sinking.
Even more provocatively they make the following observation:
"The consequences of such a further sharp correction are, by our estimation, significantly deflationary. Were there to be a neutral budget in 2010, then our estimates would suggest that the recovery in GDP would occur much earlier in the year leading to positive growth in GDP for the year as a whole".
In essence, they admit that the fiscal correction planned by the Government will be deflationary. More importantly, it will lengthen and deepen the recession. If these cuts didn’t proceed, the recession would not only end much earlier – but the economy would be in overall growth for the year 2010 (if the correction go ahead, GDP will fall by -1.1 percent and GNP by -1.7 percent next year).
To get around this, the ESRI takes up a ‘straw-person’ argument. They pose only one alternative to their preferred deflationary strategy – a revenue-neutral budget; that is, a budget that doesn’t take out any money from the economy. However, no one realistically believes that any Government should sit on its fiscal hands and let the recessionary fires burn themselves out. Too many other things in the economy would be burned down as well.
The alternative, as outlined at the recent TASC conference, is to pursue an expansionary fiscal policy based on crucial investment in our economic base – investment that we would have to make in any event if we want to improve our competiveness and productivity going forward.
The ESRI doesn’t refer to this alternative, never mind model it. Whatever (though I would have thought that one of the most important roles an institute can do is provide a range of alternatives with an accompanying fiscal and economic assessment).
We are, therefore, only left with one course – a deflationary course. And as the ESRI report shows – it is a failed course.