Sunday, 18 October 2009

IMF tanks in the square

Michael Taft: In the end-of-year round-ups, a number of Ministers will win prizes for the most absurd comments on the economy.  Minister Mary Coughlan’s declaration that the Government had the fiscal crisis under control – only weeks before the emergency April Budget – is a cert.  Minister Lenihan’s comments on the construction sector shortly after he was promoted (‘game over, game over’) – that’s a prize winner, too.  For me, however, the award for most irresponsible and insulting comment should go to Mary Harney and her latest claim:

‘Minister for Health Mary Harney said yesterday, that if the Government did not cut public expenditure by 30 per cent “then others will come in, like the IMF, and overnight they will make decisions.’

In other, slightly democratic regimes, the threat of tanks in the street is used to shut the public up. Here, Harney’s IMF serves the same purpose. Different tank design, same effect.

Just to show how detached Minister Harvey is from any economic planet in the known universe, she made her comment on the day that the Retail Sales Index was published by the CSO.  They don’t make for happy reading.

Since the huge decline in April, retail sales have struggled.  Slight increases in sales volumes have come at the cost of deflationary price-reductions. Still, following the April decline, the summer wasn’t as bad as many feared. Until August came around.

In August, much of the volume gains of the previous three months were wiped out while, in sales terms (and that’s a key element of whether an enterprise stays in business), the Index took another sharp turn south, representing the second biggest monthly decline this year.

It would have been worse had it not been for pharmaceuticals and cosmetics remaining relatively buoyant. And, what Ulster Bank analyst Lynsey Clemenger called the IKEA affect. The opening of the hyper-store resulted in a big – and temporary boost to furniture and lighting sales. Take those out of the equation, and things get even bleaker.

People have been inundated with Ministerial claims that we are living beyond our means (translation: living standards will have to be cut). Now they hear a chorus of assertions that billions more will be cut.  People don’t need to study multiplier effects to know what this will mean. But let’s do a couple of calculations.

The ESRI projected that cutting public sector wages by 5 percent and cutting the public sector payroll by 17,000 would represent a reduction of €2 billion in total.  Never mind that this wouldn’t produce much in savings (by the second year, the borrowing requirement would fall by a mere -0.4 percent). What would it do to private consumer expenditure?

•    In the first year consumption would fall by -1.3 percent rising to -1.9 percent in the second year.
•    In money terms, this approximates a fall of €1.1 billion in the first year, sliding to slightly over €1.5 billion.

That’s a big hunk taken out of spending.

This fall will have repercussions.  Enterprises selling goods and services into the domestic economy will continue to struggle with all the deflationary knock-on in terms of jobs and wages. From a fiscal perspective, this will continue to have a dampening effect on VAT and, therefore, on public finances. The Government is preparing policies that will depress consumer activity and tax revenue.

That’s bad enough. But Commandant Harney’s prediction of tanks in the street is a red flag – loss of economic sovereignty, more years of austerity. You couldn’t promulgate a better scenario to ensure a further retrenchment of consumer activity. Cuts and tanks? I know I’ll be salting it away.

Still, let’s try to find a silver lining. If the Government proceeds with their failed deflationary strategies then maybe we should welcome the IMF – not as conquerors but liberators. We could ask them to do the one thing that would boost our economic prospects and begin to bring the deficit under control:

Overnight, please take away this government and give us a chance to elect a new, progressive one – a government filled with Ministers who know what the hell they are doing.


Slí Eile said...

@Michael This whole IMF talk is the stuff of scare tactics. Stiglitz recently referred to intimidation.

PNee@ said...

>People don’t need to study multiplier
> effects to know what this will mean.

Are you suggesting that we don't cut public sector wages simply to prop up consumer spending? Sorry, that's not what I want my taxes being spent on.

As for the multiplier effect - I'm sure I don't have to tell you that its impact on small open economies like Ireland it not all it's cracked up to be. How much of that consumer spending will eventually wend its out of Ireland to foreign multinationals?

Michael Taft said...

PNee - I'm not suggesting that we don't cut public sector wages in order to prop up consumption. I'm just pointing out the effect on consumption of cutting wages. That, combined with other cuts, will mean a further deflationary effect on the economy. And why go through all that? A €1 billin reduction in the public sector payroll would have little fiscal bounce. As An Saoi and I showed, the net return to the Exchequer would probably be less than €500 million. And using the ESRI's multipliers, this would only have the effect of reducing the fiscal balance next year from -12.9% to 12.7%. Not much return for lengthening the recession and cutting domestic demand with its potential consequences for employment and wages.

And, yes, even in a small open economy, investment if targeted can produce multipliers above unity - as research by Philip Lane and Augustin Benetrix has shown. However, as I say, one has to be careful about the type of stimulus utilised.