Thursday, 1 October 2009

Marching for the economy

Michael Taft: Imagine you’re walking a high-wire. You’re nearly at the end of line. You’re doing everything possible not to fall – balancing with your arms, moving snail-like, praying; the last thing you need is for some messer to start shaking the wire.

That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget - shaking the wire.

With ICTU’s launch of a campaign to stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).

Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts – but after social welfare cuts, levy increases, and the pension levy, this is reasonable.

But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.

It appears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year. If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on the dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.

If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.

Let’s turn to the ESRI’s multiplier simulations. They modelled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?

• GDP would fall by a further 1.2 percent, or €2 billion

• Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.

And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have

• Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
• Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
• Degraded public services further just at the point demand is growing
• Cut people’s living standards and consumer spending
• Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)

All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.

There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:

• Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
• Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
• Increase unemployment by 6,600 (22,000 less than under a cuts strategy)

The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. It merely serves as an indicator.

Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.

But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.

That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?

If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment– then they will have done the economy enormous benefit.

If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.


Keith M. O' Brien said...


Great to see you are back from the break.

The only thing for it is to launch a national campaign on the issue of a 'Real Economic Alternative', and make it into a campaign the size of a referendum campaign. Force it into the style OF a referendum.

Labour, Trade Unions, Economics, NGOs and the other members of the political broad-left should just unite for a while under the plan and simple banner of an Economic Alternative.

Lets trash the details out in the media, but the size of the campaign needs to challange the size of the media itself. Currently the dominant view is the acceptance of the neo-liberal/deflationary economics of various economists and the Government.

If everyone just came under the common banner and made such a concerted effort as you see for Lisbon, it would make a real impact.

We neeed to vie for the heart and minds of the voting electorate. They need to vote for a change in the political/economic consensus, such a campaign can only help all the members of the Broad-Left.

Proposition Joe said...

For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax)

This is interesting, have the ESRI provided any concrete detail on the tax increases they've modelled?

Would their property tax for example be levied on the already hard-pressed residents of ordinary semi-ds, or the owners of "trophy houses" and yachts? Would their income tax increases be concentrated on the top end, or go across the board? Would the carbon tax apply equally to domestic natural gas, agricultural diesel and petrol?

Surely the answers to these questions would have a large impact on the economic impact of any tax increases. By virtue of their impact on different sectors with divergent spending patterns and more or less head-room to absorb the hit. But the thing is that tax increases can be optimized in a simulation so as to minimize the economic impact, yet for political and ideological reasons be very unlikely to be implemented that way in the real world.

Michael Taft said...

Proposition Joe - you make a good point. The ESRI didn't provide too much details on any particular proposal (which is not a criticsm - they were trying to provide indicators of the impact). These are the proposals they modeled:

Income Tax: an increase in the average tax rate of €1 billion. They didn't detail the particular rates. You could increase the standard rate by 1% and the top rate by 2% and that could come up with the sum. Or increase the top rate by 4% to 5%. Of course, it is likely that any increase in tax rates in the forthcoming budget will be in exchange for reducing levies.

Carbon tax: the carbon tax applicable to the non-tradable sector by €34 per tonne of carbon dioxide

Property Tax: Just a property tax that would raise €1 billion. The Commission on Taxation's suggestions could serve as the actual formula - but the ESRI doesn't provide one. In this case, they were probably testing an increase on 'capital' as opposed to 'labour'.

Of course, these were prepared prior to the April budget. Were these formulations rerun, different results might occur (the impact of further tax raising measures on top of the levies introduced in April). I suspect they might not be as robust.

On the public expenditure side, the ESRI proposed:

Public Sector wage cut: a 3.8% fall in nominal wage rates - though it doesn't state whether this is an across-the-board cut or scaled for different pay levels.

Cut 17,000 public sector jobs: the ESRI sees this coming from the education/health sectors - but doesn't state what jobs (nurses, administrators, radiologists, special needs assistants, university lecturers?).

Cut Public Investment: the ESRI doesn’t say where but acknowledge they don’t take account of ‘longer-term supply side impact reducing national output and productivity as a result of the reduced stock of infrastructure’.

Hope that clarifies some of the proposals. What all this leads to is the absolute necessity to examine the range of different options and their short and long-term impact. This is not always easy and can be subject to considerable error-margins. But it is helpful. Only problem is – the Government doesn’t do this and, to date, the national debate is lacking this crucial element.

Anonymous said...
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Slí Eile said...

@Micheal, @Keith
Great posts and comments. I have my placard, rain coat, facts and vote ready! Lets roll! Each for all and all for each.