Wednesday, 9 December 2009

Anglo-Irish bondholders + €4bn; Public Services - €4bn

Slí Eile: Budget 2010 has been well-rehearsed for many months. The Government, together with the media and principal political commentators, have won the argument for deflation. It is an extraordinary achievement that in the space of a few short months the case for a huge fiscal adjustment of some €4bn has been so widely accepted without a serious public debate or provision of alternative budgetary scenarios (with some honourable exceptions). Moreover, the acceptance of the case for cuts in social welfare, public sector pay and other areas of expenditure has won the day. The rest is detail and point-scoring. So, all those who have made the case and convinced through every means to bring along a large section of the public deserve acknowledgement. However, there are at least two problems:It is unlikely to work – rather it will further deflate the economy, depress consumer demand and lose jobs; and
When the full effects become increasingly felt in the course of 2010 it will lead to a questioning of the overall direction of economic and social policy at this time.

These are troubled times and clear-headed thinking is called for. Hardest hit in this budget are:

young people who are unemployed (budgetary documents foresee a further increase in unemployment to 13.2% next year - with a likely 30% plus for young people not spelt out in the documentation) families with children people in precarious economic circumstances These need hope. They all need to consider a coherent alternative to deflation and its devastating consequences on the lives of vulnerable people far removed from the comfort zones of those who scrutinise data, pronounce on the world and devise solutions based on a questionable values system.
Many commentators will parse the text and dissect the figures. There is no getting away from the core truth that four things have emerged since the onslaught of this Great Recession:

A highly vulnerable, imbalanced and inequitable national economy has take the full brunt of international recession more than any similar sized open economy;
Government has responded in a sharply pro-cyclical manner contributing directly to a free fall in tax revenues;
We are currently witnessing the beginning of a sharp and prolonged income and wealth transfer from poor to rich via a scaling back in public services, more opting out of public services by the few who can afford it and risk under-writing for bondholders and large depositors; and
There is an absence of a broad-based, popular, credible, progressive alternative strategy.

Taking these four factors – there is, understandably, a great sense of helplessness and resignation. People are angry, confused and afraid. But, about all, people do not see an alternative at this time to the deflationary strategy. What the Government did not and will not do (but we await further details in the Finance Bill) was:

Raise taxes on wealth
Raise capital gains tax
Raise capital acquisition tax
Close off tax reliefs.

The combined potential value of taxes raised could be as high as €7.6bn according to Sinn Féin who draw their estimates from the Commission on Taxation or directly from the Department of Finance).

In a telling comment by Philip Lane on ‘Finally, it would indeed be helpful if the Department of Finance produced a report that detailed its projections concerning the macroeconomic impact of the budget. The fiscal plan for 2010-2014 surely incorporates feedback effects between fiscal decisions and macroeconomic aggregates, but the estimates of these feedback effects have not been explicitly spelled out (as far as I know).’ The Stability Programme Update released to the Dáil earlier today gives some clues as to the likely deflationary impact of Budget 2010. The document can be downloaded here.

The document contains an update on two previous reports this year. A key point worth highlighting is contained in Table 8 of same. The combined fiscal adjustment in Budget 2010 is calculated at €4bn = 2.5% of GDP (section 3.1). The document states that:
'Table 8 below sets out the estimated loss in tax revenue of €897 million associated with the introduction of the budgetary package in 2010.'

Allowing for a negative deflationary multiplier this translates into a long-term drop in GDP – other things constant – of over 3%. Suppose, instead that Government had diverted just 10% of its huge cash reserves (that is €20bn of NTMA cash reserves plus €20bn of NPRF assets = €40bn) into a jobs stimulus package using a NewEra agency based on public enterprise holding companies it could have created a a large number of additional and sustainable jobs and saved a huge proportion of the social welfare budget through lower unemployment payments as a result. (check out section 3.6 to derive the total estimate of cash balances).

Much can go wrong. See section 2.4 'Risks to forecasts'. Essentially, Government is gambling on a recovery and a steady as she goes set of scenarios. However, if interests rates rise ... oil prices surge ...the Euro appreciates .. there is a double-dip world recession (many economists internationally see this as a real possibility)... the outcomes are quantified.

But, the big elephant in the fiscal parlour is .... Anglo-Irish, NAMA and recapitalisation. It surfaced in parliamentary debate. Hidden away on the last page of '2010 Estimates of Receipts and Expenditure' is an entry for 'Anglo-Irish Bank' – a cool €4bn under 'other capital payments'. And there is a zero entry for 2010. Does anyone really believe that we have seen the end of recapitalisation? And where does money go when it is directed to a failed bank? And what is the opportunity cost? One final thought – in the interests of democracy, social cohesion and maximum citizen engagement could the people have clearer, more user-friendly and timely documentation that outlines the entire budgetary position and allowing for a informed debate in both houses of the Oireachtas allied to citizen and community dialogue where budgets are debated at national and local government. Presently, government accounting is a hidden science with partial disclosure of information.

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