Thursday, 12 April 2012

Responding to the Minister

Michael Taft: The Minister for Public Expenditure and Reform, Brendan Howlin, has responded to the open letter signed by 39 economists, social scientists and analysts. It is welcomed that a Government Minister is willing to engage constructively as this can only improve the public debate. That the Minister claims there is considerable common ground between the contributors and the Government is further welcomed. But ultimately the Minister doesn’t believe the strategy outlined by the contributors is viable. I’d like to address some of the issues the Minister raised in his article. I speak, of course, only for myself and not for any other signatory of the open letter.

The first problem we confront is a disconnect between what the Minister claims and what is actually happening in the economy. He states:

‘The importance of growth is factored into our budgetary figures. Our own economy has returned to modest growth and indeed, the greatest impediment to future growth is the state of the global economy.’

The problem here is that the economy has actually returned to recession – a double-dip recession. The latest quarterly data we have – from the second half of last year – shows GDP in decline. When we turn to the domestic economy, we find the biggest fall since the dark days of 2009. It is difficult to reconcile the statement ‘our own economy has returned to modest growth’ with the fact that we are back in recession.

The second problem is a denial of what the Government is actually doing.

‘Contrary to the view articulated (by the contributors), the Government is not pursuing an “austerity” strategy. The opposite is the case.’

Again, it is hard to reconcile this with what the current Government is doing. In the last budget, the Government engaged in a fiscal contraction equivalent to €4.3 billion (according to the EU Commission, factoring in the carryover from Budget 2011). This was made up of tax increases – primarily regressive VAT increases – and spending cuts, in particular a significant €750 million capital investment cut.
This will have a profound impact, not only on the social fabric, but on economic growth. The Minister for Finance has estimated that for every €1 billion in cuts/tax increases, the GDP falls by €500 million. On this basis, the Government reduced growth by €2.15 billion or over 1 percent off real GDP.

It is worth noting that the Government is now at pains to distance itself from the word ‘austerity’ – such is the low esteem it is now held among people since it is a by-word for low-growth, job losses and rising debt. However, to maintain that you are not pursuing austerity while at the same time doing just that is slightly disingenuous.

From these highly contestable propositions – that the economy has returned to growth and the Government is not actually pursuing austerity – the Minister takes critical aim. But it is not clear exactly who he is aiming at. First, he claims:

‘It is perplexing then to see a problem of this scale (the deficit) effectively dismissed by the suggestion that there is a better, simpler, pain-free way.’

Clearly, this does not refer to the open letter which sets out a very rational approach to fiscal consolidation – ‘smart’ or ‘growth-friendly’ fiscal consolidation:

‘Such an investment programme must be accompanied by “smart” fiscal consolidation, focusing on the least contractionary forms of fiscal adjustment. This requires progressive and equality-proofed taxation targeting high-income groups, property assets, unproductive activity and passive income, as well as environmental measures.’

I doubt there is any Government minister that would disagree with this formulation. And this certainly doesn’t suggest ‘a simpler, pain-free way’ – though it does suggest a ‘better’ way.

Ultimately, the issue is not whether there should be fiscal consolidation or whether it should be pain-free, but what is the most effective and efficient means. According to the ESRI, spending cuts are the least efficient and effective means of deficit reduction for the reason that they most contractionary forms of adjustment. Again, the Minister would be aware of this research – and the common sense behind it.

It also overlooks the fact that investment itself is an effective means of deficit reduction. Putting people back to work, increasing the productive capacity to grow cuts both the general and the structural deficit. In this regard, the Nevin Economic Research Institute’s (NERI) recent report puts the growth potential of investment in perspective.

Second, the Minister claims:

‘The idea that we would use all of our available resources in an all-or-nothing attempt to kick-start the economy strikes me as more Fianna Fáil circa 1977 than John Maynard Keynes, bearing in mind that the sum mentioned, €15 billion, equates to approximately one year’s exchequer borrowing requirement, money borrowed to pay day-to-day costs.’

There is, of course a difference between Fianna Fail’s economic adventurism and the investment-based approach advanced in the open letter. In the late 1970s Fianna Fail gambled that cutting taxation and boosting Government consumption would lead to increased consumer spending. As a result, the indigenous private sector would expand to meet growth among indigenous firms which they assumed would respond with a surge of expansion. This didn’t happen, of course; all we got was the stagflation of the 1980s.

The open letter strategy, however, is to address the economic and social deficits through investment which will grow the productive capacity - a strategy completely at odds with the badly misjudged Fianna Fail strategy of pump-priming consumer expenditure.

In this context, the ‘all or nothing’ reference is curious: it is hardly ‘all or nothing’ to roll out a next generation broadband, to invest in education from pre-primary to lifelong learning, to modernise our water & waste system. This is not about kick-starting, it is about creating new assets that will generate income and reduce spending in the future.

The phrase ‘silver bullet’ only reinforces the notion that the Minister was debating other positions. Even the reference to the ‘€15 billion’: the open letter didn’t propose a €15 billion programme (though NERI has). It merely outlined the sources where investment could commence – the €5 billion in the pension fund, the €15 billion in cash balances, the use of public enterprises’ commercial potential. Regarding the cash balances, even the Government has admitted that using €6 billion of this amount to write-down debt would still leave the balance ‘relatively healthy’. Why not redirect this amount into building our productive capacity?

While it is welcome that the Minister has publicly engaged with the open letter, it is disappointing that he argued from highly contestable premises while failing to address the real and practical propositions that the letter put forward. We are still left with the need for the Government to actually put forward concrete evidence that spending-based fiscal contraction is economically efficient; that privatisation will enhance our net investment position; that an economy that has returned to recession and suffering from rising joblessness and poverty can somehow, at the same time, repair its public finances.

We are still left with the need for the Government to admit that its austerity strategy is not going as planned and, therefore, that it is willing to canvas alternatives.


Tom Healy said...

I note that the Beast of Structural Deficits has reared its head in the response today. I thought Germany and France were running large structural deficits while Ireland was well within the Maastricht criteria and according to various estimates of the structural deficit was not out of line with fiscal discipline up to 2007. Further plotting of the structural deficit back in time and forward would help to clarify some of these matters. A working paper will follow

Paul Hunt said...

It seems that quite a few people here are wetting themselves with excitement becaause a Minister (well, at least, half a Minister of Finance) - and a Labour Minister to boot rsponded to their smorgasbord of economic illiteracy. They seem to think that some of these hare-brained notions will secure traction with the Government.

They seem to fail to realise that a Minister is simply a cross between a highly paid PR operative and a cushion - simply mouthing the words that his or her officials have crafted and which in most instances are seeking to conceal the extent to which he or she has made concessions to the last special interest group that sat on him or her.

Over the last year the various sectional economic ibterest groups have completely nobbled the Government and have totally undermined and almost completely thwarted the thrust of the Troika's initial structural reform programme and the recommendations of State Asset Review Group - which were intended and designed to counteract the impact of fiscal adjustment.

The chutzpah and hypocrisy of this broadly academic, loyal left-wing opposition coming out now after this year has elapsed calling for a fiscal stimulus is simply incredible. Don't tell me that many, if not most, of the signatories were unaware of the intense lobbying and the exercise of pressure on Government behind the scenes over the last year to force it to whittle the Troika's structural reform programme and the recommendations of the State Asset Review Group down to almost nothingness, because I won't believe it.

This is just rank hypocrisy.

Tom Healy said...

Could I suggest that in commenting we -
Take on the idea, not the messenger.
Use appropriate language.
Keep to the point.
Clearly you are not for a fiscal stimulus and you favour privitisation as you are very much concerned about how public enterprises are run etc. is that correct?

Paul Hunt said...


I have argued consitently for measures - fiscal, microeconomic, reforms of democratic governance, structural, call them what you will - to counter-act the inevitable detrimnetal impacts of an inevitable process of fiscal adjustment.

The Troika's initial programme of strucrual reform and the recommendations od the State Assset Review provided a necessary but not entirely adequate starting point. Both have been whittled down to almost nothingness under pressure from the various sectional economic interests affetced over the last year.

If you, and those who appear to share your view, are not prepared to acknowledge this, there is nothing I can do. But I shall continue to call it as it is: either rank hypocrisy or willful blindness about how most public policy is forumated, decided on and implemented.