Wednesday, 5 September 2012

National Income and Expenditure 2011

Michael Burke: The argument in favour of ‘austerity’ measures is that the overriding objective of policy must be to reduce the government deficit, that this must be done by cutting spending and that there is no alternative to current policies. The release of the latest Irish National Income and Expenditure for 2011 should serve to dispel the several fallacies contained in that argument.

GDP has contracted by €30bn since 2007 in nominal terms, down 6.8 per cent in real terms (Tables 5 and 6). GNP, which excludes the distortions of multi-national corporations who book profits in Ireland to avail of its ultra-low corporate taxes, has fallen by €35bn since 2007 - a contraction of 11.1 per cent in real terms. If the overriding objective of policy were the optimum sustainable prosperity and well-being for all citizens then clearly the current measures would be a spectacular failure.

However, the objective to cut government borrowing on a sustainable basis is also not being met. ‘Austerity’ measures began towards the end of 2008 (unprompted by any international agency, but as a domestic policy choice). From 2008 to 2011 government current receipts have fallen by €6.3bn while current expenditure has risen by just €0.5bn, a total increase in the deficit of a little over €6.8bn despite all the fierce ‘austerity’ measures (Table 21). Worse, in relation to GDP this current deficit (excluding capital spending and receipts) has risen from 2.2 per cent of GDP to 6.7 per cent. Even if debt interest payments are excluded, the ‘primary deficit’ has risen by €4bn.

The only reason supporters of current policy can claim success in deficit-reduction is because the huge one-off payments to rescue the bank bondholders have come to a halt. These ‘grants to enterprises’ have amounted to over €43bn in the 4 years to 2011. But, even if they have now come to an end (which is at least questionable), they cannot be taken as evidence of any underlying improvement in the deficit arising from economic policy. That can only be gauged with reference to the government current income and expenditure, which is deteriorating.

What Is Policy For?

These data are of course well known in the Department of Finance, whose officials advise Ministers. It is improbable that both government and the Troika are unaware of the underlying state of government finances. If current policy even closely matched the success claimed for it, there would hardly be any need for the threatened further ‘austerity measures in the forthcoming Budget.

Yet current policy will be maintained and even deepened. This is because there has been some success, of a kind, for policy. In Fig.1 below data from Table1.1 of the NIE is shown (click to enlarge).

Source: CSO

Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.

To put this in perspective, labour’s share of national income has fallen so far in 2 years that it could be increased by 8.7 per cent over 2011 levels and this would still only have the effect of returning its share of national income to the crisis levels of 2009.

It is argued that the policy measures which have the effect of lowering wages and increasing profits are necessary in order to generate recovery, often described as ‘restoring competitiveness’ even while there is incessant and misplaced boasting about the rise in Irish exports.

But it is impossible to engineer a sustained recovery without an increase in investment. The decline in Gross Fixed Capital Formation (GFCF) is greater than the total decline in GDP, €32bn versus €30bn (Table 5). Yet, from 2009 onwards, when profits rose by €8.6bn, GFCF fell by €9.5bn. The policy of transferring incomes for labour and the poor to capital and the rich, which is the real content of austerity, has been an utter failure in reviving growth.

Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens. The policy of transferring incomes to capital and the rich does not achieve that, nor does it foster investment, the determinant of all future prosperity. Meanwhile the bluster about an improving deficit position should be recognised for what it is, just bluster.


Brian Woods Snr said...

@ Michael Burke: "Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens."

What's your economic Model-in-Use Michael? Growth is NOT sustainable - if it is real physical growth in a real physical world with finite physical resources. So any policy which DOES NOT acknowledge these realities and finiteness is just PR pap - to sooth whom?

Y = C + G + I + NX? Yes?

So: C is falling; G is falling; I is falling ... ...

So Y is going to increase? Like when? When G goes exponential?

But, but ... G's revenue comes from folks' incomes - which are FALLING!!!

What's your economic Model-in-Use Michael?

@ Moderator: Those words are VERY difficult to decipher.

Michael Burke said...


A list of the expediture categories of the national accounts doesn't really tell us much about the dynamic between them. If the vicious cycle now established in this and some other economies were impossible to break then all recessions would lead to perpetual impoverishment.

Instead, it is possible for one category to rise and so lead the entire economy to growth. Supporters of current policy assign that role to net exports, but that is misplaced as MNCs are largely based here for reasons of taxation, not production or employment.

Consumption cannot increase as it is constrained by falling incomes. Investment could increase, bolstered by both existing and rising profit shares. But firms refuse to invest.

Government can increase its own investment. Even the IMF has argued that it should increase investment. Many countries increased government spending and not only saw a recovery but an improvement in government finances.

Ireland is one of the few countries where this was never attempted. It is the only country which volunteered for 'austerity', without international pressure.

Brian Woods Snr said...

Michael, thanks for your reply. Unfortunately I have real difficulties with some of your comments.

"Instead, it is possible for one category to rise and so lead the entire economy to growth."

No it is not Michael. OK, it may say this in the econ textbooks and journal articles and it may have been slightly true in the past. But the past is gone and with it a lot of our cherished economic beliefs. Growth - as described by the Permagrowth paradigm is essentially flatlining. We need a new economic paradigm Michael.

"But firms refuse to invest." Again no. They do invest - but in financial instruments since they will get an income stream they can tap. The days of 'profit maximization' are long gone. I presume you know the differernce beteeen a Production-Consumption [PC]economy and a Finance, Insurance and Real Estate [FIRE] economy. If not, you have a very nasty suprise in store. And that is before you have to consider the consequences of the several billon additional human labour units in Chindia and east Asia joining the global workforce!

Ireland has the dubious distinction (along with the UK) of having a government which is an elected dictatorship and all the opposition can do is bang their shoes on their tables and shout Niet! Niet! Niet!. The Dáil cannot hold any government to account - which is one reason our public finances are in complete disarray. Our politicians (in the aggregate) are complegtely addicted to spending real and virtual money.

They sure did volunteer austerity. But for whose benefit: cui bono? I have always voted FG + Labour. Never again. The next election I hope both are obliterated.

Thanks again for your reply.