Friday, 2 August 2013

A Sensible Alternative Budgetary Approach

Dr Micheál Collins: The recent anti-austerity comments by Ashoka Mody, the IMF’s former chief of mission to Ireland, highlight the growing signs that the policy direction being pursued by Government and the Troika is not succeeding. In late June the CSO reported very weak economic data, a return to recession and a sustained weakness in domestic demand. Around the same time the Department of Finance recorded lower than expected income and consumption tax revenues while major retailers recorded declines in turnover and profits. The evidence mounts. While Ireland succeeds in reducing its borrowing and rebuilds its international financial markets reputation, households, workers and business’ in the domestic economy continue to experience the blunt-end of austerity. Unsurprisingly, the domestic economy is struggling and the only positive economic indicator, the reduction in unemployment, is principally being driven by emigration rather than job creation.

Can we do something about this? Well, yes. Admittedly, the gap between Ireland’s tax revenues and day-to-day spending needs to be addressed, but there is an alternative way to reach the Government and Troika target of a 3% budget deficit in 2015.

In our most recent Quarterly Economic Observer (Summer 2013) the NERI has outlined the details of such an alternative policy approach. Our proposals demonstrate that there are choices open to Government and it is possible to pursue a jobs-friendly, growth-friendly and equality-friendly fiscal adjustment. At the core of our suggestions for the next Budget are three points:

  1. Government should use the €1 billion of savings from the Anglo Irish Promissory Note restructuring earlier this year to reduce the scale of the planned budget adjustment from €3.1 billion to €2.1 billion. It makes sense to do this; these are ‘cuts’ to planned government spending on debt service costs and we should count them as such.
  2. The remaining adjustment should be re-orientated towards taxation measures with the only expenditure cuts being those already agreed and announced under the two public sector wage agreements. As we have shown, there remains potential for those on the highest incomes to contribute more in taxation to the adjustment. For example, an increase of just over 2% in the effective tax rate of the top 10% of households would provide an additional €600m in revenue over two years. Similarly, there is potential for a greater contribution from corporate taxes, wealth taxes, employers PRSI and capital taxes. Overall, tax increases should represent just over 80% of the adjustment.
  3. Government should recognise that no matter how it undertakes its adjustment, the domestic economy will continue to suffer. To overcome this, the Budget should include an investment stimulus targeted at key deficits and job intensive sectors of the domestic economy. Areas such as water infrastructure, broadband connectivity, green energy, early childhood education facilities are obvious targets. These represent opportunities for investments which will deliver large returns in the medium-term alongside immediate benefits to the state in additional jobs, increases in taxation revenues and reduced welfare costs.
The NERI has demonstrated that pursuing such a strategy, over Budgets 2014 and 2015, will allow Ireland to reach its 3% budget deficit goal. We end up at the same place as the Government’s current plans, but it is a better route. Why not follow that alternative?

Dr Micheál Collins is Senior Research Officer at the NERI and is also a member of the TASC Economists Network. The latest report is available at This blog first appeared as an article in Liberty.