Thursday, 28 January 2016

Will the radical cuts in public spending planned by 2021 be abandoned?

Paul Sweeney: Will the plan to greatly cut public spending by 2021 set out in Budget 2016 now be revised?

The question that all political parties should be asked on the doorstep in the election early this year is what kind of society they want to create.  We need to have a clearer vision of what kind of society we want and if it is cohesive, gives a level of security on health, education and minimum income with fair opportunities for all it will have to be paid for in taxes. 

In Budget 2016, the government set out a plan to greatly reduce public spending in Ireland over six years, cutting it from a low 38 percent of GDP (by EU standards) to only 28 percent.

It can be seen from Chart 1 that Ireland’s public expenditure is generally quite  low compared to the EU, with the wild exception of the period after the crash, when on the one hand, it soared while simultaneously on the other, GDP collapsed. It peaked at the 65 percent in 2010 as the Irish people generously paid off the private bank creditors. 

Chart 1

The level of public expenditure in Europe (28 states) was 48.2 percent in 2014, compared to Ireland’s 38.2. Even adjusting Ireland upward by using GNP, we would still be below the average for the EU.

Public expenditure was 49.4 percent of GDP in 2014 for the Euro area (which has higher spending than the total for all states). The average peaked in 2009 after the crash of 2008 at 50.7 for the Euro area and a little lower at 50.3 percent for the total EU. 

What Chart 1 clearly shows is that Ireland has been a low public spending country with the exception of the period 2009 to 2011. 

The exceptional period was when taxpayers dipped into their pockets to fund the biggest “corporate welfare pay-out in the world”! Indeed we dipped into the pockets of our children to pay the creditors of the private Irish banks. 

Severe Cuts in Public Expenditure Appear to be Planned.
The current plan set out in the Budget is to cut total public spending current and investment from its current low level (relative to EU standards as we have seen above) of 38 percent in 2014/15 to just 28 percent of GDP in seven years from 2015. The projection in Chart 2 below begins at this level of public expenditure for 2015. 

Chart 2

Source: Budget 2016, TA2.1.

The data in 2016 Budget shows that there will be severe cuts in public expenditure, over the next six years. Mr Noonan’s Budget booklet plans to slash public spending from 38.2 percent of GDP in 2015 to just 28.4 percent in 2021 as the Chart 2 shows.  In contrast, the average in Europe is likely to be over 50 percent in that year.

This is a very radical plan. This will mean a major reduction in public services and in investment. Each will have huge impacts on all citizens.

Perhaps this plan was written by bureaucrats and Mr Noonan and the Government were unaware of it? Perhaps it was written to be sent to the EU Commission and the others in the Troika to make these fiscal hawks happy? 

This is a very radical programme of cuts which deserves deep debate. It is clear that most Irish people will profoundly oppose such swinging cuts in investment and current spending. 

However, it should be pointed out that in this Budget plan there will be no rise in taxes. This is unlikely for even without increasing taxes, the predicted economic growth over the period will generate increases in revenue, but this plan actually sets out a small reduction in revenue from 25 to 23.2 percent of GDP. 

But abolishing the progressive USC, will cost €4bn (to the benefit those on high incomes) and may counter much of the rise in revenue expected from increased activity in a larger economy in the coming years.

There is talk of “Fiscal Space” and Mr Noonan reportedly (spin perhaps as there are no quotes available) puts it at €12bn and others at a bit less.  There is no “Fiscal Space” in the Budget Table (Table A2:1). Tax revenue and total public spending are set out clearly. 

The public is sometimes taken in by the promise of low taxes. They forget that low taxes equals poor public services. 

According to this Budget table there will be severe cuts in Ireland’s public services unless growth and job creations are wondrous in each of the next six years and the authors can say they underestimated revenue buoyancy. 

However, at end of January 2016, it appears as if the government maybe revisiting this plan. Mr Noonan is reputedly talking of “Fiscal Space” according to political spin (headline in Irish Times on Monday 21st January), but there is no hard analytical data as is published on the proposed cuts and on which these graphs are based. 

We need more and specific information before we can believe that there will be firm progress in pursuing policies which address inequality. 

Paul Sweeney is Chair of TASC’s Economists Network.

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