October 28th Lunchtime: The Recession Diaries
The fiscal meltdown is the result of our economic decline, not the cause. It seems straight-forward enough, but let’s put it another way: our fiscal imbalance is a symptom of our economic malady, not the malady itself. The reason why it’s necessary to continually repeat this is because the general political and media consensus is that we have to make sacrifices to restore our public finances. Unemployment is going up, investment and consumption are collapsing, output is falling, credit is becoming scarcer - but the Right want us to believe the real problem is that our books are not properly balanced.
Are they really suggesting that our economic decline is due to the growing deficit?
Its as if the house is on fire and everyone is arguing about the colour of the carpets.Recessions have a multitude of causes but one defining characteristic: lack of money. People don’t have money to spend, businesses don’t have money to operate, investors don’t have money to invest, banks don’t have money to lend - and so on. What you don’t do in a recession, therefore, is withdraw money. Fianna Fail has committed many sins - taking away medical cards, levying low incomes, cutting education; but a modern-day Socrates might point out that these are aspects of the ’sin’ but not the sin itself. The sin is to take out money from the economy - through public expenditure cuts and increasing taxes.
This is the ground on which the Left can distinguish itself from Fianna Fail. We’re beating around the edges - opposing this or that cut, arguing for this or that alternative income stream; the real difference is that the Left wants (or should want) to reflate the economy, put money back in, create more activity.
But that doesn’t mean we should ignore the fiscal issues. To define them properly, the Left and trade unionists have to get a handle on it - and be seen to have a handle on it. So let’s get this debt and borrowing thing into some perspective, especially as the Right raises the spectre of a return to the bad ol’ debt days of the 1980s.
First, the issue is not so much debt as debt repayments. If your debt is high but your repayments low, the issue becomes less acute (conversely, if your debt is low but repayments high - situations that many low-income households face with loan sharks, etc.). So what are our debt repayment levels?
In 2008, our net debt service was 1.5 percent of GNP. In 1987 (when our overall debt was the highest in relation to our GNP) the debt service was 9.5 percent of GNP. We could treble our borrowing levels and not get anywhere near that level. So let’s not lose our heads over this - as the headless Right are doing.
What if our debt service provision quadrupled (this would imply a huge amount of money to spend in the economy via borrowing)? We’d be back at the 1997 level - when we were two years into the Celtic Tiger boom and Charlie McCreevy was taking an axe to every tax he could find in the fiscal forest.
So the question is - what’s the problem? Of course, these are figures based on current debt service. They don’t take into account shifts in borrowing costs (which are falling), nor do they take account of the higher borrowing cost associated with that wonderful guarantee which is doing such a great job of saving our banks’ share value.
Nor would I try now to project these figures over the next two/three years for the simple reason that the Government projections for tax revenue are dodgy to say the least. Whereas the Government projects that the Exchequer balance will be (-) €13.4 billion next year, Davy puts the figure at (-) €18.6 billion. While Goodbody’s figures are not as pessimistic as Davy’s, they still project a worse balance than the Government. The fact is that no one trusts the Government numbers.
My only point here is that we shouldn’t allow the Right to dictate the terms of this debate. These are the same people who insisted that we should cut, cut, cut taxes to the point now that we don’t have enough revenue coming in. Now they’re going to lecture us on borrowing?
Of course, we can’t be blase about borrowing. We don’t want it to spiral out of control. To buttress public finances I have suggested a Donald Trump-like once-off tax on capital assets. Here’s another suggestion to keep our finances under control.
The state provides income supports and benefits to those out of work, which are withdrawn once they get a job - on the grounds that once in work, you don’t need them. Jobseeker’s Benefit/Allowance is one such support. So let’s treat tax reliefs the same way - such reliefs should be given to households which need the support, but once you get over a certain income level, they should be withdrawn.
For instance, why should individuals on more than €100,000 get medical insurance relief? Why should the rest of us subsidise something they surely can afford? Or mortgage interest relief? The Department of Environment shows that 45 percent of all borrowers have incomes of over €80,000. Of course, this figure can combine the income of two spouses/partners, but within that category there are individuals earning over €100,000 who are getting a relief which we all have to pay for.
So - the Left’s argument should be simple: borrow, borrow, borrow. Get money back into economy, increase Government activity which means more procurement for businesses, increase people’s income supports, shore up public services, ensure that the rising tide of borrowing lifts the smallest boats first. And defray some of this cost by slapping taxes on, and withdrawing relief from, those who can afford it.
In that way, our opposition to education cuts and the income levy can be placed in a long-term strategic plan and not be seen as mere oppositionism without an alternative.
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