March 12th Evening: The Recession Diaries
Indymedia has kindly posted my article ‘Towards A New Economic Narrative’. But I fear it is quickly growing out of date. The speed at which the economy is melting down means we are running hard and still not able to keep up. The article was written in November. Today we are in a much different place.
What is the difference between a recession and a depression? Actually, there are no accepted definitions of either. The usual definition of a recession is two quarters of GDP decline - through there are other measurements that are used. Whatever about recession, there is certainly no accepted definition of a depression. That is because the industrialised world has not since suffered the scale of the collapse that occurred in the early 1930s. Also, I suspect there is a reluctance to use a term that is uniquely associated with the catastrophic collapse back then.
However, a rule of thumb to distinguish a recession from a depression is either (a) a fall of GDP of more than 10%, and/or (b) a recession that last three years or more. By that definition, the Irish economy is heading dangerously near what can be described as a ‘depression’.
Ulster Bank’s latest quarterly report makes for depressing reading. I don’t have much time for the economic prescriptions of the bank’s chief economist, Pat McCardle (to put it mildly) but I have no reason to doubt the professionalism of analysis of economic trends. Here are some headline figures, always remembering that it is a projection and prone to revising, especially given the volatility in the economy:
- The bank projects that the economy will decline by 8 percent GDP this year and 3.5 percent next year. In the three year period (2008 - 2010) the economy will decline by 14 percent.
Three years? 14 percent? If it walks like a depressed duck and talks like a depressed duck . . .
The bank goes on to describe the contributing factors:
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Unemployment will rise to 16 percent by next year with 200,000 losing their jobs this year and another 100,000 next year.
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Consumer spending is collapsing: over this year and next, we will experience a drop of 12 percent
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Investment, too, is nosediving: an incredible decline of 48 percent this year. Even when excluding housing, investment in machinery and equipment will fall by nearly a third over the next two years.
Again, I emphasise these are projections. However, with the Taoiseach admitting that the economy could contract by 6.5 percent this year, the Ulster Bank’s projections are not so far-fetched. With this spectre facing us, what do we get?
A parade of commentators demanding ‘tough’ measures, ‘pain up front’, downloading the Department of Finance’s Ready-Reckoner, calculating out how much tax revenue we can get by increasing this tax rate by x percent or that tax rate by y percent. It’s great fun and you get the sense of being in the fiscal driving seat - like a Grand Theft Budget play-station game. But it is just that, a game, and all such computations should come with a warning: for play only, don’t try this in your home economy. Here’s a small example.
How much will the Exchequer earn if we increase the standard and top rates of taxes? Prior to the October budget, the Department of Finance calculated these figures:
- Cost of a 1 percent decrease in the standard rate: €622.8 (full year)
- Cost of a 1 percent decrease in the top rate: 297.3 (full year)
Yes, these are the costs of a decrease (in the past few years, raising tax rates was never on anyone’s agenda, except a few of us wacky lefties). But the revenue from increasing the rates by the same amounts would be higher, since it would bring more, lower-paid people into the tax net. But let’s keep the amounts the same.
So, in a full year, we could expect €920 million from raising these rates by 1 percent each. See, isn’t closing the deficit easy? Maybe not. Recent figures show a deteriorating situation. The Department of Finance has released new numbers to opposition parties:
- Revenue from a 1 percent increase in the standard rate
- €535 million Revenue from a 1 percent increase in the top rate: €220 million
In a full year, an increase of 1 percent in both rates will now get us €755 million. That’s €165 million less than the figures produced in October - or 18 percent less.
Why the difference? Did Finance change their model to calculate the revenue gains? Probably not. More likely the change occurred in the variables - and one such variable was the number of employed or, more specifically, the number of taxpayers. Between October and February, over 100,000 people have signed on to the Live Register. Even accepting that not everyone who signs on has ‘lost their job’ (people who are short-timed can sign on to collect for the days they are not working), that is still a large amount, and it is consistent with the more definitive Quarterly National Survey.
Are these calculations from the Department dynamic? Do they take into account the loss of taxpayers throughout the year, or next year? Don’t know. In the past, they were a snapshot at the time of making the calculation. That was fair enough since the patterns were somewhat stable and any mistakes would be underestimations given the increase in employment. Now, however, if they don’t take into account the attrition among taxpayers, they will be over-estimates. I fear it’s the latter - if only because the rate of unemployment is increasing faster than most projections.
So the Government will be increasing taxes and getting less from them. When this happens - when the lack of revenue combined with the rising social welfare costs throw things off course again - will we back into another emergency budget?
And (and this is a question for some mischievous TD to put down in the Dail) has the Government calculated (a) the displaced spending taxes, (b) the rise in unemployment resulting from a decline consumption arising from the increased tax rates, and (c) the gain to the Exchequer net of these factors? I’d love to read that parliamentary reply.
Private consumption is down and the Government will cut its own consumption; investment is down and the Government will cut its own investment; wages are falling and the Government is cutting the wages it pays. The economy is in deflation and the Government is, well, deflating.
There is one sentence, not elaborated on, that appears in the Ulster Bank report:
‘. . . the likelihood of a significant fiscal contraction between now and 2013 - with the Government taking about 2 percentage points out of the economy each year - adds to the negative influences and pushes out the timing and extent of the eventual recovery.’
Taking out? Adding to negative influences? Pushes out? So what would happen if the Government put 2 percentage points back into the economy? We don’t get those calculations because the orthodoxy slaps down anyone bold enough to suggest stimulus.
The Government is in the mud and spinning its wheels. It’s got the tax-increases-and-spending-cuts accelerator to the floor but its not going anywhere. In fact it’s sinking. We’re sinking. Because we’re on the verge of a depression. And Radio Orthodoxy is playing its music at full blast.
And, good god, it’s a dirge.
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