April 29th Afternoon: The Recession Diaries

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Do you remember why the Government introduced the emergency April budget? Rising unemployment? Collapse in economic growth? Mass depression over the weather? Let’s refresh our memories:

‘Without this supplementary Budget the general government deficit would have been 12¾% of GDP reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances the natural preference should be to leave expenditure and taxation as they stand. This is not an option . . . because of the scale of the deterioration of the public finances. It is the considered view of the Government that a borrowing target of 10¾% strikes the correct balance.’

At the same time, the Minister also announced a number of future measures to reduce borrowing targets going forward. For instance, next year more ‘adjustments’ will be made: tax increases and reductions in current and capital spending – an additional ‘adjustment’ of €4 billion. This was to ensure that borrowing would be held at 10¾ next year.

So – the entire machinery of Government is working towards one goal and one goal only: 10¾.

Along comes the ESRI’s Spring Quarterly Report:

  • GNP collapsing by over 11% at current market prices
  • Unemployment to average nearly 17 percent next year
  • Consumer spending down nearly 8 percent this year
  • Investment plummeting by over 30 percent

There is considerable rancid meat here to get sick over but initial commentary has focused (belatedly, thankfully) on the spectre of mass unemployment and the prospect of a lost generation due to joblessness and emigration. Even today’s Live Register figures – showing a slight falling off in the rise in unemployment – will not bring much comfort (as I have pointed out before – wait until the signing-ons in May/June and the lack of signing-offs in the autumn; that’s where the real bloodbath will happen).

But let’s return to the Government’s magic 10¾ percent – the raison d’être of the April budget. What does the ESRI have to say about that? The Government balance will be 12 percent. Hmmm. The Government increased taxes and cut spending to reduce the balance from an unsustainable 12¾ and now it ends up pretty much back at their starting point.

All that work, all those late nights in Government buildings, all that red penciling and Excel tables – and the Government further away from their goal than ever (let’s not forget that the Government had originally agreed a target of 9.5 percent with the EU Commission – not much chance of that happening anytime soon).

Why is the Government standing still – even though it is running like hell? Well, there are all those people on the dole; and no one is spending any money – fearful of future job losses, pension losses, wage cuts; and the only investment businesses are making are in redundancies. But there’s something more – which the ESRI quantified but didn’t elaborate on in its discussion of the impact of the April budget:

‘Overall, and including the February measures (public sector pension levy, etc.), the full year effect is to raise taxation (3.6 per cent) and cut expenditure (3.8 per cent) by similar amounts. These cuts are equivalent to 4.4 per cent of GDP.’

So, the Government takes 4.4 percent out of the economy at the very moment the economy is contracting. Does anyone wonder why everything is going pear-shaped? I’ll offer each of the readers of this post a bet. I’ll give good odds. I’m betting that this causal relationship will not be mentioned in any serious, analytical way whatsoever (except the few lonely outposts of progressive thinking that exist, mostly on-line).

Going forward (and remembering the Government’s magical 10¾), what does the ESRI predict the balance will be in 2010? 11.5 percent. In other words, we still won’t reach the target next year that the April budget was intended to achieve this year. The Government is running, but we’re in quicksand. We’re not just standing still. We’re sinking.

But there’s a little catch in all this. The ESRI is bullish about our prospects next year. While the government claims the economy will decline by nearly 3 percent in 2010, the ESRI thinks it won’t be so bad – only a contraction of 1 percent. This must be a first – Government projections being more pessimistic than independent commentators.

I wouldn’t put much stock, though, in the ESRI’s, or anyone else’s, projections for next year. This is not a reflection on their abilities but with the Irish and world economies in such flux- even short-term projections have a limited shelf-life (don’t forget, the ESRI predicted a decline of 4.5 percent for this year; and that was only 13 weeks ago). We’re on a roller-coaster – and the fun-park operator is out to lunch.

You’d think this would be grist to the Left’s mill. You’d think. Yet, both Labour and Sinn Fein – against their better instincts – played the adjustment game. Both argued in their pre-budget submissions for measures to reduce the budget deficit without including the cost of their proposed measures to boost economic activity. This should stop – and the Left should take solace in the lessons that the ESRI current projections are teaching us, lessons which the dunce-Government has failed to grasp.

For the Government is trying to convince us that there must be order in the public finances before any recovery can begin. But what we are seeing is that public finances cannot be put in order until the recovery begins.

If we learn that simple fact, then we can start putting our better instincts to work.

And, thus, the economy.

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