Growing the Economy

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Today, UNITE the union launched their ‘Growing the economy:  A Programme for Economic Stimulus‘. It constitutes a fundamental challenge to the economic orthodoxy that dominates the current debate by outlining an alternative investment approach to the economic and fiscal crisis.

It’s premise is simple enough:  Fianna Fail’s deflationary budgetary policies are not working.  In fact, they are making things worse.  Taking money out of the economy at a time when output is contracting is a certain recipe for even further decline.  For example, if you reduce the disposable income of those groups that have a high propensity to spend (i.e. low and average income groups) then they will spend less.  This loss of spending will result in less sales for enterprises dependent on domestic demand (which is most enterprises employing most people).  This loss of sales means declining profit to the point that enterprises have to short-time workers, reduce their pay or even lay-them off.  This, in turn, feeds into the downward cycle as workers with less money spend less and so on and so forth.

This is what Fianna Fail did in the April budget – substantially increasing income and health levies while cutting child income support.  Is it any wonder, then, that consumer spending and confidence is declining, the retail sales index is in freefall, and shopfronts are boarded up in every main street, high street and low street throughout the country?  It’s as predictable as sunset.

Similarly, cutting government consumption and investment – at a time when the private sector is doing the same – results in the same vicious cycle.  Less public procurement contracts for private enterprises and less investment (the Government intends to cut the capital budget by at least 23% in real terms over the next four years) will reduce economic activity even further.

Ah, but the orthodoxy says, we must first get the budget deficit under control.  So they pull out their calculators trying to figure out what taxes to increase and what public spending to cut.  They tot up the columns and, presto, the budget starts balancing – at least on paper.  But the economy is not a bookkeeper’s ledger.  And when that budget deficit keeps getting worse, the orthodoxy buys a bigger calculator.  We can see this from the accompanying table:

In the October budget, the Government introduced an income levy and spending cuts to keep the deficit at -6% – but it kept rising.

In January/February, they slashed public sector wages to keep the deficit at -9.5% – but it kept rising.

So in April the Government introduced an ‘Emergency’ budget in a desperate bid to hold the budget deficit at 10.75%.  Will this work where previous efforts failed?

Not according to the ESRI – they claim that the deficit will hit -12% this year (don’t forget, the reason the Government brought in the April budget was because the deficit was heading towards 12.75%, which they claimed was ‘unsustainable’).

And the EU Commission projects the budget deficit, based on current policies, will spin out of control – at 15.6%.

Has the Government heard of the dictum – ‘stop digging’?

UNITE is calling for a new budgetary strategy – one based on attacking the root of the economic and, so, the fiscal crisis.  In one sense, their proposals are not all that remarkable.  After all, just about every country in the world is doing what UNITE is suggesting we do here.  At last count, 18 out of 27 EU countries are putting forward stimulus proposals for their economies, 19 out of the G-20 nations, while governments as ideologically diverse as Germany’s Christian Democrats to China’s Communists – they’re all investing in their economies.  In that sense, UNITE’s proposals are fairly mainstream.
Except in Ireland.  Calls for stimulus, investment, public expenditure and investment are ridiculed, attacked, and mostly ignored.  Even progressives from the trade union movement and Left political parties have only tentatively advanced the arguments for investment stimulus.  So, in that sense, the UNITE document is breaking new ground.

UNITE calls for investment in a wide-range of areas:  physical infrastructure, public services, establishment of new state banks, increased wages and social welfare payments, job retention measures, consumer vouchers, establishment of public enterprises, etc.  It is a comprehensive menu of options for any progressive government to consider and fashion into a targeted stimulus strategy.

But how are we to pay for this?  By focusing on unemployment and falling incomes as the main source of domestic-based recession, they claim that strategies to save and create jobs while maintaining disposable income will, in itself, start a virtuous circle which will lead to higher revenue and less social welfare costs.  In order to kick-start this virtuous circle they identify four key areas for mobilising the resources for investment:

Increase borrowing to the Eurozone average.  Ireland is, after all, a low-debt nation.  We could borrow €16 billion above what the Government is projecting over the next two years and still be below the Eurozone average.  So let’s get that money (and front-load the €27 billion in cash that the National Treasury Management Agency has and which the Government is intending to hold on to until 2011) and put it to use modernising our infrastructure, creating jobs, saving companies and putting money in people’s pockets that will be spent.

Tax less-deflationary sources of revenue – namely the high-wealth, high-income sectors.  They point out that the top 75,000 households own assets worth €250 billion.  Even a small effective tax rate would bring in considerable resources.

Target regressive tax expenditures (e.g. reliefs, allowance, exemptions, etc.) that favour the well-off.  For instance, landlords receive €800 million in tax relief on interest.  If this were diverted to the Government’s own insulation programme, 32,000 jobs could be created.  This would increase tax revenue and reduce social welfare costs – win, win, and win again.

Introduce Economic Recovery Bonds to take advantage of the rising savings ratio.  If people are going to save, let them save through these bonds (they’ll earn higher interest) and, so, participate in funding the programmes for economic recovery.

UNITE openly states that, coming out of the recession, our overall debt ratio will be higher (but still average by European standards).  However, with less unemployment (meaning a reduced annual deficit, upgraded infrastructure and public services, and more enterprises operating – in the public and private sector – we will be in a stronger position to pay off the debt.

So they pose a simple choice:  We can continue stagnating, suffering an ever-growing burden of high debt, poor infrastructure, unemployment and emigration that will scar society for years to come.  Or, we can invest now to create growth.

Yes, it is an economic choice.  But it is also a political choice.  In the local, European and by-elections, the people categorically rejected the Government’s economic policies.  Until now, however the alternative has only been presented in the haziest of forms.

UNITE has added clarity to the debate.  Now all we need is for more people to get involved.

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2 Responses

  1. Proposition Joe

    June 17, 2009 9:53 pm

    We can continue stagnating, suffering an ever-growing burden of high debt

    … or we can fast-forward directly to the high debt burden, saving years of stagnation, and getting us to national bankruptcy without a slow bleed. Clever.