It’s the Economic Growth, Stupid: The Recession Diaries - November 2nd
IBEC’s recent quarterly review should give us pause. They are one of the few groups who attempt to project economic growth up to 2013 - and the numbers are not inspiring. They suggest that Government projections are wholly optimistic and that, on current trends, the 2013 target date to bring our public finances into order will be missed. Indeed, they suggest that the current fiscal policy will continue to land us with ever higher debt levels.
Of course, these are only projections and should be treated as such. They may seem reasonable now but, well, events. Still, it’s a useful exercise because too much commentary takes a static, detached view of public finances. Progressives, however, argue (or should argue) for a more dynamic relationship between the wider economy and budgets. So let’s run these IBEC numbers and see what comes out.
IBEC is not as pessimistic as the Government in the short-term (this is consistent with other commentators’ caution optimism for next year). However, coming off the trough, IBEC suggests that growth will be much more moderate than the Government is projecting. In nominal terms, this could mean a GDP level some €15 billion lower than the Government is projecting for 2013.
What’s more worrying is the economy’s ability to generate employment and investment. On the jobs front, IBEC suggests that employment will remain sluggish and won’t return to peak levels until 2015. On the investment front, IBEC’s projections are considerably below that of the Government. In fact, they project investment to keep falling in 2011 and warn that the economy could still be negative if other sectors don’t pick up sufficiently.
So what does all this mean for public finances? Taxation can’t defy the laws of economic gravity. If growth is negative or marginal, there is a limit to how high it can go. Between 2009 and 2013, the Government projects taxation to rise from 20.6 percent of GDP in 2009 to 22.3 percent in 2013. That’s on foot of, at that time, planned increases in taxation which, for next year, have been largely ditched.
Let’s keep the Government’s tax revenue ratio and plug it into IBEC projected growth. If public expenditure stays the same, what would the deficit look like?
In this calculation, we can see that with lower projected economic growth and, consequently, lower tax revenue, the Government will miss its 2013 target by a wide margin. There are a couple of caveats:
IBEC projects that unemployment will be slightly lower than what the Government expects by 2013 - by about 1%. This should ease pressure on expenditure, though this may depend on the numbers choosing to emigrate as opposed to staying here on the dole.
A real problem, though, is that the above uses the Government’s April ratio of tax revenue to GDP. It will be lower - in 2009 to 2010. The Government is ready to concede that tax revenue will only bring in €31 billion this year, a ratio of 19 percent, not 20% as under their April projection (and which the above table uses). If this is a portent of sluggish tax revenue in future years - the deficit could be widened even further.
The ESRI is projecting deficits higher than the above table. Therefore, we will be starting, even on IBEC’s minimal growth path, from an even worse starting point. Of course, the deflationist reaction can be heard:
‘We’ll just to have cut spending even further.’
Well, there’s that, but then you depress growth further and end up in a similar situation. That’s the deficit-trap that the orthodoxy has landed us in.
The key thing here, therefore, is growth. If you grow the economy, then a lot of pieces start falling into place; not all of them, but enough to spring ourselves out of the deficit-trap and on to growth path.
To rework that well-worn phrase: it’s the economic growth, stupid.
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