The Government Has a Plan – the Past is Best: The Recession Diaries – January 18th

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The Government has a plan. And, yes, you should be worried. The Government’s approach to fiscal stabilisation – namely, a deflationary approach – is often portrayed as ‘the only option’. Of course, it isn’t. There are other approaches, in particular those based on boosting investment and output in order to grow employment and, so, the economy out of the fiscal crisis. We’ve debated those alternative approaches on this blog at some length. But there has been no national debate.

Why should that be? In short, it’s not because the Government has examined, modelled and analysed all the alternative approaches – they haven’t (if they have, it has been as secretive as the D-Day planning process). It’s because the strategy they are pursuing is more about using the fiscal deficit issue as a pretext to pursue a wider agenda: to maintain the low-tax, low-spend model.

That Ireland is such a low tax, low spend economy is without doubt. In 2006, when the average Euro zone spend was 47 percent of GDP, Ireland trailed badly at less than 40 percent (of GNP). Of course, many will point out that we don’t have a big defence budget (neither do most EU countries by the way), that we have a young population and, therefore, don’t need as much social spending, etc. But there are counter-points: our young population requires extra education spending – which we don’t do; our high levels of relative poverty require extra social protection spending – which we don’t do. Our physical and social infrastructure is sub-par and requires additional ‘catch-up’ spending. We can go all day on the swings and roundabouts on this – but in the end, we have a low-tax, low-spend economy.

And that’s exactly where we will end up in 2014 if the Government gets its way. In 2006, our net current expenditure (excluding social insurance and interest payments) was 18.6 percent of GDP. This measurement is useful because it is the amount of money we spent on public services, public sector wages, means-tested and universal social welfare schemes, including Child Benefit, etc.

In 2010 it is estimated that this will rise to 25 percent but the primary reason for this rise is social welfare (non-social insurance) and falling GDP levels.

However, by 2014 the Government intends to cut this back to 19.4 percent. This is pretty grim. We are falling back to approximately 2006 levels even though we will be carrying a much higher level of unemployment. And its not as if 2006 was some golden age of public services. We fell well behind EU norms: no free primary health care, no early childhood education and a creaky primary care system, low levels of social protection, etc., etc. etc.). We would have had to increase spending on general public services by more than 60 percent just to reach the EU-14 average. And this was during the salad days.

Just to be clear, between 2010 and 2014 the Government intends to cut net current expenditure (excluding interest payments) by -9 percent in real terms. Anyone expecting improved public services or social protection will be disappointed.

But there’s one more little twist in this cutting tale. These numbers do not take account of the impending €6.5 billion in annual adjustments that the Government will pursue over the next four years (in the previous post I showed how another large portion of ‘fiscal adjustment’ has been hidden in the current expenditure figures). Therefore, these numbers will only hold if all the adjustment comes through tax increases. More likely, however, is that some of the adjustment will come through additional, unstated public spending cuts. If only a quarter of the adjustment comes via current spending cuts, then the Government will be cutting current spending by over -12 percent in real terms.

It’s the same story for capital investment which the Government intends to cut by over 20 percent in real terms. This is, again, before anything more that might be taken away through further fiscal adjustments. This bottom line of real cuts will further deflate the economy at the very moment it is trying to grow.

On the flip side – taxation – we again see Ireland down the league tables. In 2006, Irish general government revenue was 11th highest out 16 Euro zone countries (with the poorer countries ranking behind us – Greece, Slovakia, Cyprus, Malta, etc.). In that year, tax revenue (excluding social insurance contributions) made up 25.7 percent of GDP – and that was in the year of boom property-related tax revenue. What can we expect in future years?

By 2014 tax revenue will be 19 percent of GDP – well below the level in 2006 when we were still a relatively low-taxed regime. Of course, this doesn’t include the fiscal adjustment of €6.5 billion. If the Government decided to pursue all that adjustment through increased taxes, the tax revenue/GDP ratio would still be below the 2006 level – 22.5 percent. However, if only 75 percent of the adjustment comes through tax increases, that ratio will fall to 21.7 percent, even further below the 2006 level.

So that’s the game plan – maintain the low-tax, low-spend model that has dominated economic thinking. Keep spending on public services, social protection and capital investment low. Keep tax levels low. Keep the public realm low.

And if you’re looking for better services or more investment to generate growth and jobs – you’ll have to look in other places. Don’t look here.

But most of all, don’t be disappointed. Because the Government has been quite honest in all this.

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One Response

  1. tom

    January 19, 2010 3:05 pm

    Given that we have long had this low tax, low spend policy, and that we’ve now added in a low wage policy, is it reasonable to assume that government policy is actually to aim for a smaller economy.

    I presume thay have a plan to deal with the ever increasing ratio of debt to GDP that that will create? Oh yeah, its to cut wages and public spending. And therefore tax take. Thus increasing the ratio of debt to GDP…

    But at least they have a plan.