We Must Cut Growth to Increase Growth – Seriously. The Recession Diaries – July 26th

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What would you say if a Government Minister, discussing Budget 2011, came on to a current affairs programme and said the following:

‘To increase economic growth, we intend to cut growth. To promote employment, we’re going to cut employment. And as for emigration – we don’t care if it increases. Indeed, the Government sees some upside.’

If you heard that, you’d probably say, ‘how ‘idiotic’. Or you might say, ‘how so Fianna Fail.’ You’d be right in both cases. And, yes, if that Government Minister were honest with the public, that’s exactly what they’d say; if the ESRI is anything to go by.

In another installment of ‘pieces-of-information-that-never-make-it-into-the-debate’, the ESRI assessed the impact of the Government’s proposed €3 billion contraction in the upcoming budget (taken from full report which won’t be available on-line for another couple of weeks):

‘The impact [of the €3 billion contraction] on the wider economy is to reduce the growth rate by approximately one percentage point. In addition, the level of employment is lower and emigration flows higher than in the absence of such a package. These are real costs attached to the programme of fiscal consolidation being pursued by the government.’

So – the Government intends to cut growth and increase unemployment and emigration. What an odd thing to do. The ESRI estimates the domestic economy will contract by -0.5 percent. The Government’s estimate is worse: -0.75 percent. You’d think Government policy would be concerned with giving the economy – consumer spending, investment, employment – some legs. But, no, it intends to put more obstacles in the way of growth.

Indeed, it might be worse. The ESRI, without knowing exactly what the composition of the budget package would be, used the following breakdown: €1 billion cut in capital spending, €1 billion cut in current spending (though not public sector wages and social welfare rates), and €1 billion in increased tax revenue from a combination of income and property taxes.

However, the Government has signaled they intend to increase the ‘cuts’ element of the package. If they do so, GDP could be cut further (by between 0.1 and 0.2 percent according to my calculations). What fun.

Why isn’t this a subject for debate? Why are not Government ministers grilled on this? Why isn’t a fundamental question being asked – how smart is it to cut economic growth when the economy is trying to recover from recession? Why is this debate so surreal?

Or am I being naïve to even ask such questions?

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2 Responses

  1. Michael Burke

    July 26, 2010 1:06 pm

    Very good post.

    The ESRI must be assuming the confidence fairy will wave her magic wand over the private sector, as €3bn is equal to 1.8% of GDP. The private sector must be assumed to increase its own demand.

    Pity her wand was in the menders in 2009, when they cut spending by €10.6bn, and private sector demand, consumption, investment, inventories and imports fell by €40bn.

    I wonder why it is forecast to turn out dfferently this time?

  2. Brian

    August 9, 2010 2:09 pm

    At this stage, one must wonder at what FF is planning. Their desire to hold onto power in government goes far beyond mere self-preservation. Are they bringing about the destruction of the Irish state on purpose?