William Slattery Imparts Wisdom to the Nation. The Recession Diaries - September 27th
William Slattery of the financial services company State Street, and a member of the McCarthy Committee, has offered some advice to the nation in its time of need. With unemployment climbing ever higher, with 250,000 jobs already shed since the start of the recession, he proposes that the largest employer in the state slash a further 30,000 jobs. Wow.
Of all the fiscal measures that could be taken by the Government - as measured by the ESRI (income tax, property tax, carbon tax, public sector wage cuts, capital spending cuts) - cutting public sector employment is the worst. Using the ESRI findings we can measure what we might expect from William Slattery’s proposal:
All those numbers going south - what does it mean?
William Slattery wants to collapse the domestic economy by over €3 billion - prolonging the recession for at least another year and possible two.
William Slattery wants to put more than 40,000 people on the dole queues - and it could be higher if we can’t kick more people out of the country through emigration.
William Slattery wants to drive more businesses out of business by cutting consumer spending up to €1.7 billion.
But wait a minute - William says we’ll save €2 billion. Is that true? Not even close. The annual deficit will fall by -0.2 of GDP - or about €330 million. Why so little? Because after you factor in the rise in unemployment costs, the loss in tax revenue (income tax, PRSI, VAT from reduced spending), lower businesses taxes from the loss of turnover - the actual savings is peanuts.
No doubt William hasn’t thought this through. You cut your total national income by over €3 billion to get a savings of €300 million - if a CEO of a multi-national firm tried to do that with their business, they’d be clearing their desk before noon.
It doesn’t bother me that William Slattery makes such an ill-informed proposal. After all, there are people who deny climate change, evolution, and the moon landing; heck, there are people who think the radio makes noise because there are tiny little people inside it. The world is a wide world - there will always be a William Slattery around to amuse and irritate (Eamon Blaney proposes that 100,000 public sector workers be laid off but he was writing in the Sunday Independent, a publication that only exists to facilitate one of the best regular weekly on-line competitions over at Cedar Lounge Revolution).
No, what would bother me is if people mistook this proposal as a serious contribution based on an informed understanding of how the real world works.
This is a proposal written in crayon on the back of a discarded snickers wrapper in the middle of a kindergarten playground.
Pity the nation that takes its William Slatterys seriously.
Discussion
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Comment by: Michael Burke
Sep 27th 2010 at 13:09
Slattery’s rare genious, and those of his co-authors of the McCarthy Report can be gauged from the fact that that the Report states the first point of the group’s Terms of Reference as ‘the elimination of the public sector deficit by 2011′.
At their time of writing the deficit was 7.2% of GDP while the EU Commission projects a deficit of 14.7% of GDP in 2011.
So, not an elimination then, but a doubling.
The Report should have come with a health warning: The value of your debts can go up as well as down.
Comment by: Kof
Oct 12th 2010 at 09:10
What happened when Ray Burke aggressively cut (slashed!) the deficit in the 80s?
Running a massive deficit results in more greater debt with associated interest repayments.
Cut the bloody deficit radically now.
Comment by: Michael Taft
Oct 12th 2010 at 10:10
Thanks for that, KoF. It should be remembered that there was no nominal cuts in current expenditure during the late 1980s. Social welfare and public sector pay were increased in each of the years. There were reductions in agricultural subsidies but this was off-set by the abolition of the Land Tax. There were considerable savings on unemployment payments but this wasn’t due to employment rising - rather it was due to a massive increase in emigration levels that continued until the early 1990s; in effect, exporting our costs. Overall public sector numbers remained broadly static - possibly rising marginally.
Where there were cuts was in the capital budget but this was balanced out by our own stimulus programme courtesy of the EU taxpayer, through regional development funds. We don’t have that source, unfortunately - so we will have to replicate it from our own resources.
It is important to learn the proper lessons from the late 1980s. This was a period of sustained economic growth - both here and abroad.
As such, 85% of the turnaround in the deficit at the time occured through rising tax revenue resulting from that growth; not public spending cuts. The lesson here is to grow the economy (just as the recent ESRI’s Recovery Scenarios Update shows).
Mr. Slattery has not learned that lesson. If we don’t, we will continue to be plagued by high deficits and high debts.
Comment by: Kof
Oct 12th 2010 at 12:10
Ray Burke??? WTF? I should have said MacSharry obviously. Mac the knife and all that.
The Tallaght strategy had an impact too - which is different from where we are now.
Regarding your point about unemployment being a safety valve which was a factor at the time, unemployment had been just as high for years before that. Right?
Regarding the turnaround in our economic fortunes being related to global prosperity at that time - global economic growth had had little or no influence on our economic propects before that.
Our deficit is bigger now (11%) than it was back then (8% approx). Our Debt is growing rapidly. We’re running out of time.
Comment by: Michael Taft
Oct 13th 2010 at 07:10
Kof - Yes, unemployment was just as high before that (i.e. 1987/88). However, net emigration only started in the late 1980s, mostly because prior to that other economies were so sluggish, in partiular the UK. As they picked up, we started exporting our ‘excess labour’.
It is also important to remember that, whatever about global economic growth, growth in our trading partners was important. Our trade balance turned positive in the late 1980s - adding to our economic growth. This was as a result of growing exports, arising from both the 1986 devaluation and growth in an important export market - the UK. In the early 1980s the UK was emerging from a recession. By the late 1980s it was growing at a healthy 4%.
Prior to the early 1980s, exports made up 50% or less of GDP. But starting in the late 1980s we started on a new path of strong export growth - rising from 58% in 1987 to 86% by 1995.
All of this was an important contribution to our turnaround in public finances. As I stated before, it was growth, not public spending cuts (which didn’t actually happen) that turned around deficit. We should draw a lesson today.
Comment by: Michael Burke
Oct 13th 2010 at 08:10
Kof
the trade surplus increased by fivefold to the equivalent of €4.5bn between 1986 and 1992, as exports doubled to over €21bn.
See chart here
http://www.cso.ie/px/pxeirestat/Dialog/diagramloop.asp?diasize=smallest&diatype=1&matrix=TSA01&timeid=20101013294025&lang=1&noofvar=2&numberstub=1&noofvalues1=24&noofvalues2=3&ti=Value+of+Merchandise+Trade+by+Year+and+Statistic
Both Thatcher and Reagan cut taxes and created an unsustainable consumer boom (US twin deficits blew out and British North Sea oil revenues were entirely wasted).
As this table shows, net exports contributed about 1/4 quarter of the entire growth over the period.
http://www.cso.ie/px/pxeirestat/Dialog/Saveshow.asp
But the largest single contributor was the EU, with €10.4bn in net subsidies over the period. Of course, there is a large multiplier effect from the EU funds, which were used for the NDP. But, just taken with the increase in net exports, they directly account for 94% of growth in that period.
In reality, given the very high multipliers attached to EU investment funds (an average 2.05 according to a later study by Bradley, Morgenroth and Untiedt, downloadable here http://ideas.repec.org/p/wiw/wiwrsa/ersa03p313.html ), they more than accounted for the entirety of growth over that period (€21.3bn of a €14.8bn increase).
Put another way, domestic policy produced a net drain on the economy, as spending was cut in real terms and depressed actvity.
This is precisely the same effect as it is having now but without the huge subsidies from the EU to offset it.
The ‘E’ in the nonsensical ‘Expansionary Fiscal Contraction’ should really be EU. And the late 1980s experience demonstrates the imperative to invest your way out of recession.
Comment by: Kof
Oct 13th 2010 at 08:10
Canada, Sweden, and Israel have achieved very abrupt downward adjustments of their public accounts in the 1990s, followed by an immediate upturn in growth.
Comment by: Kof
Oct 13th 2010 at 08:10
In relation to cutting the deficit, (which I’m obviously fixated on) is Corporation Tax. I really think our approach here is short sighted and can be best described as a “beggar thy neighbour” approach. Correct me if I’m wrong but if we doubled our corporation tax rate to 25% (as far as I can see this would be a competitive EU rate) the exchequer would currently take in another 12 billion or so. This would help cut the deficit nicely and would seem to me to be fair enough figure. What’dya reckon?