Stop Cheerleading Us Down the Deflationary Spiral
This meeting today between Fianna Fail, The Green Party, Fine Gael and Labour is difficult to fathom. Reading reports you get the feeling that the media is reporting from the other side of the looking glass, describing a world filled with Mad Hatter’s Tea Parties and other surreal events:
The framework itself is the most unreal of all:
“The talks will seek to agree a framework for a series of budgetary adjustments over the next four years designed to bring the country’s budget deficit, currently the worst in the EU, back to an EU limit of 3 per cent of GDP by the end of 2014.”
And the strategy is weirder than a floppy clock:
“However, Minister for Finance Brian Lenihan admitted at a banking conference today that “achieving targets set for the deficit expressed as a percentage of gross domestic product GDP will require more savings because GDP will now be lower than previously forecast”.”
To put this lunacy in perspective Michael Taft has some chilling analysis over on Progressive Economy. Michael reminds us that in the last budget Brian Lenihan said that the ‘worst was over’. Since then we have only seen the situation worsen.
Michael provides a dose of realism:
“The ESRI was the first to signal that the Government’s strategy will fail. The €7.5 billion would not only fail to reach Maastricht compliance by 2014, it would fail to do so by 2020. As a percentage of GDP, (with an additional €1.5 billion added due to increased interest payments and revising growth downwards by a third, which seems to be consensus projection) this is what the deficit would look like:
As can be seen, even with an additional contraction of €4 billion, on top of the current €7.5 billion, public finances cannot be brought into Maastricht compliance by 2020. It would flat-line between -4 and -5 percent. And each additional €1 billion contraction would only lower the deficit by between -0.1 and -0.2 percent.
There is much more to Michael’s analysis so his post should be read in full.
However, its also worth highlighting a further point: the scale of the policy catastrophe might well turn out to be even worse.
“Something darker may be hiding in the Government’s fiscal cupboard. Michael Burke referred to this when highlighting the findings of the IMF. In short, for economies that have hit an interest rate floor and where other countries are pursuing fiscal consolidation, a 1 percent budgetary contraction could produce a decline in the GDP of 2 percent.
To put this in perspective, current policies are closely following the rule of thumb - a 1 percent contraction is producing a fall of 1 percent in GDP (marginally more). However, if we start entering more sustained deflation, we could really be in trouble. Even if the IMF is only half right (I emphasise half right), we could find ourselves in this ugly situation:
The deficit would fall to only -8 to -9 percent of GDP by 2014 and then flat-line for the rest of the decade.
The more we engage in fiscal contraction, the more we would be entrenching high deficits in the economy.”
There are alternative options to cracked policy of deflation. Workable, practical and sensible ones, with plenty of evidence that they work have been provided in TASCs pre-budget submission. Michael Burke and Michael Taft have provided some analysis on these. Sinn Fein, who the government are not talking to because they do not think that it is possible to get the deficit down to 3% by 2014 are publishing their pre-budget proposals on Friday.
Critically, these arguments are not being made at the meeting today, where they should be - in fact their omission is glaring. Instead we have the Lenihan mantra, that with a declining economy more savings will be required. Brian Lenihan said in December that the worst is over. Considering the responsibility for leading us down this rabbit hole lies squarely with Fianna Fail he surely meant that it was only beginning.
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Comment by: Des Derwin
Oct 21st 2010 at 12:10
Now the ESRI’s contention that the deficit reduction to 3 percent by 2014 should be strethced to 2016 makes it all that little bit more difficult to fathom. Politically as well as economically.
The ESRI usually sets rather than breaks the consensus. It is only very recently that FF, FG and Labour have been at one on the 3 percent by 2014. Now the ESRI are ‘less austere’ than the consensus and than Labour’s recent entry into the consensus.
David Begg, ICTU General Secretary, representing ICTU policy it seems, has for some time been proposng an extention of the deficit reduction along the new ESRI lines. Labour do not seem to have refered to this ICTU position when joining the 2014 conensus. Whatever about the ICTU, SIPTU is head, neck and heels into the Labour Party and the current President and Vice President of the ICTU are SIPTU leaders.
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Next up was Danny McCoy of IBEC who, to these ears, did not explicitly side with the ESRI or David Begg but who implied he did by repeating the argument about the deflationary consequences of the 2014 deadline.
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So is there division, or confusion, rather than consensus in the establishment, a not unexpected product of crisis? It is a mild difference - squeeze the workers by 2014 or 2016 - but the line up is interesting: the Government, the EU, FG and Labour v. the ESRI, the ICTU - and IBEC?
Comment by: William Wall
Oct 21st 2010 at 17:10
He does not think there is anything the matter with him
because
one of the things that is
the matter with him
is that he does not think that there is anything
the matter with him
therefore
we have to help him realize that,
the fact that he does not think there is anything
the matter with him
is one of the things that is
the matter with him
RD Laing ‘Knots’