Ignore. Downplay. Deny.

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It’s bad enough the debate has not asked the fundamental question of why, after a series of austerity budgets, the deficit did not fall, borrowing costs shot through the roof and growth rates were slashed. It’s as if none of this happened and the only way we can climb out of the fiscal crisis is to . . . pursue more austerity budgets.

Constantine Gurdgiev makes this argument over on his blog – that the cause of the burgeoning deficit is the increase in Government expenditure and not declining tax revenue. He grounds this argument in an exercise comparing current public expenditure to 2007 tax levels. From this he concludes:

‘ . . . between 2008 and 2010 the Government would have to cut expenditure by some €10.3 billion in order to bring fiscal balance to the receipts fixed annually at 85% of 2007 levels. And these are net cuts! Alternatively, only €13 billion of the total cumulative 2008-2010 deficits of €49.1 billion can be accounted for by a decline in tax revenue below equilibrium level. The rest, my friends, is due to over-spending…’

Welcome to the new austerity-denial school – commentators who claim that we really haven’t had austerity or only a little bit but, in any event, not enough. Let’s go through some of the numbers and see how this holds up.

Constantine Between 2007 and 2010 we find that net Government spending has increased by less than €5 billion while tax revenue fell by nearly €16 billion. Over three-quarters of the deficit is due to falling tax revenue. However, there are important caveats.

For instance, when one excludes interest payments, net public spending increased by only €2.6 billion, or 1.8 percent annually. Tax revenue, however, fell by 11.1 percent annually.

Second, there are many non-discretionary spending categories – and these are critical to understanding public spending patterns. Take pensioners: people get old and there’s little the Government can do about that (though, the Government is raising the retirement age in 2014 which will slow the rate of expenditure). State pension expenditure grew by 21 percent between 2007 and 2010 (or nearly €800 million). Even though the Government has cut these payments – abolishing the Christmas bonus – they will rise in any event.

The biggest growth category, apart from interest payments, has been unemployment payments. Jobseekers Benefits and Allowance has grown by an extraordinary three fold – or nearly €3 billion in the three years. And this is despite the Government’s extraordinary austerity measures. And this doesn’t count all unemployment-related expenditure: mortgage interest/ rent supplement, back-to-school payments, medical cards, etc. When one factors in all this – the non-pension/unemployment costs – public spending has actually fallen.

And then there’s the simple matter of demand. More people mean more demand on public services, expenditure and income support. Even with emigration, the population is estimated to increase by 3.6 percent between 2007 and 2010.

If we take public spending (excluding interest payments) per capita, we find that total public spending has increased by ½ percent annually for last the three years. Given the rise in unemployment and related payments, the extra demand on public and social services, the rise in old age demographics – we can hardly make a claim about ‘over-spending‘.

In one calculation, Constantine assumes tax revenue in 2007 to be 85 percent of the actual intake – to account for the property-related tax bubble. Even if we do that, we’d find that the fall in tax revenue accounts for 63 percent of the deficit – 77 percent if we exclude interest payments. No matter how many games we play with this, the result is the same: it’s falling tax revenues, not rising spending.

There are many causes for falling tax revenue – the asset-bubble burst, the fall in employment and wages, and declining profits and consumer spending. And a major contributor has been the very austerity policies which some commentators are eager to downplay, ignore, if not outright deny.

We know this: if we continue with austerity policies, tax revenue will remain sluggish and the deficit will remain high. If we haven’t learned that from the last couple of years, then we have learned nothing.

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5 Responses

  1. Seanán Kerr

    January 10, 2011 4:18 pm

    Very good points, though I have some respect for these public economists who make some attempt to disseminate this information for the public at large. When most of them appear in the media very few are willing to take them on in debate, to the extent that presenters and co-guests almost deify their opinions.

    Is there such a species as the Marxist Irish economist?

  2. Conor McCabe

    January 11, 2011 1:24 pm

    Professor Terry McDonough, NUI Galway is a frequent contributor to Marxist / Materialist journals and conferences. Tom O’Connor in Cork would be coming from a Marxist perspective.

    Not to be presumptuous but I think both would see themselves as heterodox / political economists – the areas of economics where real-world analysis still takes place, as opposed to the metaphysical modelling which passes for scientific analysis in post-1945 mainstream economics.

    The creation of a simplified model of an economic system as a substitute for the robust analysis of real-world economic systems is not scientific, it’s just playing with Lego on the kitchen floor. Heterodux economics understands this.

  3. eg

    January 12, 2011 9:43 am

    “State pension expenditure grew by 21 percent between 2007 and 2010″

    But surely we didn’t get 21 percent more OAPs? It’s disingenuous to lie about the cause of this. Taft claims it’s demographics. The answer was both demographics and a conscious decision by FF to adopt a higher-spending policy on pensions. Presumably the brothers around here would support this. However, we had no money.

    “Given the rise in unemployment and related payments, the extra demand on public and social services, the rise in old age demographics – we can hardly make a claim about ‘over-spending‘.”

    But you yourself admit that our tax revenue has fallen by about 30%. Yet per capita, every Irish person has received an extra 2% of free money from the Irish government. Short of increasing income taxes by 50% to extremist anti-worker levels, how can this be solved by anything but a reduction in spending?

    A person who increases spending on himself by 2% while his income declines by 30% is massively over-spending. If you deny that, you deny economics and reality. And he is certainly not being austere. Does anyone here think that this person is being austere? (Arguments, please, not just repeating the word “neo-liberal” over and over again.)

  4. Michael Taft

    January 12, 2011 1:00 pm

    eg – ‘lie’ is a big word; and unhelpful. Instead of making such accusations, let’s ground our comments in facts. Expenditure on pensions has increased by 21 percent. The increase in pension recipients between 2007-2010 was between 11 and 12 percent. Were the Government to have frozen pensions in nominal terms, it would have reduced pension expenditure by €350 million.

    However, we know that it wouldn’t have ‘saved’ that amount. You’d have to substract a number of items: the lost income tax revenue, the lost VAT revenue from lower spending, the lost business taxes (again, from lower speding), the increase in public spending from higher unemployment costs (from lower demand) and the knock-on effect on income tax/VAT/PRSI, etc. Roll all that up, and the ‘saving’ becomes lower.

    But does it actually cut the deficit? From the lower demand going through the economy, the GDP/GNP declines. Therefore, the burden of spending as a % of GDP may not change at all. We are left with a similar burden but the economy has been weakened and in is a poorer state to grow in the future.

    And that has been the problem over the last two years – cuts in public services, social transfers, public sector wages and numbers, capital spending, etc. – and the deficit actually increased.

    Austerity doesn’t really stand up to close examination. Spending cuts reduce tax revenue, increase public spending in other areas (notably, unemployment and related costs) while weakening the economy’s ability to generate revenue.

    So a question, eg: Given that the Government cut €14 billion over the last two years and, yet, the deficit rose – can you explain how another round of €14 billion contraction will produce a qualitatively different result? Evidence, please, not just repeating the word ‘neo-liberal’ or ‘lie’ over and over again.

    PS. If you are worried that pensioners living standards aren’t being cut, don’t be. The Government is working hard. It has cut the chistmas bonus (a 2 percent cut in annual income); it has introduced co-payments for medicine on the GMS scheme which wil particularly hit the elderly who use this more; and it has introduced a carbon tax which hits those on low incomes more than those on higher incomes.