Memory Hole

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On Prime Time Tuesday night, debating the Finance Bill, Fianna Fail’s Michael McGrath thought he was scoring a point on Sinn Fein’s Pearse Doherty by stating:

‘Your plan is to have 80 percent of the [fiscal] correction by increasing taxes and 20 percent by reducing spending. So without any equivocation or doubt Sinn Fein in office would mean billions of extra taxes on Irish people.’

McGrath went on to describe this as ‘scary‘. I’ll leave it to Sinn Fein to defend their own policies. What amuses me is that McGrath is attacking his own party’s success in correcting the deficit back in the late 1980s. What McGrath describes as scary is what his own party did over 20 years ago.

Between 1986 and 1990 the fiscal deficit was cut from -11.4 percent to -2.2 percent. That was quite a reduction. Must have been a lot of spending cuts, eh? Actually no.

  • Current Spending Increase: €696 million
  • Capital Spending Increase: -€443 million
  • Total Spending Increase: €253 million

Hmm. Nominal spending actually increased during this period – but why should anyone be surprised? Social welfare rates were increased, public sector pay was increased (as per the first national wage agreement).

So how did the deficit get turned around? Tax revenue shot the through the roof:

  • Government Revenue increase: €1,783 million

Over the four year period, government revenue increased by nearly 20 percent. So there must have been a lot of tax increases, right? No, actually taxes were cut – the Land tax was dumped, the Residential Property tax was dumped, and there was small but consistent cuts in income tax through increases in tax allowances and the widening of the standard rate tax band.

So how in the world did the Government manage to turnaround the deficit if spending wasn’t cut in nominal terms? If taxes were actually being cut?  Simple. The economy grew.

During that period, nominal GDP grew by over 18 percent. Compare that to our predicament today – nominal GDP has fallen by approximately 16 percent since 2007.  Back in the late 1980s, consumer spending rose, investment and government consumption (spending on public services) rose, investment rose, exports and wage rose. How did this happen?

One reason is that Ireland had its very own stimulus programme. Ireland received over €1 billion in the late 1980s through European Social Fund and European Regional Development grants. This amounted to 3 percent of GDP. In today’s terms that would be equivalent to nearly €5 billion. That’s a strong injection into the economy – one that we could sorely use today.

Of course, back in the 1980s, Exchequer net revenue made up over 35 percent of GDP; today it is about 21 percent. So when the economy grew, the state received a larger share. But that larger share certainly didn’t stop consumer spending, government consumption, investment and exports from increasing.

It would help if Mr. McGrath was aware of these facts.  Hopefully, the new government will be aware.

For this leads us to a provocative conclusion: growing the economy through an investment stimulus is, itself, a tool of fiscal consolidation.

But we are already know that, don’t we?

NOTE: Statistics come from my chapter, ‘Fiscal Reductionism and the Disconnected Debate: Developing a New Fiscal Platform’ which appears in ‘Understanding Ireland’s Crisis’, edited by Stephen Kinsella and Anthony Leddin.

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