Austerity = Corp Profits + Lower Wages + Stagnation but Investment = Growth + Improved Outcomes for Majority
There has been an important series of posts on Progressive Economy by Michael Burke about the government’s recently published Medium Term Fiscal Statement (MTFS) which includes a series of forecasts. By examining the MTFS we now know that the deficit and debt levels are higher than expected, real growth is not happening (in fact, its contracting) and that, perhaps even more importantly, government finances benefit by 0.6% from a 1% increase in GDP. This means that investment which increases GDP will reduce the deficit, and significantly, this increasing sensitivity leads to a compounding effect of growth on government finances in years to come as the level of GDP grows and both tax revenues and government outlays improve.
On the deficit and debt levels, recent data shows that the deficit is higher now than forcasts had predicted and our debt level is increasing, which is a definitive indication that austerity measures are making matters worse.
“In the Information Note on the Economic and Budgetary Outlook 2011-2014 issued by the Dept of Finance in November 2010 the central forecast for the deficit for 2014 was 2.8%. In the recent MTFS it is now 5%. A year ago the debt level for 2014 was projected to be 85.5% of GDP. Now it is projected to be 117% of GDP.”
On the effect of austerity on the economy, contrary to the narrative that Ireland is the EU’s poster child for the benefits of expansionary fiscal consolidation real growth is not happening. In fact rather than growth there has been a contraction.
“Yet the CSO’s latest quarterly national accounts shows that nominal GDP was €39,032mn in Q1 and €39,553mn in Q2 (Table 5, extract below). If growth were zero in Qs 3 & 4 (€39,553mn), then nominal GDP for the year would be €157,691mn, much higher than the €155,250mn Noonan has forecast.
The actual outturn for nominal GDP in 2010 was €155,992. The government forecast is now €155,250. This is a contraction. Yet the whole document talks about a ’shallow recovery gathering momentum’.”
So far then, austerity is not improving the situation and it’s clearly beyond doubt now that it is making matters worse. However, the third post on the sensitivity of government finances to increases in GDP should show light at the end of the tunnel.
The data from the MTFS
“…clearly shows that a 1% increase in GDP leads to a 0.6% improvement in government finances (as a % of GDP) in the first year (2012). An increase of 1% of GDP in the first year leads to a lower deficit from 8.6% of GDP to 8% of GDP.
But it gets better. The table also shows that for the 1% increase in GDP is an increasing sensitivity of government finances, 1.1% in 2013 rising to 2.1% by 2015. These are in effect the compounding effects of growth on government finances, as the level of GDP grows and both tax revenues and government outlays improve.”
This shows that:
“…first, government investment leads to much stronger growth and, second, that this stronger growth leads to much improved government finances (60 cents for every €1 increase in output in the first year, rising to €2.1 over 4 years).”
Sinn Fein, in its pre-Budget submission has advocated a €7bn euro stimulus which incorporates this sensitivity into the calculations of what benefit can be derived from this stimulus. They use the same models as their last submission and all of their calculations are based on information from the Dept of Finance and the CSO.
Using the Lane multipliers they show that there is a total improvement in GDP of 4.44% (page 35).
There has been plenty of people who have questioned the effect of multipliers in Ireland, but not the government, as the Lane mulitpliers are used to calculate the benefit of investment in Fine Gael’s NewEra document (page 12).
The SF submission also points out that the sensitivity of 0.6% is a better than taxation for improving government finances for two reasons:
“First, most taxes are levied on marginal changes in activity (incomes, capital gains, profits, etc.), most of which have thresholds before taxes are paid. Secondly, the sensitivity also includes the benefit of increased activity in lowering government outlays, especially on welfare.”
So the combination of the multiplier effect and the sensitivity of the governments finances to increases in GDP Sinn Fein calculate that the impact of a €1 billion increased government investment over 4 years improves government finances as follows:
€1bn X 4.44 X 0.6 = €2.664bn.
Of course, any investment plan suggested by the government are supposed to happen in tandum with the selling off of state assets and the cutting of jobs and reducing public expenditure through austerity. Claims that these must be implemented as terms of IMF/EU/ECB are false. The sale of state assets is not part of the Memorandum of Understanding and austerity not only cancels out any investment provided, it has also been in place long before we were forced to rely on the bailout. In addition all of the governments plans for investment whether its in water or broadband etc are geared solely towards using state resources to create utilities that will be privatized in 7 years time.
There is much else in the Sinn Fein submission that is worthy of our attention: the decoupling of banking and sovereign debt, the household stimulus, the introduction of a wealth tax while removing low income earners from the tax net, a move away from reliance on indirect and consumption taxes, abolition of the USC and the closing of tax loop holes. Many of them are sensible and necessary. Some do not go far enough and some, unfortunately, keep in place a system that if it was changed would bring about the positive change: the retaining of the 12.5% corporation tax rate.
However, as a detailed highly credible and workable plan it should be respected and used by those who are constantly being told that there is no alternative to the austerity being imposed by the majority of politicians in the Dail.
We now know with 100% certainty that not only does austerity not work to improve the economy. This is not to say it is being imposed without reason. There is a very good reason why the political establishment in Ireland: Labour, Fianna Fail, the Green Party and Fine Gael.
Austerity’s function is solely to drive down wages in an attempt to boost profits when output is falling, leading to a stagnating economy at best in the long term. That is exactly what austerity has achieved in Ireland so far, as Michael Burke has shown:
…..there is also another way of expressing the investment rate - investment as a proportion of corporate incomes, or profits. On this measure, the investment rate has fallen by €1.9bn even as profits have increased by €2.9bn, by reducing wages by €4.9bn. The total investment rate has fallen on this measure from 21.3% to 15.3%.
From the point of the view of the economy as a whole, this transfer of incomes has been disastrous. The corporate sector has €32bn in unspent (uninvested) income from profits. But the household sector - which spends more than 90% of its income - has had its income reduced.
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