Never-Ending Austerity Amidst the Ruins

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18-06-2013_for2

Ministers are fond of telling us that we are 80 percent through the dark austerity forest. Soon, maybe within a couple of years, we will enter into the light where all will be well and normal fiscal policy can be resumed. Just one more push and austerity will be no more. Should we put a lot of faith in this? I would recommend caution – extreme caution.

The Government has published a long-term scenario – stretching out to 2019. This builds on the projections up to 2016 in the recent Stability Programme Update. The Government is at pains to state that this is an illustration:

‘Again it must be stressed that this is purely an illustrative scenario.’

They even underlined it. Yet, it is consistent with the Government’s SPU projections and it is certainly consistent with reports of a new plan being developed by the Minister for Finance.

‘The State’s anticipated exit from the bailout this year will not mean a relaxing of austerity targets as Mr Noonan hopes Government will approve a fresh regime with firm timelines similar to the EU-IMF-ECB programme.’

Minister Richard Bruton was also giving a warning:

‘Mr Bruton rejected the accusation that the public had expected the end of the bailout term would signal an easing of austerity by saying no “crock of gold” was available to the Government.’

Mr Bruton suggested that this situation would continue for some time.

So it is worthwhile to look at the Government’s ‘purely illustrative scenario’ as there is a very good chance it will morph into the ‘only scenario’ (TINA will become TIOOS – There is Only One Scenario). Let’s look at primary public expenditure – that is, public expenditure excluding interest. This identifies how much money will be spent on public services, social protection and investment. I have used ‘real’ expenditure – that is, expenditure after inflation using the GDP deflator (the economy wide inflation indicator).

18-06-2013_realexp

As seen, primary expenditure is expected to fall by nearly 9 percent over the next two years. From 2015 on, primary spending still continues to fall – by 2.6 percent in real terms up to 2019 despite the Government pencilling in GDP growth of approximately 12 percent during this same period.

But it gets worse. In many areas public spending will rise automatically due to demographic pressures. For instance, the number of pensioners will increase so that even if pension payments remain frozen, expenditure will rise. We should also allow for a rise in demand on health services with this aging demographic. And in education, we will have to spend more just to accommodate the continuing rise in our student numbers.

In other words, we will have to spend more on pensions, health and education just to stand still. When this is factored in, there will need to be additional cuts in other expenditure – in other public services, social protection programmes and investment projects.

We are heading into a period of semi-permanent austerity. Why, if by 2015 we have reached the Maastricht target and when employment and economic growth will continue to reduce deficit and debt levels? The Government gives two clues. First:

‘Ireland is on track to correct its excessive deficit by 2015. Thereafter, the public finances in Ireland will no longer be subject to the corrective arm of the Stability and Growth Pact (i.e. the Maastricht guidelines) but subject to the requirements of the preventive arm and the Treaty on Stability, Co-ordination and Governance (the ‘fiscal compact’).’

Ah, the Fiscal Treaty; remember those debates – how Government ministers insisted that compliance with the pact would not necessitate further austerity? We climb one hill only to find there are more hills to climb.

Second, the Government seems determined to drive the budget balance down to zero and then into surplus. In other words, we will be taking in more money than we are spending by 2019. Now there’s nothing wrong with a balanced budget at the appropriate time. But the Government’s scenario estimates (and to be clear, this is not a projection) that unemployment will be 11 percent. How could anyone imagine any scenario where you run a budget surplus with double-digit unemployment?

Is a balanced budget necessary to reduce debt per the fiscal treaty? No – this is an issue we will revisit in a subsequent post.

This is the future that some Government Ministers are planning. After destroying our social and economic infrastructure with irrational austerity policies, what is next? Continuing austerity amidst the ruins.

That’s the current scenario – unless we work for something different; different than what has happened in the past, and different than what is being planned for us in the future.

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