Flying Pigs and the End of Austerity

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1_tDo you really believe that 2015 is the last year of austerity?  If you believe that fiscal pigs will fly, then, yes, 2015 will be the last year of austerity.  However, if you are even just a tad sceptical then read on.  For 2015 is not the end – it is just the end of the beginning.  After 2015 we will be into a new phase of real austerity.

The Government has produced a budgetary scenario up to 2019.  They emphasise that this is just a scenario.  They even underline it.

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

So this is one possible future that the Government is considering.  However, given that they have published it twice means that this scenario is being serious considered – especially as they have not produced any other scenario.

The key to understanding why real austerity will continue up to the end of the decade is the premise of this scenario:

‘Expenditure is assumed to increase by 1 per cent per annum.’

Ok.  And how much do they expect inflation (GDP deflator) to increase by?  1.4 percent per annum.  So each year the increase government expenditure will not match the increase in inflation.  Therefore, each year it will be cut in real terms – that is, after inflation.

Let’s run through some basic numbers – focusing on primary expenditure, which excludes interest payments.  This means we’re looking at expenditure on public services, social protection and investment.

gps

There may be some slight variations due to rounding and small exemptions from the benchmark but this tells the broad story in absolute terms.  This confirms the Government’s assumption of maintaining expenditure below the rate of inflation.

Between 2015 and 2019, real primary expenditure will be cut by 2.3 percent, or approximately €1.5 billion.  This may not sound like much (and in comparison with what’s gone on before, it isn’t).  But this is coming off the back of massive cuts.  Between 2008 and 2015, primary expenditure has already been cut by a massive 18.5 percent in real terms.  And now, we’re in line for more up to 2019.

But this only tells part of the story.  For in that expenditure there will be certain demand-led programmes, expenditure that the government has no alternative but to increase.  The big category is the increasing number of pensioners.  There is no official estimate of this, but we can make a bit of a guess.

Between 2008 and 2012, there was annual increase of 3.5 percent in recipients of stat pensions (contributory and non-contributory old age pension, and widows’ pensions).  There will be a blip this year with the increase in the retirement age but long-term growth is probably around 3.5 percent.

If this holds, then between 2015 and 2019 there could be an increase of between 75,000 and 90,000 in pension recipients.  In 2012, average pension payments were €11,900 per recipient.  On this basis, old age expenditure could increase by approximately €900 million.  And this doesn’t factor in any increase in pension payments.  Nor does this factor in increased demand on public services (health services, medical cards, eldercare, etc.).

In short, increased pension payment could take up 50 percent of the assumed increase in public expenditure up to 2019.  If this holds, then expenditure on all other programmes – public services, social protection, and investment – will have to be cut further in real terms.  And when the demand on services is considered, the cuts will have to be even more severe.

There will be some benefits to public expenditure; namely, reduction in unemployment benefits.  There may be fewer primary level students, but there will be more secondary and third-level.  The Government may be successful in passing on health expenditure to households (forcing them to purchase private insurance).  So there are ups and downs.

But the bottom line is that expenditure will be squeezed, squashed and stuffed.  There will be real public spending cuts under the Government’s scenario.  Austerity will continue – but not because there will be actual cuts, though this could happen in particular programmes.  It will mainly happen by letting inflation do the cutting – that is, below the radar.

Why?    The Government is equally up-front about this.

  • Frist, to reduce the level of tax revenue.  As a percentage of GDP, the Government hopes to cut tax revenue by 3 percent (and that’s with more people working and wages rising).
  • Second, to run a budget surplus of nearly 1 percent by 2019.

So, reduced tax revenue and a budget surplus – it doesn’t take an economics department to figure out how you pay for that.  You can only do that by cutting public expenditure in real terms.

There is one bright spot.  All this may be on the planning boards, but those boards can be discarded.  It is likely there will be a change of Government after the next election.  I would like to think one possibility would be a progressive-led government but that looks unlikely if Adrian Kavanagh’s estimates are anything to go by.

However, there is a definite need to intervene in the debate – not only to highlight what’s being planned, but to provide an alternative; an alternative based on fiscal expansion, increased tax revenue and investment, growing efficient public services and providing a strong floor for all low-income groups whether in work or not.

This may sound all abstract – and that’s exactly what vested interests want you to think (‘oh, don’t you be worrying your little heads over structural balance assumptions, the experts are looking after you’).  But it’s not.  This is real – just as real as the nightmare we have had to endure over the last six years.

You may not believe in flying fiscal pigs but we had all better believing in fiscal sheep.  Because we’re being herded into a place we definitely don’t want to go.

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