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Fiscal Policy

Politics for beginners

Ireland is a small country with a very odd political system, and so we don’t necessarily expect our politicians to be economic experts.

We do however expect them to get the politics right.

The title of this post comes from a piece by Brendan Keenan in yesterday’s Sunday Independent, in which he adds his voice to the growing calls for a broad-based and front-loaded approach to solving the state’s financial crisis. I fully understand the initial reluctance by the government to take too much demand out of the economy too early, but as Philip, Patrick and others have pointed out, growing levels of uncertainty may be doing more damage to consumer spending at this stage than would be associated with the increase in taxes that everyone knows is going to have to take place sooner or later. And clearly demonstrating that the government is in control of the state’s finances is important, not just in its own right, but because of the implications for the credibility of the bank guarantee.

To these economic arguments can be added a political one that is to my mind equally compelling: trying to solve the fiscal crisis in a piecemeal manner will be politically extremely difficult, if not impossible. As Jeff Sachs used to say in a very different context long ago, you can’t cross a chasm in a series of short steps.

4 replies on “Politics for beginners”

The piece of course fails to deal with the crucial point – the Government has no mandate to introduce any of these policies. Fianna Fáil stood for election on a manifesto, written by B Cowan esq., which was a figament of his imagination then, as it is so clearly ludicrous now.

I am not sure how much good an election would do, but the difference is that an incoming Government would have a mandate to act.

It does of course ring very hollow to be lectured by any journalist still working for Independent Newspapers, a company hoplessly insolvent for reasons other than trading problems. I wonder how safe your pension is Brendan? I certainly would not trust mine to the O’Reilly family.

Note that Keenan seems to favour the publication of “a detailed [fiscal] strategy for at least the next three years” rather than a “front-loaded” approach. Following the Swedish approach, the credibility of such a plan would require that Cowen and/or Lenihan promise to resign if clearly defined fiscal benchmarks are not achieved.

Any views on Obamas budget? ….he’s just finishing his plans to bring back overseas jobs in 6 months..Ireland Inc in ruin on Sept 11th…Mark my words..check out U.S. websites etc .I have and it aint pretty.Irish media missed this BIG story last week… why ?Charlie Bird was in Cuba I think!!!

B. Keenan says the Swedes and Danes offer a strategic insight: “if one has to impose hardship, spread it thick and make sure no citizen escapes entirely. That way, they are all furious and get in each other’s way.”

The Government has clearly allowed many citizens, including some of the least deserving, to escape unscathed. It could and should remedy that fairly quickly. But it will not be able to “spread it thick”.

The problem is that the Government has planned to spread most of the pain over the next four years. According to the “Addendum” document sent to the Commission (which, absurdly, is the current fiscal plan), the Government aims to save €2Bn. this year.

In ordinary times, this would be a bold move but the collapse of revenues means that, in order to get the deficit down to Stability Pact levels, and then to make additional adjustments amounting to €4Bn in each of the following two years with further adjustments of €3.5Bn. and €3Bn. in 2012 and 2013 respectively. That’s €14.5Bn. in total savings and/or tax increases in the next four years.

The EU Commission is clearly sceptical about the Government’s ability to deliver on these adjustments. The measures announced in last October’s Budget and subsequently will probably not deliver a full €2Bn. this year yet they have had such a severe impact on the Government that it is difficult to imagine how our political system can even attempt to deliver savings of €14.5Bn. .

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