Over the past months, the challenges of stabilising the public finances and sustaining the banking system have dominated the macro policy debate. Unavoidably, the depth of the crisis has put policy making in a defensive—indeed survival—mode. The first-order issues have been maintaining the ability to borrow and ensuring a working credit system.
In the months before the next budget, I hope the debate will broaden to focus more on a policy offense to counter the recession. Even though it is getting harder to be shocked by ever-worsening economic forecasts, this week’s outlooks from the ESRI on growth and unemployment were truly depressing—all the more so since the burden will fall especially hard on young workers, as Liam Delaney has reminded us. One message that comes through in the slides from Thursday’s ESRI conference is the importance of minimising inflows into unemployment. It is worth noting that in his presentation at the conference Jaakko Kiander said Finnish fiscal policy was too restrictive in the midst of their “Great Depression;” it took years for employment to return to pre-recession levels. We should be careful we do not look back later with the same regret.
On fiscal policy, the government was under obvious time pressure in putting together its emergency budget. There is no excuse for October’s budget. A fully formulated—and preferably legislated—medium-term fiscal framework should provide room for shorter-term countercyclical measures. We should take advantage of the time to have a vigorous debate about how to use whatever fiscal room there might be.
(I do not mean to suggest that promising policies are not being debated every day on this blog. A few that come immediately to mind: Paul Hunt’s eloquent arguments on tackling inefficiencies in the non-traded sector and for targeted infrastructural investments in growth sectors; Sean O’Riain’s proposals for development-oriented financing; and Liam Delaney’s emphasis on youth-oriented investments and opportunities.)
On credit policy, Karl Whelan has been the catalyst for an impressive debate on how to sustain the banking system in the face of apparent insolvency. But I find it surprising that relatively little attention has been given to the customer side of the credit market—both in terms of the demand for credit and the impact of business/household balance sheets on the willingness to supply credit.
In the international debate, there is a growing attention to the idea of a “balance sheet” recession. The outstanding feature of such a recession is potential borrowers try desperately to repair balance sheets by curbing their spending. In addition, the poor state of balance sheets harms the creditworthiness of many of the remaining willing borrowers. This again suggests there is much to debate on the policy front, from the role of coordination failure in the credit collapse to the potential for targeted tax relief in sustaining investment and employment.