O’Leary on Fiscal Policy and Competitiveness

Jim O’Leary analyses these topics in today’s Irish Times: you can read it here.

23 replies on “O’Leary on Fiscal Policy and Competitiveness”

This a rational analysis of what should be done but the problem for the Government is that the country is in a mood of irrationality and anger.

Jim makes the point that some of the comments on the Irish Times site, “bordered on the offensive,” towards David Begg. Apart from the propensity to be more liberal with abuse on the web, some of the reaction reflects the prevailing mood towards the centres of power.

The slow-motion response of the Government to the crisis and its reckless mismanagement over the previous decade, has left it in a weak position to make its case.

Changing course from “we invented the free lunch” to the hairshirt is obviously a challenge and the perception that the political class has been feathering its own nest, does not help.

Self-interest is stronger in a society than is admitted and the vested interests have had a free run in response to the Bord Snip report as the political class have went on holidays despite the crisis.

Proposals are criticised but no alternatives are put forward in respect of the same spending pot.

Today, in the Irish Times, an article written from the producers’ slant, attacks the Bord Snip comments on the science budget.

“It’s terribly short-sighted, it’s misguided, I don’t know where they get their numbers from or what the basis for their opinion is,” says Luke O’Neill, professor of biochemistry at Trinity College Dublin.

So even the Bord Snip point about overlapping administrative costs does not even merit a favourable response.


If the politicians and senior civil servants, are unwilling to significantly reduce their own costs, then whether there is an election or not, reducing spending will entail much strife.

We already see that benchmarking is a one-way street and that’s the way with much else, when it comes to public spending.

Here’s the difficulty I have with the kind of argument made by Jim O’Leary and similar commentators. Let’s assume that he is correct that, in the short term, the best and quickest way out of the crisis is to cut spending and keep taxes low. The problem is that in the medium to long term that leaves us trapped in the ‘Anglo-Saxon’ social model – with underdeveloped public services and infrastructure, and comparatively high rates of social inequality on almost any indicator that you can think of. Even when economic circumstances improve, politicians (at least in recent decades) do not want to risk increasing taxes, and when the economy is doing well, they are not under significant pressure to do so in any case.

Now I realize that many of you may not care for a more social democratic model of society(!) But I would be very interested in any ideas about how it might be possible to create a more virtuous circle of equitable socio-economic development.

Jim O’Leary makes a temperate and impeccably rational case for a fiscal adjustment that is focused more on reductions in pay and transfers. The evidence supporting this contention is substantial, but, before acting on the logical prescription, it makes sense to assess the existing fiscal arrangements. We will have to wait for the report of the Commission on Taxation to provide, hopefully, some objective and comprehensive data, but there can be little argument that the taxation system has relied increasingly on revenues from property transactions and consumption taxes with a corresponding decline in reliance on income and profits taxation.

This bias in revenue extraction has been accompanied by very high “point-of use” charges for a wide variety of services most of which are provided by the State via State agencies or semi-state companies. In addition and in the absence of effective competition policy or regulation, providers of professional and financial services have been able to capture significant rents.

An examination of the CPI detailed sub-indices and the percentage price increases in the last year to the month of June provides useful evidence. “Point-of-use” charges take no account of income or ability to pay and, where the provision of these services is directed by by State, there is growing evidence that they include an implicit tax on consumers. High charges for goods and services other than FMCGs and white goods, in turn, make a strong case for high transfer payments, a relatively high minimum wage and for higher pay generally.

Curtailing rent extraction by providers of professional and financial services, stripping out implicit taxes in the State-directed provision of goods and services and raising more tax via the more progressive income tax system would provide significant benefits to those on low pay and provide an equitable basis for the required fiscal adjustment which, in addition to reductions in public sector pay, might include reductions in transfer payments and in the minimum wage.

Such a change would require a concerted challenge to the crony capitalism and corporatism that has characterised Ireland in the last 10 years. As always, with policy prescriptions of this nature, the usual disclaimer applies: I wouldn’t start from here or with this crowd in charge.

“…that leaves us trapped in the ‘Anglo-Saxon’ social model – with underdeveloped public services and infrastructure, and comparatively high rates of social inequality on almost any indicator that you can think of.”

Why do American right-wingers feel obliged to be climate-change deniers and European left-wingers are always ready to defend public services even where the primary motivation is the self-interest of the providers and the vulnerable in the society are treated as supplicants?

A bit extreme maybe but I do care about a social democratic model of society but not one where there is not an emphasis on the efficient delivery of services – – and not this broken Irish system of clientism where the powerless go cap-in-hand to a majlis.

Paying people in quangos exorbitant salaries is hardly the best formula to deliver services to poor people in society.

In the present system, the politicians respond to collective power – – whether farmers or trade unions. The individual does not count.

@ Paul
“Curtailing rent extraction by providers of professional and financial services…”

Certainly and Adam Smith warned about gougers such as those who expect to grab €250 per hour for photocoping from a bankrupt company.

we are not denmark. we don’t like high taxes because we have seen little in return for them. we don’t have the natural resources or the decades of investment in education that scandanavia has. in any case it’s a moot point for the next decade because of nama and the long term unemployment problem yet to hit.

I wasn’t making an argument in favour of paying people in quangos exorbitant salaries! I was trying to make the point that we cannot have a developed public infrastructure (efficient or otherwise – and who can be opposed to efficiency?) without the resources to pay for it. If we don’t pay for our public services through taxes, then we have to rely on ‘windfalls’ such as stamp duties generated in a property bubble, or once-off privatizations of public enterprises. Neither seems to me to be sustainable, leaving us in the position that we will either inevitably find ourselves in a position of ‘structural deficit’ again in the future, or we will content ourselves with minimalist public infrastructures. Fair enough, if that’s what you want, but be upfront that it means that – for example – greater proportions of Irish children will live in poverty compared to in other European countries.

By the way, I am in no way supportive of the treatment of ‘vulnerable’ or powerless people as supplicants, which is precisely why I am in favour of universal systems of social provision.

I accept your point that Irish people are sceptical about high taxes because they haven’t seen much evidence that they are used effectively in the provision of public services – and here I agree with Michael’s point about the harmful role of clientelism in giving rise to this situation. But I don’t think it’s really good enough to just ‘give up’ on these grounds.

Jane – your request for ‘any ideas about how it might be possible to create a more virtuous circle of equitable socio-economic development’ is certainly reasonable and politically necessary to escape the many shortcomings of the Anglo-Saxon, or Anglo-American model. Unfortunately, Jim seems determined to exclude this possiblity from debate in his claim that ‘it would be fanciful to suppose that it can be solved without at least some reductions in public spending, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter.’

This argumet confuses means and ends to such an extent that the goal of bringing the fiscal deficit under control is collapsed into the necessity of public sector cuts. So intertiwned are the two – cuts and fiscal consolidation – that to question the efficacy of the former is to question the need for the later.

Yet, the efficacy of cuts is highly questionable. The ESRI’s simulation (in Working Paper 287) show that cutting 17,000 jobs public sector jobs and reducing public sector wages by 5% will deepen the recession, reduce domestic demand and drive up unemployment – all this with little effect on the borrowing requirement and the fiscal deficit. This shouldn’t be surprising – cutting Government consumption and investment during the middle of a such a severe contraction will only worsen the situation.

All independent institutions project the government – following deflationary budgetary policies – will miss its 2009/2010 fiscal deficit targets; in some cases, by a mile.

But Jim won’t entertain the possiblity that the alternative – which would involve substantially increasing public expenditure, per a stimulus programme – could work. Or indeed that it should even be discussed. Anyone who suggests this course is not serious. So we are stuck with a one-hand clapping debate.

Re some of the comments above.

It’s obvious to me that in the interest of a fairer society we should reduce public sector wages and pensions as they are way too high relative to those in the private sector. And that is before you factor in the worth of job security or pensions. I believe that history will look very unfavourably on the people involved in the benchmarking fiasco for their contribution to the massive problems we now face.

Cutting salaries would be a much fairer solution than cutting temporary teachers etc. Yet has anyone in the main unions proposed that instead of cutting staff numbers by say 2% we should have a 2% cut in wages? So the vulnerable would not be effected by reduced services and support. That would be true socialism – caring about services to society.

As for the notion of having a stimulus package, I don’t think that the EU would condone it, and neither would the ECB facilitate it by funding our debt issuance as is what effectively happened in Q1. Why should they – maybe it’s not true, but I have heard suggestions that they are aware that we pay our teachers/nurses/doctors etc considerably more than they do in Germany, France etc.

Would anyone trust the government to introduce a proper stimulus package anyway?

Unfortunately hard choices have to be made and the majority of the people are not ready to accept them yet. I think an opportunity to belatedly gain some moral authority was lost when the government failed to remove the boards of all the banks, as they were all clearly incompetent about protecting their shareholders’ interests. Understanding the suffering caused to shareholders doesn’t really help much or excuse their lack of capability.

The government should have led from the front in taking paycuts to bring their salaries into line with EU peers at least. Mybe then they would be seen as having some moral authority.

And my final rant. Given that we now know the Financial Regulator was wholly incompetent, should we carry out an audit of all government appointed regulators to ensure their capability and that they’re not creating other problems for us? I wonder about our electricity regulator for one: hint, despite already having among the highest wages in the country the ESB happily got a payrise this year, as they were profitable and could not claim an inability to pay. And of course, this ‘profitability’ ignored a huge hole in their pension fund which will undoubtedly be paid for by all of us. Has the regulatoir ensured that electricity prices are at the appropriate level

Am I being simplistic in pointing out that tax receipts being some €575m, or 3%, behind projections, mainly due to a shortfall of VAT (€448m behind), is the entirely obvious result of taking spending power off low and middle income families, and that that situation will be exacerbated by going after welfare recipients and those on low and middle income wages even further?

Following from Michael Taft’s point… those on welfare and those on minimum wage / lower pay pretty much spend every penny they receive and spend it in the Irish economy. They don’t / can’t save; they don’t get to avoid tax, they don’t get to avail of tax breaks. The money these people spend ultimately ends up back in government coffers through sales taxes, through the income taxes of the people they help keep employed by their spending and so on. Taking money off these people takes it straight out of the economy.

Of course the better salaried are in a position to save and to avoid tax. What use to our ‘fiscal policies’ are tax-deductible pensions, AVCs, tax free executive and employee share options and all the rest of it?

Just like the more bloated monoliths in the private sector, the explosion of high salaried middle-managers and consultants doing invent-a-jobs in the public sector is the real pay issue – but it will be front line staff doing jobs that need to be done who’ll be expected to bear the brunt of any cuts.

This debate seems to be getting to the heart of the matter about the mix of policy actions and the trade-offs and balances that will be required to waether this economic storm and to set the path towards a better balance of prosperity and social cohesion.

Many of the posts highlight areas that need to be addressed and specific proposals that are valid, but, individually, they are unlikely to gain much traction. They need to be woven into a workable and sellable package.

My starting point, as I indicated above is the CSO’s CPI detailed sub-indices data and the price changes in the last 12 months:

The “Poor can’t pay” campaign has highlighted some of these, but they would repay more detailed attention. There is a very simple proposition: any provider of goods or services which can raise prices while the general level of demand is collapsing at a historically unprecedented rate is exercising market power that is not in the public interest. It is bad enough that the costs of these goods and services are increasing, but it is even worse that they have risen previously to unjustifiably high levels.

And it is these high costs that have driven demands for high pay levels, a high level of transfer payments and a relatively high minimum wage by international standards. Stripping out these costs would tranform the economic landscape. And the Government could lead the way since the provision of many high-cost goods and service is State-directed.

I fully agree with Michael Taft that cutting public sector pay, front-line public services and the minimum wage and reducing transfer payments is entirely self-defeating while this price and rent-gouging continues. John, for example, queries the role of the energy regulator. The current electricity and gas price proposals for 1 October will leave gas prices (excluding VAT) 10% higher than those in Britain and electricity prices 20% higher. Add in the VAT differential (13.5% in Ireland, 5% in Britain) and the scale of the excessive cost burden should become clear.

Because the main energy businesses are in public ownership there seems to a naive view that Governments have been part-financing the huge investments they have undertaken. The truth is that successive governments haven’t advanced one red cent. Consumers have contributed the lion’s share of investment finance. This gloriously inefficient financing of investment imposes an implicit tax on all consumers. The “promotion of competition” adds another implict tax and the list is rounded off by huge wrong-headed investment in gas interconnection.

Similar, but less easy to quantify, examples abound in other sectors. In this case, the simple, but radical, solution is to privatise the energy networks and integrate the gas and electricity markets on both islands. Even though this would bring gas and electricity prices down to the levels in our main trading partners and generate proceeds for an investment stimulus, I doubt that Michael Taft and his comrades woud support it.

However, the Eircom ESOT’s backing of Singapore Technologies Telemedia (STT) proposed takeover of the rump Eircom business might give some pause for thought. Not all private sector investors are rapacious, asset-stripping, short termist, private equity vultures. In any event for the energy networks they would need to be very bad if they were to do worse than succesive governments holding the majority shareholdings.

I remain convinced that developing this narrative of stripping out rents, unearned profits and implicit taxes provides the basis for an equitable fiscal adjustment and investment in the infrastructure and utilities required to promote economic perfomance and productivity.

However, I am equally convinced that this Government which is totally fixated on political survival and on protecting the banking and business elites that supported its ascendancy and which does not have a popular democratic mandate for the policies it is pursuing is entirely incapable of designing or of implementing the policies required.

As I’ve posted previously, Ireland will muddle through, but at enormous cost in terms of blighted lives and crushed hopes. All one is left with is fury at the avoidable waste and suffering.

@Paul: You wrote about ‘a high level of transfer payments and a relatively high minimum wage by international standards’ I would be grateful for any data links (EU, OECD or otherwise) to substantiate this observation.

@ Michael Taft

“But Jim won’t entertain the possiblity that the alternative – which would involve substantially increasing public expenditure, per a stimulus programme – could work”

So an average government deficit of c.10% over the next 2-3 years isn’t enough of a stimulus for you??? We’ve been running a structural deficit of around 7-8% for most of this decade, at a time when the Irish electorate continually demanded low tax policies, but hey, lets just start throwing more good, hard earned, and difficult to find money down the toilet eh? At some stage the grown ups have to take control and stop this madness.

Eoin – given that, according to the ESRI, cuts in public spending (and, to a lesser degree, increased general taxation) will prolong the recession, reduce domestic demand further and drive up unemployment with little impact on the borrowing requirement; given that this is what the Government has done three times since October and the deficit keeps growing; given that the EU Commission projects that the deficit will spin out of control next year (and that projection was made taking into account the April budget measures); given all that – what would grown-ups do? Keep doing the same thing? Or, at the very least, entertain the notion that there might be alternatives.

There is, after all, a difference between borrowing to invest in the productive sector of the economy (creating jobs which increase tax revenues, lower social welfare costs and increase domestic demand) and borrowing to subsidise people on the dole while filling the fiscal gap from the continuing decline in economic activity.

You are not alone in arguing we shouldn’t cut welfare or jobs as it will dampen consumer spending more and deepen the recession. You are right it will.

So let’s not do it and just keep on borrowing more and more till no one wants to lend to us anymore.

Sometimes things have got to get worse before they get better. We’ve got to find whatever level the Irish economy can be sustained at. It’s going to be a mix of lower public expenditure (i.e jobs) and higher taxation. We can’t get there in one move but we do have to start moving. We’ve increased taxes; from what I can see in the latest returns we’ve actually increased public expenditure. Does anyone believe that there isn’t at least 10% waste in public expenditure?


How much waste did Colm McCarthy’s group find?

Most of what the expenditure their report suggested we ‘snip’ consisted of simply transferring some current costs of government onto private enterprise or citizens, or just cutting spending in areas not deemed essential – like supporting sport or the arts.

When you add up the supposed efficiencies, the streamlining of operations, and the productivity increases what percentage of public expenditure is that? If anything their report strongly implies there’s little or no fat to trim.

If we want to find waste in public expenditure and dump it we could start with rooting out the rest of the Rody Molloys in the system.

Stuart – the corollary of protecting jobs and social welfare recipients’ living standards (such as they are, being in relative poverty) is not doing nothing until no one wants to lend to us anymore. Rather it is to mobilise the resources we have available to invest into the economy. Second, just to note – net voted expenditure came in nearly 1% below target at end-July, all of the savings coming from reduced capital expenditure. Third, while there may be some who believe there is at least 10% waste in public expenditure, apparently the McCarthy Committee doesn’t. A close reading of their proposals suggest that there is little waste as most of their proposals have little impact on the operational efficiency of the public sector (the majority of their proposals – at least in Euros – come from reduced transfers to low-income groups, enterprises and social organisations. This is not surprising since the National Competitiveness Council produced OECD findings in their latest Competitiveness Report that show that the Irish public sector is the fourth most productive in the EU, though obviously such findings have to be treated with some caution as public sector productivity is hard to pin down. You might be interested in this reading of the McCarthy report and the public sector – http://notesonthefront.typepad.com/politicaleconomy/2009/07/shock-horror-mccarthy-vindicates-public-sector-efficiency—–noel-whelan-wants-you-to-read-the-report-he-wants-you-to.html#more

@Dealga & Michael
To say there is waste is not a criticism of the public sector alone. There is also waste in the private sector. When things are going well companies spend money needlessly. The state was doing the same thing whether it is on marketing, consultants, empty buildings, unnecessary foreign trips, maintenance contracts, useless subsidy schemes, unused garda cars whatever. I’m an accountant, let me in with a couple of colleagues and we’ll find it. I’ll find 10% waste in any business, it’s all about challenging the status quo.

The people in the public sector know where the waste is. I’ve heard them on the news whether they be school principals, teachers, nurses etc. They see it every day. What about the ratio of middle management to front line – that’s where most corporations do the culling.

“Rather it is to mobilise the resources we have available to invest into the economy”
Don’t disagree but this is too vague. What resources do we have? Where do we invest it? Who does the investing? How long is it going to take because if we keep borrowing at the current rate we don’t have very long.

The public sector does not produce anything per se, it is service orientated. The only way it can generate income is to hit the population with charges or taxes. It cannot export.

The only solutions I have seen so far from those who don’t believe public sector spending should be touched are
1. Increase taxation to move towards a more European model. Even if that is deemed fairer it isn’t going to do much to stimulate the economy, quite the opposite.
2. Mobilise the resources – that suggests we have some resources sitting around unproductively. I have to say not obvious to me what these are but I’m open to suggestions.
3. Wait for the world economy to improve which will bring us back to where we were through export growth. But as John has pointed out consistently our exports didn’t really get bashed all that much so they probably arn’t going to grow enough to bridge the gap.

My understanding is the McCarthy team didn’t go digging themselves but relied on the various departments to make submissions and on department of Finance evaluations. It wasn’t exactly rigorous. They were all going to present themselves in a good light or at least try to.

@Slí Eile,

You raise an interesting point. There seems to be an absence of good quality (and up-to-date) comparative analysis and data in this area, but the way you have couched your query suggests that you have access to some which refutes my observation. I cheerfully admit that I have no comparative advantage in this area. It’s simply that the scraps of comparative data I’ve accessed lend some support to my view. Perhaps you could post links to relevant data and analysis.

There is, however, a larger point at issue here. I’m not saying that transfer payments and the minimum wage are over-generous. It’s simply that we’re at a point where major fiscal policy choices will have to be made and cuts that may be effected at the stroke of a pen will be extremely attractive to a government under pressure. To many people transfer payments and the minimum wage may “appear” over-generous, but my contention is that they are at these levels to provide some compensation for price and rent-gouging by those with excessive economic power and for implicit taxes imposed by a succession of inept governments.

It is in the interests of the vast majority of citizens and residents to strip out these rents, unearned surplus profits and implicit taxes. My focus is on the development of a mixed economic system characterised by genuinely competitive markets circumscribed by effective democratic governance, policy control and regulation and accompanied by sufficient provision of non-market services. I have no interest whatsoever in reducing transfer payments or cutting the minimum wage per se; I simply want to see an economic system that minimises recourse to these mechanisms.

(In passing, by all accounts Amartya Sen’s latest book, “The Idea of Justice” (it’s on my summer reading list) makes more progress in rescuing Adam Smith – the author not only of “The Wealth of Nations”, but also “The Theory of Moral Sentiments” – from the clutches of those who shout about “liberty, free markets and the rule of law”. The canny Scot, were he alive, would smartly observe that their real passion is the unbridled pursuit of power, profits and prestige.)

So, finally, I have a question for you. Since it is almost ineviatble that the welfare budget will be cut, which would you prefer to see:

1. A 3% cut in nominal benefit levels that leaves all the price and rent-gouging and implicit taxes intact; or

2. A 3 % cut in nominal benefit levels accompanied by a stripping out of the price-gouging and implicit taxes that will lower the cost of living for everyone – and by probably more for low income households – and the privatisation of some restructured semi-state businesses that will reduce implict taxes and generate proceeds to leverage the financing of an investment stimulus?

Over to you.

@Michael Taft

Costs in a small country which is largely dependent on foreign companies for its industry and internationally traded services and EU funding for its farmers, should not be significantly out of line with its trading partners.

Last month Eurostat reported that Irish consumer costs were 27% above the EU average.

High price cartels continue to exist in the upper levels of the professions and the public sector has been a munificent cash cow for many areas of the private sector.

There are many shades of socialism in Ireland and in the Sunday Independent today, Shane Fitzsimons writes about high paid pharmacists: “my experience of community pharmacists — they’re the ones standing behind the counter — is that no matter how highly educated they are, the task they perform is no more onerous than that of a grocer. I ask them to take certain boxes off the shelf. They put the boxes in a bag, print off a receipt which I sign, and off I go.”

In May 2009, the CB Richard Ellis Global 50 Index of most expensive locations for prime office rents in the world, had Dublin at rank 10 and Brussels at 49; Oslo at 38 and New York Midtown at 21.

Total occupancy cost for Dublin was €760 per sq.m pa, down 12% in year (33rd biggest decline; Singapore fell 34%), compared with Brussels @ €338 per sq.m pa, down 8%;

Berlin does not appear in top 50; its total occupancy cost was €23 per sq.m pa and Belfast’s was €22.50.

Salary and benefits levels in the Irish public service are out of line and in a system of limited accountability, I can’t say what the level of waste may be but the waste in eGovernment and total IT alone , does not inspire confidence.

Vaue for money from a few billion euro over the last decade?: Science Foundation Ireland invested €400k in a computer system that has turned out to be a dud!

Manufacturing labour costs are one area where Ireland isn’t out of line and the absence of a mandatory pension scheme is a big help, if you are a member of the deluxe Irish public sector scheme.


Ireland’s minimum wage was second-highest in the EU in Jan 2009. Germany does not have a minimum wage.

In 2007, Eurostat said the % of employees receiving the minimum wage in Ireland in was 3.35 in 2005 compared with 16.8% in France.


As for the merits of a stimulus, some businesses that are not staring at the risk of collapse, can maintain an existing lean structure in the hope that a recovery is not too far distant. The same can apply to an economy but Ireland will have to go cap-in-hand overseas debt funding for years ahead. Thus far the Japanese are able to finance their own debt but they too face a day of reckoning if its business as usual.

Already more than a third of their workforce are temps earning less than the Irish minimum wage.

We could “mobilise the resources we have available to invest into the economy,” if the finances can be fixed within a reasonable time scale but do we run big deficits for the next decade or return to high taxes?

We are putting €1 billion annually into a science budget; a founder of a high-tech start-up praises the people at Enterprise Ireland; says “academics and teachers typically have no idea what is involved in successfully commercialising a new technology”; “Academics have consistently encouraged us to “slow down” research time frames, because they wanted to justify stretching out the funding over a longer span of time.”

Stuart – I’ll just address one of the many valid points you pose (don’t want’ to take up all the website space) – namely, mobilising the resources. This could entail any or all of the following

(a) Utilise our low-debt status – we could borrow up to €15 billion in excess of Government targets and would still be below the Eurozone debt average;
(b) Front load the drawing down of the €20 billion the NTMA has accumulated in free cash balances – current policy is to begin in 2011
(c) Raise revenue from low-deflation taxation streams such as high-incomes and high-asset households – (a capital assets tax or reform of regressive tax expenditures); general tax increases should wait for the post-recession, when the economy can absorb it
(d) Launch ICTU’s proposed Economic Recovery Bonds for households to take advantage of the rising savings ratio;
(e) Establish ICTU’s proposed public enterprise holding company (similar to Fine Gael’s NewERA) to expand current, and establish, new public enterprises to oversee infrastructural investment based on retained revenue and borrowings off-the-books.

As to the areas of investment, I would refer you to UNITE’s ‘Growing the Economy’ which can be read here: http://www.unitetheunion.com/pdf/Growing%20the%20Economy%20-%20FINAL%20URGENT.pdf

Yes, there are considerable efficiencies to be had in public sector productivity and policy-level reforms. Those efficiencies should be reinvested into an investment stimulus to reduce the extra borrowing needed. None of this excludes fiscal consolidation; the foundations of this can be started during the recession. But substantial advance will have to wait until the post-recession period.

Paul – you may well be, unfortunately, correct – social welfare rates may be cut (though I wouldn’t rule out the substitute of means-testing social insurance). However, that shouldn’t exclude us from asking more fundamental questions. Cutting social welfare rates would reduce departmental expenditure by €510 million (using the McCarthy Committee’s report). Unfortunately, the ESRI didn’t simulate a social welfare cut in their multiplier effects. However, we can estimate what the effect would be by using the impact of cutting public sector wages and cutting 17,000 jobs. The ‘net savings’ or reducing in the borrowing requirement could be between €250 and €340 million. This would reduce the General Government Balance by less than 0.2%. Given that cutting social welfare could have a high impact on domestic demand (social welfare recipients spend most of their income) and, so, be particularly deflationary – my question to the issue of cutting such rates is: why?

@Michael Taft,

I think the debate on this thread has been useful, but it may not have occasioned any move from entrenched positions. I also think we agree on the need to minimise the contractionary fiscal adjustments and to initiate contracyclical policy and investment initiatives, but I suspect we differ quite a bit on the elements and priorities.

In any event, it is largely an academic exercise, because we are stuck with a Government that lacks a popular democratic mandate for its policies and is focused on getting over Lisbon II, ramming through a very difficult budget and getting NAMA up and running. The poll in today’s Sindo – insofar as it captures the popular mood – suggests that there is little appetite for an election and a change of government – presumably because the likely outcome would be an FG-Lab coalition which would struggle to agree and implement an appropriate programme of government.

I’m afraid my fury at the suffering and waste caused by previous and continuing major policy failures has not abated.

Took a look at that link and I now understand much more where you’re coming from.

I think you have more faith in the state driving this investment than I do. I fear I must confess that we will borrow the money to maintain the jobs and at the end of it all we will still lose the jobs and end up with the borrowing. If you take Element6 in Shannon, will they grab a pile of cash from us to “save” 140 jobs and then still go in 2/3 years time.

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