In my presentation to the DEW workshop yesterday and in several previous papers over the last two years  (my recent work on the Irish fiscal situation is gathered here, while you can look up my earlier list of papers here), I have tried to explain the reasons why the current Irish situation requires a fiscal response that is subtly different from the standard Keynesian prescription.  In general, my global view on fiscal policy would be very much in line with the IMF’s view during the current crisis (as explained here):  fiscal expansion should be pursued where it makes sense but “one size does not fit all” and some conditions call for a different fiscal approach.

Here are some of the key issues (but please read my actual papers if you want the more detailed versions of these arguments):

  • The current recession in Ireland is not just a demand slump.  The pre-crisis economy was highly distorted due to the construction boom and the debt-financed consumption boom.  The economy needs to be re-orientated towards the tradables sector and that requires real devaluation.
  • Outside the monetary union,  other countries are undertaking currency depreciation to achieve real devaluation.  The equivalent for Ireland is to reduce domestic wages and prices.  Since aggregate inflation is low in the euro area, a reduction in Ireland’s relative wage and price level requires nominal reductions.  While this is uncharted territory, real devaluation by this method should parallel the gains obtained by those countries that achieve the same outcome through nominal depreciation outside the currency union
  • Part of the distortion during the bubble was that pay rates in the public sector grew rapidly.  While this is understandable to some degree due to the very tight labour market at the time, the change in the labour market since then calls for a reduction in public sector pay rates. This is an important component of the overall real devaluation process.
  • If the government had run sufficiently large surpluses during the boom, the very large swing in the fiscal position in the last two years could have been tolerated without much corrective action.  I have repeatedly pointed to the example of countries such as Chile that successfully ran large enough surpluses during the boom.  I have been highlighting since my 1998 paper in the Economic and Social Review the dangers of such pro-cyclicality in fiscal policy.
  • A large proportion of the deficit is structural in nature:  the resumption of GDP growth in itself will not lead to a return to a sustainable fiscal position.  A combination of tax increases and spending cuts is needed to put the structural deficit on a course back towards balance.
  • Due to the ageing of the population,   public spending is set to increase sharply in the coming decades:  excessive accumulation of debt is not appropriate, given future spending needs.
  • Funding risk remains non-trivial for Ireland.  The sovereign debt spread remains substantial and it is an open question what would happen to the spread if the market’s re-assessed Ireland’s commitment to fiscal stabilisation.  The situation of the US and UK is quite different since the sovereigns in these countries ultimately control the currencies in which government debt is funded.

For such reasons,  I consider that those who advocate an ‘off the shelf’ Keynesian prescription (as advocated by Danny Blanchflower yesterday) do not have a correct diagnosis of Ireland’s current economic and fiscal situation.  The standard Keynesian prescription is appropriate if an economy on a sustainable growth path and with sustainable public finances has been temporarily knocked off course by a demand slump. For the reasons given above, this is not the situation in Ireland.

That said, I would not exaggerate the differences too much:  according to the ESRI’s latest projections,  Ireland is set for a general government deficit of 12.9 percent of GDP in 2009, which corresponds to 15.2 percent of GNP.  A fiscal package of €4 billion in 2010 would still leave the deficit at 12.8 percent of GDP in 2010  – it is not the case that the current strategy is seeking to ‘balance the books’ in the short term.

71 replies on “Mis-Diagnosis”

So then, we are going to have your response to Blanchflowers paper, without having Blanchflowers paper.Interesting approach to discourse.

Philip Lane, Ireland’s greatest economist, exposes the gross economic illiteracy of Irish unions.

Can somebody please ensure that this piece gains exposure in the mainstream media.

@Vincent, Blanchflower’s work is widely available on the internet and the work he presented yesterday on youth unemployment was previously flagged on this blog. His comments regarding Irish fiscal policy were not based on an underlying paper – his work is more directly concerned with strategies to tackle youth unemployment.

Philip’s central point, and the burden of Patrick Honohan’s remarks to the recent ESRI/Foundation for Fiscal Studies conference, is this: we are not redressing a fiscal imbalance deriving from a cyclical downturn. We are trying to recover from a Bubble.

Two bubbles actually – a public spending bubble (including public payroll) and a credit-fuelled property bubble. These were home-grown, but are compounded by the strong exchange rate, the worldwide credit crunch and international real economy downturn. David Blanchflower has missed these points about the Irish situation.

“One size does not fit all”. The problem the current Irish Fiscal Stimulus (and yes we should start using the phrase stimulus given we have a double-digit deficit) is that it is targeted almost exclusively at maintaining older people in their jobs and younger people on unemployment benefit. A large reason for the increase in Irish public spending this year is social welfare paid to young, healthy people. The stark lunacy of keeping this cohort of young people out of employment is compounded by the demographics of the country, as pointed out by Blanchflower yesterday with this cohort being as large as it ever has been, followed along by much smaller population groups at younger ages.

The long-term productivity effects of this are potentially enormous, and more importantly the social consequences are enormous. We are making the adjustment in the most damaging way conceivable and not even a war-time enemy could devise a more cunning scheme for reducing the long-term productivity of a country than to have 30 per cent of its young people sitting at home.

This was really the most compelling feature of DB’s paper and talk, and an area on which he is a noted scholar and has produced compelling work. The comments on public sector pay and increased borrowing simply did not seem to have anything behind them and did not help to advance the pure Keynesian case in Ireland other than restating it.

@ Philip

super input from you, exactly the sort of clear and forethright analysis that is required to get everyone to wake up to the bubble that still exists in our general economic situation – the government finances simply must be addressed in the upcoming budget and this is not going to come predominantly from the taxation side of the ledger.

By the by – EU Commission growth forecasts released this morning are still pencilling in the following:

*EU SEES IRISH PRICES DROPPING 1.5% IN 2009, 0.6% IN 2010, RISING 1.0% IN 2011
*EU SEES IRELAND UNEMPLOYMENT 14.0% IN 2010, 13.2% IN 2011
*EU SEES IRELAND DEBT AT 82.9% OF GDP IN 2010, 96.2% IN 2011
*EU SEES IRELAND DEFICIT AT 14.7% OF GDP IN 2010, 14.7% IN 2011
*EU SEES IRELAND GDP DOWN 1.4% IN 2010, UP 2.6% IN 2011

I think theres the economics and the politics…

On the economics its a no brainer that very severe cuts must be made…. Our circumstances have changed irrecoverably and pay rates have to reflect that.

On the politics…. a maximum wage in the public sector combined with a third tax rate or levy is the best way to cut through the BS, show leadership, and try to create the conditions where recovery is possible…

Very radical solutions are called for….. A few % here and there isn’t worth talking about.

“David Blanchflower has missed these points about the Irish situation.”
He certainly has. Since you economist chaps are too polite to say it, I will: it’s a scandalously inept knee-jerk reaction to deficit reduction.

Does he know we’re in the euro? That we can’t have a currency devaluation? That we can’t inflate within the euro? That what we are dealing with is a previous inflation within the euro!

And this is a reduction. The ECB are predicting a 14.7% GGD for 2010 and 2011. I presume this includes planned cuts in spending, so it is saying that government income is going to drop for the next two years. This is not some slash and burn job, it is a minor cut to a massive problem (not disparaging your work Colm, do you fancy doing it again for the next two years?).

Anyway, I think 25 bn in government spending is the bubble excess, what is the professional view on how much is unsustainable?

In the light of all this, could the government really have afforded to shelve the Commission of Taxation report?

Coming back to one of Blanchflowers points.

Is there any economic neutral way of dealing with youth unemployment?

It could be a good time to institute a year/ period of time/ of national service etc.
Hospitals, army, etc.

Or we could conscript and declare war on… Aran Islands


Actually in Blanchflower’s intervention on Irish radio yesterday, he came across as one of those international commentators who will talk informatively about any economic problem in the general, and who are willing to leap in on a specific case without having looked veyr closely at what the specific case entails. His comments were the normal handwaving about not being pro-cyclical. At one point he said something along the lines that Ireland shouldn’t damage demand now, and should instead let growth return and it will return us to an even keel. The automatic stabilizers kick in an bob becomes the proverbial uncle.

But if he knew the nature of Ireland’s fiscal crisis he didn’t show it. He showed no appreciation of the large structural component or the fact that the bubble locked us in to unsustainable spending levels.

Overall I thought it a pretty unhelpful intervention since it prevents what is really needed in Ireland now: for people to internalise the size of the adjustment in standard of living that is required from Celtic tiger levels. He merely gives voice to the union fantasists who offer lots of solutions: postponement of action, more borrowing, pot of gold taxes. Lots of solutions that is except the right one: admit the tiger is dead and start living within our means.

@ Philip Lane

You say, “In general, my global view on fiscal policy would be very much in line with the IMF’s view during the current crisis (as explained here): [Fiscal Policy for the Crisis]”.

However, the entire thrust of that paper is an argument in favour of an optimal fiscal package which is “timely, large, lasting, diversified, contingent, collective and sustainable”. (Executive Summary, p.2)

Of course there are the normal caveats regarding very open economies and the variablity of fiscal multpliers. But nowehere is it sugested that these might be reasons for engaging in no stimulus measures at all, or worse, a fiscal contraction of €4bn.

It seems to me that Ireland’s particular features preventing stimulus that you enumerate above; this not being a demand slump, currency appreciation, increasing pay rates, weak govt. finances, structural deficits and ageing populations, and funding risks are not peculiar to Ireland at all.

Everywhere, the slump has been characterised by plunging investment (and, in some cases exports, but not Ireland). Many Asian currencies are also appreciating against a weak US Dollar; pay rates generally rose during the boom as they generally do. Many countries also had weak govt. finances and/or structural deficits going into the recession, although Ireland was one of the worst culprits because of its low tax base. Likewise all the OECD economies are facing ageing populations, and so on.

Yet the unambiguous IMF advice to all of these was for ” timely, large, etc.” fiscal stimulus measures, not fiscal contraction.

In fact, the only thing that I can find unique about Ireland’s fiscal position currently is the size of its bank bailout, which is equivalent to 232% of GDP, bigger proportionately than the next 4 worst Euro Area economies put together.

It is also worth noting that the IMF’s take on public sector pay is very different to the policy lkely to be enacted in the Budget. In terms of stimulus, “public sector wage increases should be avoided as they are not well targetted……nevertheless, a temporary increase in public sector employment may be needed”. That is, nothing like the policy advocated here.

One key area never addressed by advocates of pay cuts here, explicitly to achieve a competitive devaluation, is how our European partners might react to this breach of the entire communitaire spirit. My guess is very negatively as it is explicitly a beggar-my-neighbour policy. I hope at least they are not witless enough to emulate it.

This seems very reasonable and reasoned BUT what’s with the proposed further tax increases? Now it’s not just that I’m philosophically opposed to more tax – it’s that even with borrowings of 400m per week (a sort of massive stimulus package of sorts) we still have serious deflation. Isn’t the problem with tax increases that they take money out of the productive / investing side of the economy whereas public spending cuts (if done with any basic competence) will simply reduce waste (waste including the amount they are overpaid by)?

Now I accept that cuts in public spending will be deflationary but can’t we cut public spending AND taxes. All this ‘fairness’ nonsense has got out of hand. We need a budget that says to the public sector:

1. Er – Actually far from ‘not having caused the problem’ you are – assuming the problem is fiscal – the MAIN cause of the problem.

2. We are cutting public spending / pay etc…..AND we’re cutting taxes.

Are you agnostic about the difference between tax increases and public spending cuts – seeing them simply as ‘balancing the books’ or do you accept that they will effect different behaviours in different sectors?

I gave both talks careful consideration and was impressed with both, but I think that Blanchflower was peculiar in that he essentially presented a british-centric solution to a british problem to an irish audience (not to say we are unaffected by youth unemployment but that his version was of some issues particular to the UK).

While there are lessons and ideas to be had devaluation isn’t really a remedy for this country because we simply can’t do it, nor can we opt for some of the other provisions that would give the necessary funding, the opening line of Philips talk about ‘doctors knowing their patient’ was perhaps the most befitting analogy of the day.

however – giving existing incentive to the participant is a prospect worth considering, such as (mentioned) child benefit going to a child who stays in schools.

btw: on class sizes (partially debunked by Colm H. yesterday) – I know plenty of smart people who are 60+ years old. If they are 60 years old then chances are they were in a class of 40+ students in primary school and despite not having half of the modern amenities and opportunities that today’s generation have they turned out pretty damn great in my opinion.

thinking of ‘stabilization’ in any terms that don’t include cuts is ludicrous, its like a child in a country with a famine demanding chocolate cake, you don’t have to advocate it one way or another because inevitably it is going to happen for the simple reason that it has to.

As the person responsible for inviting David Blanchflower to Dublin for the workshop, can I first of all thank him and secondly encourage you to read again the measured and careful perspective provided by Philip in his posting to one part of the message contained in David’s paper. Philip reasonably presents why the situation is not one that allows ONE PART of the Blanchflower message (the spend spend spend argument) to follow through in Ireland.

David could not stay due to travel commitments which is a pity – I would have liked to hear the debate. I will, of course, point out this blog feed to him and he may indeed look to develop a post (or response) in due course. And we are working on editing the video feeds taken in the room (time permitting we should get them sorted in the next 24 hours).

What I took from yesterday, as noted by Karl Deeter, is that the core message is well understood as portrayed by Philip in this post, by Colm McCarthy and other, and indeed very directly by John Fitzgerald in his summary of the Blanchflower presentation. I don’t hear anyone disputing what needs to be done (or at least didn’t in the room yesterday). There is a fact that we don’t know the behavioral response that will follow (broadly, the automatic stabilizer argument DB puts forward in favour of avoiding cuts now) but we soon will. I think anyone taking comfort in what DB said on the radio or otherwise is taking him out of the context of his wider agenda (somewhat like the way the Card/Krueger were made the posterboys of a pro-minimum wage agenda a decade ago, where clearly nobody had read the C/K work in any detail).

As an aside I doubt David would do anything but agree with the out-of-sync nature of public sector pay nor would he argue against cutting it – I think he would just argue the timing – a luxury we don’t have.

The reason I asked him over was to discuss the microeconomic response to a labour market crisis. Some part of the debate did come back to the need to intervene in the labour market and we do have a poor history in Ireland (and many other places) with labour market programmes that have high deadweight costs. However, the DB point is that this is not about dealing with some problem in the labour market that active labour market programmes are normally tailored for (intervening to get at a targeted group like LT unemployed). He is talking about a response to stop the floor falling out of the lives of a cohort. This is not where we have the luxury of time either – we don’t have the time to design an elaborate intervention scheme. DB is talking more about fast intervention to ensure employment experiences (largely for the under 25s). This is not high cost – much of this is redirected unemployment benefit. It is not obviously high benefit in the short term which might make the policy community put this on the long finger. But if DB and others are right, the long term social and personal payoff is very large. It is important to get the distinction right as comparing ALMP interventions (which can work but have to be designed well, plus we have a chequered history with them as Colm McC points out) to the ‘propping up’ of a labour market cohort is not comparing like with like.

in terms of economically neutral ways of dealing with youth unemployment:

– complete overhaul of FAS.

– massive internship programmes far better communicated and targetted than the ones announced recently.

– the immediate appointment of a committee within DFSA charged with investigating ways of reducing the numbers of people claiming benefits through innovations in payment mechanisms.

– switching capital expenditure for now toward much cheaper and more labour intensive projects such as repairs.

– allowing the public sector more scope to hire people on temporary contracts at lower wages for the following two year period.

– specific schemes e.g. classroom teaching assistants for the approximately 4,000 schools in the country.

– examination of potential mechanisms for encouraging small business growth among college leavers.

– prioritising pay reductions over numbers reductions in the public sector.

@ Karl D
“I know plenty of smart people who are 60+ years old. If they are 60 years old then chances are they were in a class of 40+ students”

Good god.

That sound you heard was my jaw hitting the floor.

By the way, my mother-in-law is 85 and smokes 40+ a day. Do you think we could get the HSE to launch a “Smoke Your Way to a Long Life” programme?

Speaking of devaluation, I recommend directing your attention to the increasingly imminent risk of a run on Irish banks. AIB and IRE are losing 10% a day, which is very bad when you’re a bank, particularly when your insolvency is almost taken as a given by the broader market. Let’s hope that trend stops in the next few days, or else all the other topics on this blog might find themselves resolved on a less voluntary basis than one might wish.

Karl Deeter wrote:

btw: on class sizes (partially debunked by Colm H. yesterday) – I know plenty of smart people who are 60+ years old. If they are 60 years old then chances are they were in a class of 40+ students in primary school and despite not having half of the modern amenities and opportunities that today’s generation have they turned out pretty damn great in my opinion.

Shorter version: “ah, sure, it’ll do.”

Sorry, it won’t do. If you think education is about educating for “the smart people” who can do well in any educational environment, may I respectfully suggest that you broaden your view?

@ Liam D

Fas has, in a sense, made itself redundant in the sense that the majority of the unemployed are either:

Uni/ IOT graduates


Craftspeople who already have a craft/trade

I now of craft/trades people that cant get the dole as they were self employed, lining up for courses in FAS as it is the easiest way to get some financial assistance.

Graduates will need to show something on their cv for the next few years

There probably needs to be some serious out of the box thinking for all these people.

It should look at two(?) aims of progression and experience.
There is little there for either group at the moment.


Congratulations Philip on a very clear and well argued post. I find it a convincing case for the “least worst option”, given the pro-cyclicality and general lack of foresight in fiscal and general government policy which stoked the bubble. To paraphrase the joke, to get to a healthy economy you really wouldn’t want to start from here.

My concern remains, which Philip recognizes, is that “this is uncharted territory”. His argument that “real devaluation by this method should parallel the gains obtained by those countries that achieve the same outcome through nominal depreciation outside the currency union” would benefit from some heft, because it is going to create a lot of losers and pain. Some stronger demonstration that it will (not should) work is needed to win over the doubters and to make it feasible for any honest politician to be convinced that the short-term unpopularity it will cause is what statesmanship is about.

To draw an analogy, Paul Volcker “knew” that jacking up interest rates in the U.S. in the 1980s would eventually wring inflation out of the system and create the basis for sustainable growth and so judged that it was worth the misery and pain it created for many. What can a policymaker “know” about this course of action today?

The economic problem we face today – and for a long time to come, has its genesis about three or four decades ago. So fixing it will take many years, and very imaginative and innovative thinking and action. Since there is no politician, political party trades union, special interest group, etc. who will attempt the degree of reform needed, we are stuck.

The youth non-employment predicament is, politically and socially, very dangerous, like ‘weepy’ gelly! The emigration safety valve is in lock-down mode. A Smithian economy can only move forward – like a shark; no bouyancy. If the economy falters, and it is doing so – wer’e all in big trouble.

Demand, and achieve reductions in wages and salaries by any means you can, but you MUST also force all service charges, fees, premiums, food + energy prices, etc. in the same direction, and this specifically includes credit availability and even more critically, debt.

Dept is the equivalent of a lead-filled belt around the waist – the sort that scuba divers wear. But someone keeps adding extra lead to ensure the diver is unable to surface, no matter how hard he/she struggles. So, the number one priority is – get rid of all the debt very, very fast. Else that treacherous ‘weepy’ gelly will detonate! Choose – debt or social devastation. Whose country is it after all? The citizens or the interest groups?

B Peter

@ Philip Lane

You are quite correct, an IMF Article IV supports fiscal consolidation in Ireland, but that’s hardly surprising. It would be a shock if it didn’t.

My query was a more specific one, what is there in the IMF paper you cite Fiscal Policy for the Crisis, which supports fiscal contraction? I could see nothing.

More generally, approving overseas fiscal stimuli while doing the opposite here is untenable, unless it is argued that Ireland is in a unique position. That seems to be the thrust of your 7 points above.

But, aside from the enormous scale of the bank bailout, which the stock markets seem to be telling us are about to get even bigger, there is no unique Irish crisis. Of the 7 key issues you cite nearly all are either widespread or near-universal features of the crisis across all economies caught up in the severe recession and, as such, do not seem to justify a uniquely contractionary fiscal policy.

Yes it’s true, “one size doesn’t fit all”. But everyone else (apart from Sr. Berlusconi) seems to have called the fire brigade to fight off the fire, whereas in Ireland the call has gone out to the undertaker.

There are three seperate but related issues here:

1. Our Spending Deficit
If the EU sees the Irish deficit at 14.8% of GDP then that is equivalkent to about 17-18% of GNP. That is off the charts. We simply must reduce it.

2. Fiscal Policy
Traditional Keynesian prescriptions are less attractive because (i) we are a small open economy and much of our stimulus would leak abroad (ii) according to a recent (24.09.09) Economist article on the key question of multipliers “Fiscal multipliers will probably be lower in heavily indebted economies than in prudent ones.”

3. The Balance of Pain: Old v Young
Older people with jobs are favoured by jobs system but at risk due to personal overindebtedness. Younger people without jobs find it hard to get into a system where wages are higher than would be set by a free market (due to stickiness) but are probably not at nearly as much risk of negative equity.

We need to aggressively reduce the fiscal deficit. The benefits of a Keynesian approach in Ireland are exaggerated – approaches that might make sense in other countries won’t work nearly as well here. Some sort of reform of the jobs market is required to somehow reduce the position of incumbents and increase the chances of outsiders (the young).

@Cormac Lucey
With our spending deficit as large as you say and with all our other problems I think it is time for our establishment to move to a war footing.
The bozos in our failed technocracy will take years to get us out of this unless outsiders Irish and foreign are brought in en masse.
As regards our labour market we need to bring down private sector wages quickly and I would recommend an average cut of perhaps 9% across the board.

@Paul McDonnell
In the past income tax rates were much higher than they are now and there was little negative economic effect. We should have no hesitation in pushing them up to 63% or higher if that is what is needed. When the crisis is over the electorate can decide what rates they want.

Don’t worry about movements in our banks share prices. They are just twitches of the corpse. Only the prospect of NAMA is giving them a share price at all. If they dropped to zero tomorrow it would mean nothing, if we all kept calm, which some people probably wouldn’t allow us to do.

@Michael Burke
NAMA is a disaster in progress. After all of his reports now Peter Bacon comes up with this. Why does he hate us so much?

@ E76

“In the past income tax rates were much higher than they are now and there was little negative economic effect”

Huh? Were you on drugs for most of the 1980’s?

@Bond. Philip Lane has a particular policy wrt comments. Please familiarize!

@E76. Pity that your correct. Makes for some disgruntlement! I’d skip the taxes. The debt is the real problem. This MUST be tackled. Problem is, it resembles a second-hand dog turd – no touchee!! Of course you could always don your NAMA mits – sort of a pooper-scooper!

My guess would be that most of all social welfare is spent on necessaries – including lotto, dogs, nags, fags, etc, etc. Still, some comes back in VAT and excise.

If we have to apply emergency taxation, set base rate of 20 % on gross incomes – no deductions of any sort are permitted. One band up to, 6 x (8 x min wage x 365), then its 100%! Run for 36 months, then review. Those who want to leave are free to go. Frying pan into the fire!

For the modelers and mathematically inclined: If the spread between disposable income and cost of necessaries is zero – whence the consumer economy?

B Peter

@ BP Woods

no insult was intended. I simply needed a strong enough statement to express my incredulity. We can discuss income taxes needing to be raised to plug a fiscal gap, but lets not claim that very high rates of tax come with “little negative economic effect”.

As was noted on the Frontline last night, raising the higher rate to 75% on all those ‘tax units’ (ie including couples) earning over 75k would raise around 4bn. Try that on our economy and Ryanair will be opening up 5 new bases in Ireland to help people exit the country post haste.

@E76 ‘In the past income tax rates were much higher than they are now and there was little negative economic effect.’


Deregulate and allow competition (full competition) in all sectors – allow Wall Mart in; Aggressively reduce size and cost of public sector; Destroy the power of the public sector unions to veto policy; Don’t conflate public and private sector. In a properly deregulated (i.e. competitive) economy the private sector will be self-correcting in terms of wages and costs. The public sector is a vast feudal expanse of fiefdoms, sinecures, patronage and political no-go zones. We need conflict between the state / private interests vs. public sector unions – and not appeasement of greed and stupidity dressed up as ‘dialogue’ – and the public sector unions need to lose and lose utterly. If Jack O’Connor has any say in the running of this country in 5 years time then it will not be worth living in. Period.

The extent to which the public sector unions have a say in the running of this country is the extent to which its prosperity and stability are threatened. In their interaction with the semi-states the public sector unions have all the morality, some of the methods and much of the economic impact of organised crime

@ Paul MacDonell

Well I’m glad they werent in charge of the banks then, otherwise something might have gone wrong.

Very high rates of tax will do a couple of things
1. Increase the black economy. Even people who consider themselves law abiding will get sucked in.
2. Discourage working. I do remember the 80s, I started work then. When it comes to a trade off between working harder to get a bonus or leisure time how much of that bonus you actually see will help make up your mind.
3. Emigration of our best and brightest. Despite what everyone says there are jobs around the world for well qualified people. Quite a few have gone already.
4. Discourage inward investment. Will we be exempting FDI from the higher tax. The IDAs new marketing campaign will be “Invest in Ireland for the low corporation tax but your staff will get taxed to the hilt.” Can’t see the Americans buying that one.
5. Reduce consumer spending, reduce confidence.
6. Depress the property market further. If net disposable income goes down then the price you can afford to pay for a house goes down. There was a reason why my house cost €66k in 1987 and was €750k at the top of the boom.

The 80s weren’t great, the noughties were excessive. There has to be something in between.

@Michael Burke. That’s a non sequitur. What’s your point? If Jack O’Connor and David Begg had been running BoI, Anglo and AIB things would have been different? The public sector unions may have loved monopolies but even they weren’t able to monopolize greed and venality. But they cornered a big enough market in these things to sink this country – even without a banking crisis. The looting of the treasury that passed for fiscal policy in this country was another pyramid scam masked by the boom. The fact that the banks had their own bubble disaster doesn’t detract from the threat posed by the public sector unions, the bubble of their costs and the extortionate, wholly regressive tax their host industries (gas, electricity) represent for consumers.

Board Gais unions have just been awarded a pay increase by the Labour Court on the basis that Board Gais is ‘profitable’ – this is a government monopoly.

To cite the banking crisis to detract from this criminality is dishonest and silly.

I mean do you really think any sane person on this blog would ‘defend’ the practices at the banks because they thought the public sector was worse?

Your point is empty.

High taxes on the rich – I believe there is not a lot of evidence of any harm.
High taxes on upper earners and the middle – I would guess some effect.
High taxes on low – would create poverty traps.

So I would keep taxes down for the low and the middle if we are cutting wages, raise them a bit for the upper and then really jack them up for the rich.

It will only be for a short period and will help get us out of this fix so policy makers must do it. Any revenue is good. I believe the US had a 90% top income tax rate for many years and boomed. Problems arose when tax rates rose on middle and lower earners in the seventies. Unfortunately Reagan and the Wall Street types swept to power and sensibly reduced income taxes, but slashed them for the rich. It’s obvious to anyone living in this country that our oligarchs have too much money for their own good. Hence all those obscene weddings and €200 million multiple gifts to family members.

@BP Woods
100% – I’m not that bad.

@Paul McDonnell
Jack O’Connor is not a left-wing Paul McDonnell, nor even a left-wing Michael O’Leary, he is more like a left-wing Moore McDowell. Just try to picture him with a white beard and a posh accent.
Although you probably think of Moore McDowell as left-wing.

The original post is the clearest and most concise statement of our predicament that I’ve seen anywhere.


I’d just point out:

Irish domestic demand is projected to fall by nearly 4-5 times the rate as the Eurozone average in the three years 2008-10. Clearly, there are more factors than just a demand slump – but this is playig a crucial role.

Regarding wages, it is important to note that Irish private sector labour costs are nearly 14% below our peer group in the EU-15 (non-Med countries). In terms of competitiveness, wages would not appear to be the issue. Nor would cutting nominal wages. In the manufacturing sector, a cut of 5% would equal 0.5% of enterprise costs – hardly likely to give us competitive leg up, especially as our labour costs are so far behind other economies anyway When one considers that public sector wages grew at a slower rate than industrial or financial wages in the period 2000-20008 (in percentage terms), there may have been ‘rapid rise’ but it was consistent with other sectors which, in the European context, were only playing catch-up.

I take your point re: running up surpluses. This was one aspect of fiscal policy that achieved some success. Our debt/GDP ratio fell from nearly 40% to 25% between 2000 and 2008 while on the eve of the recession, our effective wealth fund, the NPRF, had approximately €20 billion assets. Considerable savings was taking place. That is the one silver lining that we can put to work.

It should be noted that Ireland, even by end-2010, will remain below the Eurozone/EU-15 debt/GDP ratio average. That’s not counting the Exchequer balances of over €30 billion (18% of GDP). In fiscal terms we still maintain considerable manoeuvrability though the Government’s deflationary measures have eroded much of this advantage.

The ESRI, factoring in the €4 billion contraction, claimed the budget would be ‘significantly deflationary’. They also noted that if the contraction were withdraw, the recession would end earlier and next year would overall positive growth. Unfortunately, Government policy will not allow this to happen. Indeed, it has been the Government’s measures which have contracted the economy even further than what it might have been while seeing the deficit spiral upwards. This shouldn’t be too surprising – deflationary fiscal measures during an output contraction is like running in quicksand. You work up a lot of energy but still end up sinking.

Whatever about ‘standard Keynesian prescription’ there is considerable scope for an investment stimulus. Indeed, there is a necessity. With our infrastructural quality already ranked 64th in the world according to the WES and with a social infrastructure European in name only, there is a clear danger that further degradation will be an impediment to productivity growth and competitiveness in the years to come. We will fall further behind without a rapid modernisation of our economic base. We clearly have, by virtue of our relatively low-debt, asset-rich status, the resources to do this. And the positive thing is that this will create jobs, new taxpayers, reduce government expenditure, and increase domestic demand and economic activity generally. This would appear to be the most sustainable way to address the high deficit and debt levels going forward.

In that respect, the Dublin Economics Workshop should be congratulated for bringing David Blanchflower to Dublin. His perspective is both refreshing and relevant to our needs – even urgent.

@ E76

well could you at least somewhat suggest what band and what rate you want to bring in these taxes on the very wealthy? I think its been noted on multiple occasions already, but there’s isn’t really all that much in the way of ‘high income’ earners in the country to tax anymore, at least relative to the top of the bubble.

If a 75% tax on all ‘tax units’ earning over 75k yields 4bn, what would a 63% rate on all those earning over 150k be likely to yield? 500mio?

If you want to levy it on those earning much less than this, than aren’t you going to be hitting the “upper earners and the middle” that you acknowledge would have a negative impact on the economy?

@peter maguire – that analogy is totally dichotomous, comparing class sizes to a decision to promote heavy smoking is downright odd.

however, it tells me that you must feel that generations below age 60 are clearly smarter and more suited to modern life because of their superior education upon the sole metric of class sizes. Interesting, but back it up, I’m fairly open minded but a sniper shot from the sideline and an inappropriate comparison don’t really shed any light on my comment being correct or incorrect.

In defence of my statement Colm Harmon did have a slide showing that class size wasn’t the deciding factor in education.

@ernie ball “Sorry, it won’t do. If you think education is about educating for “the smart people” who can do well in any educational environment, may I respectfully suggest that you broaden your view?”

I don’t think education is for smart people only, although we do tend to overspend on trying to educate [in a certain manner] people who may have little utility for it in the future. I would rather see larger classes and instead spend money ensuring every child has a laptop and internet connection, the belief that we can flood the market with teachers and get a knowledge economy would be like flooding it with doctors to do away with illness, I don’t normally compare education to health but took @peter maguire’s lead on it! 🙂

@E76. Yes Moore McDowell is definitely a bit too left-wing for my liking. Why is one always accused of ‘extremism’ when one opposes the vast patronage and looting that passes for public policy.

I mean why is arguing for state confiscation of most private income above a certain level not regarded as ‘extreme’ whilst opposing this is?

We need to start seeing the state ‘enterprise’ / high tax model with its attendant systemic mawkish sentimentality about ‘vital social services’ as the land of unreason and deal with advocates of these things accordingly.

Why is there so little curiosity, let alone recognition, about waste and inefficiency in the state’s appropriation of responsibilities over vast areas of our national life?

The fact that the state chooses to provide a safety net for the poor or those out of work is not game set and match for the empire of serfdom, public sector principalities and any number of medieval-church-style socio-economic structures that are consuming nearly half of our GNP – from education to healthcare.

The onus to prove is not on those who believe in cutting 1 or 2 bn from public spending. The onus is on those who don’t believe in cutting to prove why – other than a few thousand people (max) to run and administer Social Welfare payments and the department of Justice we, really need to spend a cent beyond this.

We need zero-based economic policy in which the private-sector tax-payer is sovereign.

Income tax and VAT should be cut to 15% flat. Corporation tax could be raised to 15%. A decision could be taken as to exactly what’s needed to run social welfare and justice and everyone else could be fired.

The economy would recover much more quickly.

@E76. to spell it out in simple terms.

1. The state employs many tens of thousands of people it simply doesn’t need. It would be cheaper to pay them social welfare.

2. The object should be to get maximum productivity where the state absolutely HAS to do some particular thing – if this includes outsourcing healthcare operations to Germany or inviting German consultants here to work full time for the government for 130K per annum then Great. Let’s do it.

3. The state saves money.

4. The state cuts taxes

5. There is more money for investment.

6. In any case the state does not have a right to tax beyond what it needs just to dodge reform.

@Michael Taft
“Regarding wages, it is important to note that Irish private sector labour costs are nearly 14% below our peer group in the EU-15 (non-Med countries).”
Eh, who says that’s our peer group? Those aren’t the countries we are losing jobs to.

“Our debt/GDP ratio fell from nearly 40% to 25% between 2000 and 2008 while on the eve of the recession, our effective wealth fund, the NPRF, had approximately €20 billion assets. Considerable savings was taking place. That is the one silver lining that we can put to work.”
And that 20 bn collapse to 16 bn at end 2008…
At end 2000, the national debt stood at 36,511 mn.
At end 2008, it stood at 50,398 mn.

So over the period we borrowed nearly 14 bn and saved 16 bn… counting interest costs… well, it doesn’t really make for pretty reading, but you may continue to believe in pots of gold if you like.

“what would a 63% rate on all those earning over 150k be likely to yield? 500mio?”
€500 million would be great in our present difficulties.

@Paul McDonnell
You are welcome to propose anything, even the abolition of almost the entire public service and I will not take it personally.
However, I would say that if Jack O’Connor is bad then the rest of our establishment is positively demonic.
FF/the Bankers/the Developers/the Senior Public servants/the Cartels/the professions have taken a large amount of our money and simply destroyed us.
The people he represents are even less culpable.
Even if all public servants only deserved 80% of their wages at least they provided a public service for it.

Yoganmahew – regarding a wages, which countries to you suggest that we compare ourselves to, if not those in the EU with appoximate GDP/GNP levels?

I’d just point that at the end of the 2010 our gross debt / GDP ratio will be, according to the ESRI, less than 76%. The EU Commission projects a Eurozone ratio of 84%. We are a relatively low-debt nation. But when you factor in the Exchequer cash balances, our net debt ratio would fall to 58%. I’m suggesting that this relatively strong debt position should allow us to, at least, canvas alternatives to a fiscal strategy which is deflating our economy and potentially embeding high deficits/debt going forward.

I don’t understand your reference to a ‘pot of gold’?

@ Michael Taft

the problem isnt where the debt ratio is now, its where its going to be in 2012 (never mind 2015 if left unchecked). We can be fairly certain that regardless of any economic rebound, due to the structural deficit we will be loading on 7-8% of GDP onto our debt burden each year. If this was a once off response to the downturn then fine. But its not. Essentially we’ve been running a real deficit of at least 4% every year for the last decade, but this has been covered up by a once off super-cyclical bubble surplus. And your answer to this – lets keeping running huge deficits for the next decade. Excuse me if i don’t sign on.

I’m going to assume yoganmahew and Michael Taft’s figures are both technically correct, I have no reason to believe otherwise.

A great example in the creative use of statistics….

@ Garry

as Homer once said:

“Oh, people can come up with statistics to prove anything Kent. 14% of people know that.”

@Michael Taft
“which countries to you suggest that we compare ourselves to, if not those in the EU with appoximate GDP/GNP levels?”
Hungary, Poland, Spain, Portugal. The other peripherals.

“I’d just point that at the end of the 2010 our gross debt / GDP ratio will be, according to the ESRI, less than 76%.”
Ah, you believe NAMA will pay back every red cent? And the SPV/off-balance sheet 54,000% leverage? Me, I think that liquid and certain debt should be counted, illiquid and ‘assets’ should not.

That’d put us at 111%.

Exchequer cash balances are all very well, but they are still debt that has to be repaid. If they are propping up the deposit base of the banks, they are not really money that is either available for use or about to be repaid.

Then there is the small matter of recapitalising the banks. What do you reckon, 12 bn? And the Social Insurance fund depletion… another 4 bn?

Finally, the 146 bn in outstanding residential mortgages is waving its trunk and flapping its ears behind me… I think it wants a peanut.

The pot of gold reference is the idea that there is some untapped source of wealth still within Ireland that is waiting to be discovered (such as the NPRF… the pensions crisis it was supposed to address hasn’t gone away. The way the NPRF are accounting for their 7 bn in bank preference shares indicates to me that they expect a significant loss on them). The wealthy have moved their liquid assets abroad, leaving their borrowings behind. They’ll divorce the country in friendlier jurisdictions leaving the state (that’s you and me) to pick up the cost.

@E76 ‘The people he represents are even less culpable.
Even if all public servants only deserved 80% of their wages at least they provided a public service for it.’

Agreed on general venality all around. By no means is Jack O’Connor responsible for even half of the nonsense. As to whether public servants provide a service – In many, many cases I would dispute that. The following Gov’t departments are, in my view either unnecessary or mostly unnecessary and, therefore, their employees are consumers and not producers of anything – least of all a ‘service’.

Department of Agriculture, Fisheries and Food (SHOULD BE ABOLISHED)
Department of Arts, Sport and Tourism (SHOULD BE ABOLISHED)
Department of Communications, Energy and Natural Resources (SHOULD BE ABOLISHED)
Department of Community, Rural and Gaeltacht Affairs (SHOULD BE ABOLISHED)
Department of Education and Science (PRIVATISE MOST EDUCATION – REDUCE TO 10% OF SIZE)
Department of Enterprise, Trade and Employment (SHOULD BE ABOLISHED)
Department of Environment, Heritage and Local Government (SHOULD BE ABOLISHED)
Department of Foreign Affairs (SHOULD BE ABOLISHED)
Department of Justice, Equality and Law Reform (ABOLISH ALL EXCEPT THE JUSTICE BIT)
Department of Transport (SHOULD BE ABOLISHED)
Department of the Taoiseach (SHOULD BE ABOLISHED)

Ah….what a good day’s work that would be.

Perhaps someone could point me in the right direction here

Does Philip’s work discuss the impact of the ‘devaluation through lower wages’ on the real value of debt, and what the debt dynamics will be in the recovery scenario that Phillip has in mind

In recent commentary Richard Koo has pointed out that in the Japanese case the real value of debt for both households and PNFCs rose because of deflation. Hence, demand and investment remained weak because of problems with credit demand as housholds and PNFCs struggled to reduce the real value of their debts.

The parallels with Ireland are striking. While NAMA may help to restore credit supply, could falling wages and prices lead to a large increase in real debt levels so that credit demand remains weak for the forseeable future.

While Ireland is a more open economy than Japan, it will still need to run large current account surpluses to erode the real value of the debt. The fact Ireland is in the euro will make this adjustment all the harder. And credit demand from domestic facing firms and consumers could remain extremely weak as they attempt to repair their balance sheets – perhaps so that overall GDP growth remains below trend?

Of course these processes may help with the overall adjustment towards growth based more on exports than on domestic demand (construction) as firms are forced into the export sector. But are we underestimating the potentially prolonged negative impact on domestic demand, and its overall impact on GDP, that the dynamics of lower nominal wages and rising real debt values imply?

Any thoughts, pointers, on this welcome very welcome as I haven’t seen this discussed.

Some of this debate has become somewhat fenzied.

It might be useful to refer a cooler appraisal, specially one which places Ireland in the international context, which is often sadly lacking.

I today’s FT veteran analyst Martin Wolf appraises the changing trends in public and private savings and the consequences for public deficits. Here. http://www.ft.com/cms/s/0/a7977fc6-c8c2-11de-8f9d-00144feabdc0.html

He refers specifically to Ireland at a number of points. I’m sure no-one, ot even on this thread, will accuse him of representing Irish vested interests. But, no doubt, there will be some who claim that he doesnt know the Irish patient as well as many here. That’s as maybe, but he’s addressing key trends in the advanced economies and of course these are applicable to Ireland.

Crucially, “the deterioration in the fiscal position is a result of the cutback in the private sector’s spending, not a cause of it. Not surprisingly, the fiscal deterioration is also biggest where the private sector has cut back most: in the post-bubble economies”.

And, “Of course, governments could have tried to tighten fiscal positions in the teeth of the crisis. All that would have done is turn the recession into a depression. As a result, they would also have transformed part of the structural fiscal deficit into a cyclical one. This might well have lowered the private sector surplus, but only by destroying private income even faster than spending. This would have been a monstrous blunder. In a world in which the private sector is driven towards austerity, as now, governments must offset this behaviour, not reinforce it.”

This is of course where Martin Wolf’s knowledge of the Irish patient is deficient; he doesnt seem to realise that policy here IS a monstrous blunder.

@ Michael

as many have stated here – increased spending on producitve job creation/protection in the private sector, increased spending on long term productive infrastructure projects, massively decreased spending on unproductive public sector wages.

There is far more nuance required than simply “keeping government spending high”.

However, that said, the level of government expenditure has to stop somewhere, or are you suggesting that 20-25% GDP deficits are a good idea? We need tackle the deficit and at least show we are bringing it down towards 10% in the next year or two, which would still make it one of the largest government deficits (and so a stimulus) in the developed world.

@ Bond

I think I get the gist of the argument. But it it is a huge fallacy to assert that public sector expenditure, incuding wages, is unproductive, whereas private sector spending is productive. If you build a road, teach in a school or take out an appendix, it is all productive, whether done by the private or public sectors.

Of course, public spending can be wasteful. But in the era of Anglo-Irish, AIB, BoI et al, no-one is going to assert that private sector expenditure is always productive. That is patently untrue.

Therefore, the issue is reduced to this, would an increase in investment benefit the economy and reduce the deficit? The answer is patently yes. And it the private sector is unable/unwlling to do this, it falls to the public sector to do so, as Martin Wolf argues.

You can pluck all the huge numbers from the air that you like, but the truth is that the level of debt or deficits in Ireland is not qualitiatively different from a large number of other countries pursuing reflationary policies.

A challenge to all the slash and burn advocates: Name another advanced economy which intends to pursue a course of slashing public spending currently in the way that Ireland intends.

@ Michael B

im kinda with you half way here. I would have no problem if the government decided tomorrow to build an efficiently and productively costed deep water port in North County Dublin for instance, or decided that we needed to build another motorway in some part of the country, or came up with a good idea for some sort of train/metro line to the airport.

What i have an issue with is keeping public sector wages at what i consider to be fairly high levels compared to the rest of the economy, just for the sake of creating a government stimulus effect. Better to cut public sector pay AND cut taxes if you want to have that effect. This would see the benefits of govt stimulus spread to 1.5mio people as opposed to just 350k or so.

As for your last question – well name me another advanced economy that created as big a public spending and credit bubble as Ireland. This is where the comparisons fall down. In the US, the UK and Iceland they have at least had the ability to massively debase their currencies (in Iceland by 40-50%) in order to get them through the crisis, a choice we do not have.

@ Eoin

Honestly, I think that project could be a great suggestion. The effect of productive public investment is threefold, it boosts GDP (and taxes), raises trend productivity and thereby lowers real wages. Tax cuts don’t work as well as government investment as, in a crisis, the rich don’t need to spend the money and poor are to afraid to (liquidity preference).

The maintenance of pubic sector wages is recognised by the IMF and others as an important automatic stabiliser, running counter to the contractionary effect of the recession. I think others have dealt with this comprehensively, such as Michael Taft. Wage rates are distinct from overall compensation across all pay grades. There really aren’t any fat cat teachers and gards, they just don’t exist.

The major economies in the Euro Area such as France and Germany and Spain are busy adding reflationary measures currently, ie in the last few weeks. Only Sr Berlusconi is the odd man out, but that is a defining characteristic.

On the ‘public spending bubble’ I don’t regard the deficit of 12.8% of GDP as qualitatively different from the US’s 10% and Britain’s 11.5%, although these have, as you say devlaued their currencies. It hasn’t had much effect though, in reviving activity as external demand remains weak (and Britian is still in recession).

Now, I have to admit I’m hard pressed to come up with anywhere that had as big a credit bubble as Ireland (that ould come down by removing th guarantess, of course). But Ireland’s bank bailout measures are equivalent to 232% of GDP and the next highest in the Euro Area is Belgium at 92%. And Belgium has many other similarities, public debt over 100% of GDP, rising deficits, very open economy, as well as the Euro (even a coalition govt.).

And it was recently strong-armed by the Commission into fiscal consolidation measures. I’m not sure now, though, it would have agreed to these had it known what was in the pipeline in terms of reflation elsewhere, especially from Germany.

So the government came up with a package of tax increases on those who had benefitted from the bailots, banks and insurers, and those who had done well during the recession, energy producers.

At no time was a policy of public sector pay cuts and spending cuts suggested as, to quote Martin Wolf, “this would have been a monstrous bunder”.

@ Michael

“On the ‘public spending bubble’ I don’t regard the deficit of 12.8% of GDP as qualitatively different from the US’s 10% and Britain’s 11.5%”

I would call them qualitatively different in that both countries have some level of reserve currnecy status (de facto for the USD, semi for the GBP). As such, the funding of their deficits is far easier than for Ireland. For instance, US and UK bond yield levels are still very close to their all time lows, while ours are well above the average of the last decade despite base rates being at an all time low. This is an obvious effect of our ballooning deficit and why we need to get some level of control on it, while still appreciating that some government stimulus may be required.

But again, as i said, im not against well thought out government investment in infrastructure, or in protection/subsidisation programmes for productive parts of the private sector. However i think having the argument for keeping public sector wages high purely as a stimulus measure will only see the much needed reform of the public sector put off once again, as well as rewarding the one sector of the workforce that has the greatest protections already imbedded in it (pension, monopoly positions, job for life status, public sector cant go bust).

@ Eoin

The deficits are not qualitiatively different in size, as I think you will accept.

Your point is that the US reserve currency status (and lesser British one) provides a safety-net for their bond markets and the cost of govt. borrowing.

true, but that is a double-edged sword and there have previously been balance of payments crises in both countries; run on the currency and collapsing demand for debt including govt. debt. In fact there were dire predictions that that would recur in Britain in the recent crisis, which proved wide of the mark so far.

Inside the Euro, Ireland faces no such risk. The yield premium is a function of default risk, see http://www.marketwatch.com/story/ireland-default-fears-rise-fears-irelands
which arises from the enormity of the bank bailout measures, equivalent to 232% of GDP, more than the next 4 worst Euro Area economies put together.

Essentially bond investors aren’t concerned because Irish teachers are paid too much, in either case. They are concerned about the enormity of the bank bailout. Given the relative sums involved you could cut their pay to zero and the risk of default would still remain.

@ Michael

they’re concerned at the rate that irish government liabilities are rising. simple as that, doesnt matter where from. Fitch said the following yesterday:

“The breadth and depth of the country’s banking sector problems have substantially increased sovereign risk. NAMA is set to inject EUR54bn of fiscal resources – a third of GDP – into the banks in exchange for property and development loans after applying a 30% haircut to the book value of the loans. The banks will in turn recognise about EUR23bn of losses and are likely to require additional state capital. Government debt ratios are rising very rapidly due to large fiscal deficits, the fall in GDP and additional liabilities associated with banking sector support measures. Gross government debt including NAMA liabilities will rise to over 110% of GDP by the end of 2010 (77% excluding NAMA). As recently as the end of 2007, gross government debt was just 25% of GDP. The rise in debt is likely to push the ratio of debt interest payments to revenue above 15%, one of the highest among Fitch-rated sovereigns in the ‘AA’ range, reducing fiscal flexibility.”

This “rise in government liabilities” obviously comes two fold – from NAMA (54bn, off market and off balance sheet, over a decade, and with some form of repayment) and GGD (c.20bn pa for the next 4 yrs per your suggestion, on market and on balance sheet). So starting at the 1st Jan 2009, by mid-way through 2011 we will have added the same amount of NAMA liabilities in additional debt, without actually gaining any real ‘asset’ which we can at least dispute the value of. This GGD is just as much of an issue as the NAMA stuff.

@ Eoin

Quite right, it’s all real borrowing. But we are attmempting to identify what is uniquely keeping Irish yields highER than elsewhere.

A gross government debt equivalent to 77% of GDP is large, but would only put us on a par with France and Gemany, and behind countries such as Belgium and Italy. We have to identify the unique factor.

To explain the yield differential, we have to identify the difference in debt outlook. That’s the bail-out (not just NAMA). The bailout is, I repeat, 232% of GDP, more than next 4 worst countries put together. The bond market doesn’t seem to share Mr Lenihan’s optimism about repayment.

As for the current deficit, the source of that is collapsing revenues, not rising spending. In the first 10 months of this year taxation revenues are €5.4bn lower than a year ago, spending up by just €1.3bn. If we want to close the gap we need to increase revenues, by promoting economic activity and carefully targeted tax increases.

The other way around, is just walking up the down escalator. Declining activity keeps pushing the budget target out of reach.

@ Michael

“If we want to close the gap we need to increase revenues”

What, like with stamp duty, capital gains and VAT on housing? Eh, that aint coming back anytime this side of 2020. That’s the real underlying issue which is causing Irish yields to be so high – our 7-8% structural deficit. It’s not about us “increasing” expenditure this year, its how semi-permanent (ie not related to economic performance) expenditure increased alongside one-off super-cyclical revenue over the last decade.

I suppose what im saying is that the 48bn or so budgetary current expenditure we were originally forecast to spend this year is a completely artificial number, unrelated to any actual balanced or near-balanced budget. It was budgeted for when we thought we were going to run massive surpluses forever. However you seem to think its something thats real and that needs to be maintained, that can be afforded and sustained in the medium term.

In reality we should have been running enourmous surpluses between 2003-2007, and kept government expenditure in check. Our long term sustainable current expenditure, on a balanced budget basis, is probably around 40bn at today’s prices, yet we are spending around 46.5bn this year, vs a likely revenue of 33bn. We’re undershooting our revenue by 15-20%, and overshooting our expenditure by 15-20%. All im actually suggesting is that we go back to 2006/7 levels of expenditure. Or at the very least re-direct some parts of that expenditure on those areas that need it most, which the public sector clearly doesnt.

And by the way, as im sure you are aware, simply taxing our way to close the budget deficit is not a stimulatory effect, as its just taking money from one part of the economy and giving it to another, namely the public sector workforce. In fact, in almost all cases it will have some sort of negative economic growth effect.

@ Eoin

That is why I used the phrase, “If we want to close the gap we need to increase revenues, by promoting economic activity and carefully targeted tax increases.”

That means restoring growth and only those tax increases (in fact often closing loopholes) which will not affect consumption. Many high earner pay an unfeasibly low proportion of income tax
http://notesonthefront.typepad.com/politicaleconomy/2009/11/the-discussion-on-frontline-last-night-at-some-points-bordered-on-the-surreal-take-the-discussion-on-taxation-the-questio.html and taxing them hurts only savings, not the required consumption.

But the main point is increasing revenues by promoting activity. You can’t cut your way out of a recession. It’s why no-one else is doing it, not US, China, Japan, Germany, France, nor Spain, another post-bubble economy with a similar public debt profile to Ireland’s.


I believe there may be an element of this debate that requires consideration by those advocating cuts as realignment of public spending with government revenue.
My understanding is that this argument is best supported by the idea that the government income was unsustainably high and caused by the property bubble, therefore simply enough, with that bubble now deflated and stamp duty etc. almost absent from the coffers we simply must cut public spending accordingly.
Conversely there is an argument that suggests that public spending improves conditions of economic activity and as an example the money given to the IDA and its use to attract foreign investment would be an indirect and clearly beneficial result of public spending, plus the argument that cutting people’s income and welfare will depress the economy further and so the income take from consumption and indeed employment taxation (unemployment) will further reduce requiring further cuts to meet the new deficit and lead to further reduction in government income. A deflationary spiral.
Countering this is the fact that once this adjustment is made people will return to spending and earning at a more sustainable level i.e. without the artificially high levels of activity in the housing market.

What would seem crucial then in deciding which of these interpretations you prefer and which resulting course of action you espouse is whether you believe the economic activity which depended on this misplaced emphasis in one sector, can, in fact, be replaced by other areas of development. Considering that if income was to magically increase by 20% next year we would not be advocating cuts, reform, sure, but not cuts. Therefore this is not a question of whether the public spend should come down but whether it has to because the income to government cannot come up to meet it. The debate of public pay and private pay is for another forum entirely – perhaps a new benchmarking process, and is, in fact, irrelevant to this whole debate.

So, can we replace the economic activity allowed in the past by the housing boom; well while we can’t predict the future it would surely be worthwhile to attempt to project from what we know and have experienced?

In this regard I feel that economics can be brought down to – stuff! That is to say that I would consider myself better off than the someone in the top 1% of wealth in 1800 AD (by the way I’m a long way from that percentile now!) Why am I better off, well; food, medicine, healthcare, longevity, transport, leisure time activities, communication and information technologies enablers, access to support and advice, (housing), etc. or in short ‘stuff’
I simply have more stuff than he does.
Stuff, of course, that arises from enterprise, innovation, research and development, and economic activity, or people working – productivity.
The financial economy can be seen then as the background enabler for the productive effort to take place in. Certainly, as risk and enterprise requires rewarding, there is a downside of money making money without any real contribution other than speculation; and left unchecked this can, clearly, have negative impacts, but, ideally the capital is merely an enabler, and Michael Burke’s argument that we need to replace private investment with public investment therefore stands up, unless we feel that there is no more stuff that can replace housing; nothing else that will employ people and entice employees to part with their earnings for other items and services provided by other employees.

This is the key difference between, say, an oil crises, where there is, in fact, a problem with the ‘real economy’ i.e. an essential element of the economic activity is not available in sufficient amounts; and this financial economy difficulty – if we can agree that there are alternatives to housing for our activity.

So, the answer is – a monumental yes. The worlds of technology, nano-tech, robotics, genetics, pharmaceutics, bio-tech, communication and information technology, will allow for increases in the level of ‘stuff’ unlike anything seen before – why? Because technology does not grow linearly, it grows exponentially, see as a very simple example Moore’s Law. In fact, it is difficult to be aware of this revolution of opportunity when being immersed in it – but almost all, understand that it is there and it is gaining in significance; watch any film or show from five years ago (see how old fashioned it seems and why), and you will appreciate why someone like Ray Kurzweil suggests that the patterns are undeniable that the rate of change shows us that things moved as much in the last five as the previous ten, and in the previous fifty as the proceeding two hundred years.

And yet, we cut. We suggest that we cannot increase our productivity and economic activity sufficiently and to resist taking our borrowings up to a higher -though not from a comparably currently high level – we must cut, and dampen public investment and indeed public confidence.
One must accept then that this is potentially a massive mistake.
Firstly, because there is so much potential awaiting finance, secondly because the vast majority of our peers are at least trying to stimulate, and thirdly, because there are plenty of nations who will seek the means by which to chase down this new activity in a positive and confident mood, which may ultimately see us relinquishing our position in the global market place to so many particular countries who will invest again and again in education and enterprise.

Having said all of this, I cannot see how the current minister for Finance or the current government can retrace their footsteps thus far, and so it would seem essential that we have a general election and that someone puts a confident hand high up in the air to lead us in a positive and assured manner.

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