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.

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.
http://www.ft.com/cms/s/0/a7977fc6-c8c2-11de-8f9d-00144feabdc0.html

“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.

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.

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.

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.

“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).

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”.

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.

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.

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.

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.

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.

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 Defence (SHOULD BE REDUCED TO 10% AND WE SHOULD JOIN NATO)
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 Finance (REDUCED TO 10% OF SIZE - OUTSOURCED TO CONSTANTIN GURDGIEV AND MYSELF!!)
Department of Foreign Affairs (SHOULD BE ABOLISHED)
Department of Health and Children (REDUCED TO 10% OF SIZE - ABOLISH HSE - PRIVATISE ALL HOSPITALS AND PURCHASE TREATMENT FOR POOR)
Department of Justice, Equality and Law Reform (ABOLISH ALL EXCEPT THE JUSTICE BIT)
Department of Social and Family Affairs (REDUCE TO 10% OF SIZE - USE AUTOMATION TO PAY WELFARE AS MUCH AS POSSIBLE)
Department of Transport (SHOULD BE ABOLISHED)
Department of the Taoiseach (SHOULD BE ABOLISHED)

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

“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.

as Homer once said:

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

A great example in the creative use of statistics….

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’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’?

@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.

“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.

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.

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.

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?

Have the President dissolve Dail Eireann. Before Nama is signed.

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!