Budget 2010: Stimulus

The budget contains some measures that have been advertised as stimulus. The opposition parties will certainly argue that these measures didn’t go far enough.

I’ll take a contrary attitude here. All the parties put forward plans in which the net fiscal adjustment was about €4 billion so the fact is that all parties are agreed that the overall macroeconomic effect of the budget needed to be contractionary. It’s easy to paint a budget that has €5 billion in spending cuts and €1 billion in new spending initative as “having stimulus” and a budget with €4 billion in spending cuts and no new initatives as being “devoid of stimulus”.

The reality is that, by and large, these two hypothetical budgets will have the same effect. Of course, one can always argue that some types of tax cuts or spending increases are particularly stimulatory and that one can think of a better mix than the government put forward. But, by and large, this is a secondary issue to the principal one related to the overall macroeconomic stance.

My contrary attitude extends to the government’s own limited stimulus measures. The idea that the the half percentage point increase in the VAT rate triggered an huge increases in cross-border shopping was always ridiculous: See two articles from the early days of this blog by current adviser to the Minister for Finance and former blog alum Alan Ahearne (back then blog posts were written in the third person apparently!) and a later crankier post by me.

To my mind, cutting the VAT rate is just a kneejerk response to a wildly inaccurate public perception based on a desire to be seen to be doing something “positive”. Cutting excise duties on alcohol similarly won’t do much to reduce cross-border shopping. I wouldn’t care much if these were measures that didn’t give up much revenue. However, the summary of budget measures shows that these two decisions alone will cost €257 million on a full-year basis. For comparison, the cuts in child benefit will save €220 million.

And, of course, I never liked the scrappage idea. And I still don’t.

23 thoughts on “Budget 2010: Stimulus”

  1. Scrappage scheme is designed to have Pat BMW Kenny fawning (irisheconomy.ie is a polite forum) to Minister Lenihan when Lucky Lenny appears on the eponymous (haven’t seen that word for a while) radio programme tomorrow to answer questions at 11.00 a.m.

    I wonder how the site valuation tax will value Pat’s rocky outcrop in Dalkey.

  2. @ MOL

    Be careful
    Pat doesnt take this kind of crap anymore.

    Overall, it could have been alot worse…. or alot better

    Al

  3. In raising the VAT rate to 21.5%, the government estimated it would raise 220m. In reducing it, the government foresees revenue falling by 257m. And here’s me thinking the budget was going to be contractionary…

  4. It’s probably wrong to equate the cut in Child Benefit and the cut in excise on alcohol. It’s also unavoidable. One makes reluctant sense, given the apparent difficulties in either taxing or means-testing. The other is bonkers, Liveline economics.

    Has any study been done on the actual revenues foregone here by southern shopping for alcohol up North, in particular the change in revenues foregone in the last, say, two years versus the situation in the preceding five (during which period it was a matter of no concern, and in any event was offset by petrol tourism)?

  5. @Karl Whelan
    I would worry about even the effectiveness of the government’s big stimulus, capital spending. The government is officially and unreservedly committed to the belief that property prices have fallen by 50%. More in some categories, less in others. It would seem quite likely then that until the NAMA valuations are completed, and thereafter by keeping property off the market, large parts of the capital budget will be unnecessarily wasted on site acquisition.

    I would also wonder whether jobs are being prioritised in the spending. I heard a call for the spending on school buildings to be increased as it generated more jobs. Then it was announced about €200m in capital spending was unspent in this year’s education budget.

    Finally, I wonder whether metro north will go ahead, no matter what the site costs, the return on the investment or the jobs generated short-term or long-term are. You can apply that to many other projects whose political returns are far greater than their economic or employment ones.

  6. There never was any intention of a stimulus – beyond present imaginations. Slapping the nether natives a minor deal in comparison to keeping in with the global capital markets and a genuflection to the 12.5% corporate tax rate – as the other attractors have all but emigrated – oh – and keeping all these property/banking types in business.

    I would expect some lovely externalities to emerge from the parachuting of a second form of public service pension – Irish labour just might wake up on this one – our society is unequal and unbalanced enough in allocation of resources as it it is. One might as well ask youngest and brightest to please not join the Irish public service and emigrate – this is a very ill-thought out move – as all pensions and health insurances need to be addressed.

    The labour market response – mini-stimulus – looks like an add on. Should not be too difficult to guarantee anyone on an apprenticeship, but out of work, that the state can guarantee that they get sufficent work to complete their apprenticeship before booking a ticket for Brisbane. We are a long way to go to get away from this guff on the smart economy.

  7. Full agreement on the car scrappage scheme.

    The budget for energy efficiency is also going up. This strikes me as an expensive way to create jobs, save energy, and reduce emissions (unfortunately, SEI has yet to release its evaluation). There is double double regulation. Emissions and taxed and emission reduction subsidised. Households’ fuel use is compensated and households are subsidised to reduce their fuel use.

  8. On the VAT change it’s too small to have any effect on pricing. As an e-tailer I didn’t put my prices up when the rate went up to 21.5%, they won’t be going down with the reduction.

    The UK is going back to 17.5% on the 1st Jan which will narrow the gap somewhat but the only way cross border shopping will decline is a strengthening of Sterling. I expect the exodus to be up this December as more people abandon patriotism for pragmatism (it saves money). The VAT returns for December will be telling.

  9. I think that VAT cuts are somewhat stimulatory (?) in circumstances where a business does not pass them on to the customer but instead retains them in the business, and to the extent that where passed on to customers who have spent money that customer will have more money to spend.

    I would like to have seen a reduction in VAT rates for professions that have been decimated by the crash such as architects et al to make them more affordable to private individuals.

  10. @karl,

    I agree that any the so-called stimulus measures you have identified (plus Richard Tol’s observation on the budget for energy efficiency – and I am sure there are others of similar ilk) “are based on a desire to be seen to be doing something “positive””.

    The Minister in his speech was quite clear and forthright about what is required to restore and boost economic growth. For example,

    “..the adjustment process must be made by way of reductions in wages, prices, profits and rents…..our unit labour costs will fall this year. But our prices are still amongst the highest in Europe…we have priced ourselves out of the market. We will not be able to stem the haemorrhage of jobs until our prices and the costs of doing business here move down in line with those of our main trading partners.”

    Stripping out excessive costs, monopoly rents and implicit taxes is the most effective form of stimulus. Philip Lane has consistently argued for serious efforts in these areas. Whether due to lack of time or because the focus was on sending a signal to the international capital market that the Government was determined to get a grip on the public finances I have seen little evidence (apart from cuts in fees for medical consultants) of any serious initiatives in these areas.

    The Minister has displayed courage in tackling public sector pay. I realise this isn’t politics.ie but this marks a major retreat from Bertie’s previous increasing left-of-centre thrust. There may also be some evidence that senior officials in the DoF who recognise the need for reform are beginning to set the agenda. For example, it is unlikely that the DoF material submitted to BSN was prepared ab initio during the review period.

    Politically, and for reasons both of distributional equity and of economic efficiency, it would make sense for the Minister to begin to tackle excessive costs and prices across the state, semi-state and sheltered private sectors.

    This will require heavy-lifting and no small amount of courage as the vested interests are well-entrenched. In my view, in the public interest there is a role for academic economists to begin to quantify the profit-gouging, monopoly rents and implicit taxes that exist so as to inform policy-makers of what is possible and achievable.

    Any takers?

  11. @ Karl – putting the excice reduction against the child benefit reductions is very instructive.

    I agree that the excise reduction won’t make much difference to cross border shopping – the price differences are too large, and that covers a range of items e.g. for anyone with kids – have a look at toy prices. As Stuart Blythman says – it will take a strengthening of Sterling to make a big impact on cross-border shopping.

    We are going to waste money on a scrappage scheme – the last time we had one the car replacement rates actually declined indicating that this was 100% deadweight.

    The reversal of the VAT increase signals that the government accepts that this was a mistake.

    @E65bn – I have argued about site costs and the capital programme lots of times. I fear that by the time the advice finally makes an impact we will have wasted some of out scarce resources.

    I would worry about a knee-jerk reaction to the flooding, which is not going to be simply (and cheaply) solved by civil engineering schemes – much more thought on whole river management is needed.

  12. There was a car scrappasge scheme back in the 1980s. Rodney Thom described it as ‘..borrowing Deutschmarks to buy Volkswagens…’

  13. @ Colm – it was actually the 90s (July 1995 to end of December 1997 to be precise) but the description is right.

    Of course the Germans have had their own scheme recently spending over a billion – now its over nobody is buing cars and the dealers are complaining!!

    Nobody in the so called ‘industry’ seems to have considered that more new cars means less repairs and servicing Unless they deliver very badly made cars – now there is an idea) – so any job in sales that is saved will probably result in a job in servicing lost.

  14. @Paul Hunt
    “..the adjustment process must be made by way of reductions in wages, prices, profits and rents…..”
    The government’s policy has been to keep rents and property prices high, in a situation where the fall in both should be a huge competitive boost. They also refuse to touch the income of the superrich (€55m in a crisis! it’s laughable) and the rich, or to abolish the tax breaks. I have not heard anything about further cuts in professional fees. The high rents and the government’s refusal to cut pork barrel spending are in turn keeping prices high.

    All of the adjustment is coming through welfare and public sector wage cuts, and the slow process of freezing most and reducing some private sector wages.

    In short, Brian Lenihan is the Minister for Developers, Bank investors, Property Owners and Landlords, The Superrich, the Rich, Well Paid Public Servants, Retired public servants, Professionals, and FF supporters who depend on the patronage and the pork he refuses to cut.

    For everyone else, the not rich, the average, the below average, the working poor, the unemployed, the poor pensioners, the disabled, and their carers, he is the enemy.

  15. The full set of measures orientated towards the labour market is as follows:

    €1.2 billion will be provided in 2010 to support job retention and tackle unemployment through a range of activation and training measures, employment programmes and the Employment Subsidy Scheme

    An additional €90 million will be committed in 2010 to increase the number of training and activation places for the unemployed by 16,300 – to a total of 146,300, bringing the number of activation places across Government to over 180,000. A detailed announcement on the nature of places to be made available in 2010 will be made at a later date.

    In addition, there will be an additional 500 Community Employment Scheme places in 2010. €20 million of the additional funding will fund a call for proposals targeting the low skilled and those suffering from unemployment in declining sectors including construction.

    All of this is part of the Govt.’s new “Activation Fund”:
    http://www.budget.gov.ie/Budgets/2010/Summary.aspx#Enterprise
    http://www.entemp.ie/press/2009/20091209a.htm

    Also from the DETE press release (the second link above):—

    The Tánaiste confirmed that headline job stimulus measures in Budget 2010 included:

    * -a prioritising by Government of capital investment in the productive sector and ‘Smart Economy’, with a €474 million capital commitment to the enterprise, job creation, and science, technology and innovation mandate of her Department and its agencies, IDA Ireland, Enterprise Ireland, Shannon Development, Science Foundation Ireland and the County and City Enterprise Boards;

    * a one-year employers’ PRSI exemption for all new jobs created for the unemployed in 2010;

    * a reduction in both the standard rate of VAT and rate of excise on alcohol to sustain jobs in the retail sector; and

    * an extension of the three-year corporation tax exemption for start-up companies with a liability of less than €40,000.

    Finally, the Second Call to the Employment Subsidy Scheme went live yesterday:

    http://bit.ly/4xsKOM

    The cost of €65 million associated with the second call brings the total financial allocation for this scheme to €135 million.

    The Second Call is open to exporting and non-exporting companies from all sectors of the economy that employ more than 10 employees.

    A notable difference is that there are now two bands within the Second Call. Under the first band employees must work an average of 35 hours or more per week and enterprises will receive a subsidy of €9,100 paid over a twelve-month period for each subsidised job.

    Under the second band employees must work an average of 21 or more hours per week, but less than 35 hours a week and enterprises will receive a subsidy of €6,370 (70% of the full subsidy) over a twelve-month period for each subsidised job.

  16. @E65Bn plus economic costs & NO extra lending!

    What you say may be true – and, Lord knows, there is plenty of evidence to support your contentions. But it doesn’t help to progress matters. I could be reading things incorrectly, but I suspect the bulk of the Minister’s speech was drafted by DoF officials and I detect an intent with a far wider application than just reductions in the welfare and public sector wage budgets.

    The political, economic and social equity case for stripping out unearned profits, inefficiencies and implicit taxes in the state, semi-state and sheltered sectors is compelling. There is a pressing demand for independent and objective analysis and quantification of these unjustified economic costs. The BSN report is an excellent start in the state sector, but the remit has to be far wider.

    I feel I’ve done my bit to highlight the inefficiencies and unnecessary costs in the electricity and gas sectors – even if it’s had no impact – and I would be delighted to see similar efforts to uncover inefficiencies in other sectors. At least then the Minister and his officials could not say that they have seen no evidence of these unjustified costs.

    This is a job for economists who are not conflicted by commercial ties, but I’ve seen little evidence of a rush to volunteer…

  17. @Edgar:
    “Unless they deliver very badly made cars – now there is an idea”

    It’s been done. Remember British Leyland?

    bjg

  18. The SFKL web site was equally disehanted with what it regarded as exercises in optical illusion.

    It also focussed on misdirection that the Northern shopping trips represents and wonders instead whether its more the general high cost of the southern state ( a mix of high overheads and no small measure of squeezing the consumer) thats resulting in people driving to newry.

    Equally its unmoved by the hybrid cars measure and the scrappage scheme.

    These are items that look good in the spin cycle, being consumable sound bites easily understood, but are only exercises in misdirection.

    http://sinnfeinkeepleft.blogspot.com/2009/12/so-budget-is-out.html

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