A group of Irish economists have an interesting joint article in today’s Irish Times. It is available here. It usefully goes beyond the rather sterile austerity/no austerity debate to focus mainly on the mix of adjustments.
Drawing on the available evidence, the article notes that fiscal consolidation measures lead to slower growth and job losses.
The evidence is clear: contractionary fiscal policy does indeed restrict economic activity and employment.
The austerity-focused policies being pursued in Europe and in Ireland will continue to drive down employment and living standards, while embedding high levels of long-term unemployment in the economy.
However, the article does not claim that consolidation is unnecessary (though it does not offer a preferred time path for bringing the deficit down), but rather focuses on the mix of consolidation and financing measures. The authors argue for a mix that involves higher capital spending and higher taxation aimed primarily at higher income individuals. (For the medium term, they also argue for higher social expenditures financed partly by increased PRSI contributions.)
Such an investment programme must be accompanied by “smart” fiscal consolidation, focusing on the least contractionary forms of fiscal adjustment. This requires progressive and equality-proofed taxation targeting high-income groups, property assets, unproductive activity and passive income, as well as environmental measures.
In the medium term, we should explore the potential of social insurance and local taxation to broaden the tax base while providing real benefits in return. PRSI can be expanded and combined with general taxation to provide free universal healthcare and earnings-related pensions. Stronger local taxation has the potential to be more accountable while providing investment in services responsive to local needs.
The mix of adjustments is also receiving recent attention in the international debate. For differing perspectives on the most effective mix from a macroeconomic perspective see Alberto Alesina and Francesco Giavazzi here and Simon Wren-Lewis here.