In this new paper, I argue that the current crisis calls for a re-assessment of the optimal conduct of macroeconomic policies during non-crisis normal times. In particular, the risk and costs of crises can be mitigated by macroeconomic policies that lean against the wind in the face of cyclical, sectoral and external shocks. In this paper, I discuss the challenges involved in deploying fiscal policy in pursuit of a broad definition of macroeconomic stabilisation. The main policy conclusion is that pro-stabilisation fiscal policies are likely to be more effective if fiscal policy is determined under a formal fiscal framework that combines a set of fiscal rules and a substantive role for an independent fiscal policy council. (Forthcoming in Nordic Economic Policy Review.)
Category: Fiscal Policy
For an economy that’s supposedly in recovery, the unemployment figures seem to be puzzlingly weak. The July Live Register figures show an increase in the standardised unemployment rate from 13.4% in June to 13.7% in July. Slightly less negative were the July exchequer figures: Tax revenues had fallen from being on target in April to 1.6% behind target in June. The July figures reversed that trend to be only 1.4% behind target.
Still, both sets of figures raise a question. We keep hearing about how GDP figures are supposed to be coming in better than the assumptions penciled into the last budget: How is that to be reconciled with tax revenues being behind budget target and the unemployment rate coming in higher? (The budget assumed a year average unemployment rate of 13.2%, which is the average for the year so far with the figure now moving in the wrong direction.)
Update: I was interested to hear Minister Eamon O’Cuiv explain the increase in the seasonally adjusted unemployment rate on seasonal factors. Sure unemployment always goes up in July, I heard him say on the radio. You’d think the CSO boffins would have factored that in to their calculations …
I wrote a couple of posts (here and here) earlier this year about a Department of Finance release that discusses the impact of restrictions on the use of tax breaks for higher earners via the imposition of a minimum effective tax rate. I pointed out that the document is very poorly worded and leaves itself open to being misinterpreted.
Well, the latest edition of this release is out and it’s still got the same poor wording and it’s still being misinterpreted. I had missed the release when it came out but realised that the DoF’s poor wording had struck again when I heard contributors to Sam Smyth’s Sunday morning radio show discussing the report and saying how puzzled they were at how few people seemed to be earning large salaries (e.g. puzzlement at the idea that only 23 people earned over €2 million in 2008).
Let’s recap on this report. The report does not purport to be a full accounting of the tax paid by rich people in Ireland. Rather, it only covers those who would have paid less than the minimum effective tax rates that have been introduced. So, the whole report relates only to the 423 people who earned over €500,000 and were subject to the minimum effective tax restriction.
The document should emphasise throughout that these 423 people represent only a small subset of those earning over half a million euros in 2008: Unpublished information from the Revenue Commissioners published in the Irish Times last year (nice table here) showed that there were 5,393 cases of people earning over that amount. However, the report does very little to emphasise this point, leaving itself open to misinterpretation.
Sure enough, many people reading the Sunday Tribune today would have been apalled to read this piece about the Department’s “analysis of high-income earners” informing them the report showed “most of those earning more than €500,000 paid tax at a rate between 15% and 20%” and also providing other estimated tax rates that are not at all representative of the rates being paid by average high earners. For example, the figures in the Irish Times table show that the correct figure for the average tax rate paid by those earning over half a million is 32%. Remember also that this doesn’t include PRSI and that these individuals are now paying an additional 6 percent levy on income over €175,000.
I’m not saying there isn’t room to raise more tax from the rich or that tax reliefs shouldn’t be closed but it hardly helps public debate about this issue when the Department issues documents that are so easily misinterpreted.
Update: Ian Guider who wrote the piece for the Tribune linked to above has written to me to point out that the piece mentions 423 individuals and so he reckons it should be clear that all subsequent statements in his article refer only to a small subset of high earning individuals.
The government has released its revised National Development Plan for the period to 2016. The documentation includes a short leaflet, Investing for Growth and Jobs: Infrastructure Investment Priorities 2010 – 2016. With a bit of chutzpah, the document claims the 40 percent cut in capital spending as “stimulus” for the economy. The emphasis is on new priorities and not on the overall cuts. Fortunately, the Department of Finance has also released Infrastructure Investment Priorities 2010 – 2016: A Financial Framework, which makes a more sober case for the shift in strategy (see, in particular, Chapters 2 & 3). The arguments of Colm McCarthy for just-in-time infrastructure provision (based on the time value of money) and more broadly for cost-benefit analysis – as championed on this site and elsewhere by Edgar Morgenroth – would appear to have been influential in the overall approach. Of course, the precarious state of the public finances looms large behind the change in strategy.
Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic). But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong. This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit. The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper). I doubt that there are many Irish economists who would claim to hold this view if pushed. However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery.