A Fiscally-Neutral Stimulus Package

Minister Brendan Howlin on RTE’s The Week in Politics has said the government are preparing a “stimulus package that is fiscally neutral”.  As a macroeconomist, this strikes me as a pretty strange concept. Pretty much everywhere else in the world, a stimulus package implies a set of measures that cut taxes or raise spending and are not “fiscally neutral.”

Still, one can hardly argue that the current set of tax and spending policies are optimised to generate as much employment as possible, so it may be possible to adjust policies to generate additional employment and I’d be interested in people’s suggestions for fiscally neutral measures that can boost employment. But shouldn’t we stop calling such changes “stimulus packages”?

Job Subsidies and Stimulus

One point I had meant to make in yesterday’s post about job subsidies but forgot to was the following.  Beyond the fact that these programs are expensive and known to be ineffective at reducing unemployment, it remains the case that, whatever agreement the government comes to with the unions, the fiscal situation remains the same (I am discounting arguments here that these schemes pay for themselves because we know they don’t.) I doubt if the government will change its plans for the budget deficit by one cent if it adopts this plan.

So if we spend €250 million (or a €1 billion) on these schemes we will undoubtedly have to find a corresponding €250 million in tax increases or, more likely, spending cuts to offset them.  These measures will themselves have a negative effect on aggregate demand and thus unemployment.

This comes back to the point I made in my post on stimulus. In the current environment, spending measures like this need to be evaluated according to balanced-budget multipliers (i.e. factoring in the negative effects of the taxes that need to be raised or other spending that needs to be cut to pay for them.)  With so many difficult cuts in public spending ahead of us, why put ourselves deeper in the hole by adding an extra €250 million (€60 for every man, woman and child in the country) just to pay for a program that doesn’t help much.

Stimulus?

Stimulus is a term being used these days by a wide range of people across the political divide. Unions, business groups, Fine Gael, Labour—everyone has a stimulus plan.  Everyone, of course, apart from the poor old government.  And, indeed, the vast majority of mainstream economists in the country.  Since the term keeps popping up everywhere, I thought it might be useful to open a debate about it here, outlining why I have not joined the public clamour calling for stimulus.

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