Michael Taft: While we await the publication (or, at least, the drawn-out leaking) of the An Bord Snip Nua report, it is well to be reminded of the considerable limitations that public expenditure reductions will have on our fiscal deficit and, so, our borrowing requirement. The ESRI has worked through a number of policy proposals to assess their impact on economic activity. Let’s take three calculations. They assess the following three proposals:
• 5% reduction in public sector wages
• 10% cut in health and education employment
• €1 billion in public investment
Together, these would reduce public expenditure by €3 billion. This is more than the Government hopes to cut next year, and about 66 percent of Bord Snip’s total cuts, as reported in the media. No doubt these are the type and extent of cuts that many commentators have been calling for, claiming that it will considerably improve the Exchequer’s fiscal position. However, the ESRI’s conclusions suggest caution regarding the fiscal effect.
Taking these three policy initiatives together, we find that the domestic economy (GNP) would decline by -1.5 percent, consumption would fall by -1.3 percent, while unemployment would climb by 1 percent. Of course, this doesn’t take into account the impact on the quality– in the case of cutting employment – of our educational and health infrastructure.
So: further economic decline and higher unemployment resulting from these three measures. What would be the impact on the Exchequer fiscal position? Minimal. The ESRI calculates that, taken together, these measures would reduce the Exchequer borrowing requirement by 0.9 percent. To put this in perspective, the ESRI projects the borrowing requirement to be -15.6 per cent this year and -14.7 percent next year.
If taken together, the cumulative impact would be even more severe than their individual effect, as reduction of GNP is piled on reduction. The economy will be in a weaker position to confront ever higher debt. And, while accepting that the ESRI doesn’t do black humour, its warning that ‘if the external environment were to continue to be very difficult such a level of emigration might not materialise resulting in higher unemployment in the medium term’ suggests that the small reduction in the borrowing requirement might be limited even further, arising from higher social welfare costs.
Hopefully, more careful analysis of the economic impact of deflationary measures will enter the public debate. For it is becoming clearer (if it isn’t clear already) that deflating an economy through budget reductions is like running in quicksand. The more you cut, the more you sink – with little to show for in terms of controlling the fiscal deficit.
Michael Taft @notesonthefront
Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.
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