The Report (or, it really is the economy, stupid)

Michael Taft: No one should be too surprised about the broad thrust of the report of the Special Group on Public Service Numbers and Expenditure Programmes (here referred to as The Report, best said aloud in deep, sombre terms). We knew there would be cuts of €5 billion, cuts in social welfare, health and education, cuts in public employment, cuts in programmes in every Department – an orgy of cuts to satisfy even the most insatiable deflationist gourmand. Okay, now we know the details. Now comes the concern, even outrage.

With over 300 pages to pore and sweat over, how do we get an initial handle on The Report without getting lost in the considerable detail contained therein? Can we take a step back and view – much as we might examine the dark cloud from afar, to get a more comprehensive sense of the oncoming storm.

First, let’s deal with a political issue – and this is not down to The Report and its Authors. There is nothing in this – and I emphasis nothing – that could not have been drawn up by Ministers, their appointed advisors and civil service staff. Indeed, as the section under Methodology points out, many (most?) of these proposals came from the Departments themselves. No doubt, many of these proposals have been hanging around for a while – if only in shorthand.

Fianna Fail is cynically using The Report as a kind of good-cop, bad-cop pantomime. The Report recommends cuts of €5.3 billion. But the Government is only looking for €2.5 billion in current expenditure cuts next year. So when people get all wound up by this or that proposal in The Report, the Government will step forward with a reassuring tone: ‘Yes, citizen, that is awful. We won’t go there.’ See how it works? And, then we’re supposed to be grateful that Fianna Fail is only cutting off one finger rather than our whole hand.

But back to The Report proper. We are, in effect, being sold tainted goods. And the Authors are completely aware of this. The Terms of Reference state

‘Review the scope for reducing or discontinuing Expenditure Programmes with a view to eliminating the current budget deficit by 2011.’

This was written in November 2008. Events have overtaken this term – the Government’s strategy, revised in April, doesn’t envisage the current deficit being eliminated until 2014 or later. Nonetheless, the work of the committee was instrumental – to provide a sustainable basis for eliminating the current deficit.

Here, The Report employs an obvious sleight-of-hand. It talks about ‘savings’ of €5.3 billion but the Authors know full well that this ‘headline’ figure is disingenuous. It is not the same as reducing the current deficit or reducing the borrowing requirement by that amount. Indeed, they know that the fiscal effect of these cuts will fall short of €5.3 billion. The Report calls these cuts ‘savings’, all the while knowing that we will not save the amount they claim. It is misleading – knowingly misleading.

Let’s take a look at two areas. First, the Report suggests reducing public sector employment by over 17,000. Interestingly, the ESRI ran a simulation of reducing public sector employment by this same amount (they culled these numbers from the educational and health sectors; in The Report these sectors accounted for over 75 percent of overall employment cuts). What did the ESRI conclude?

• A drop in the GNP of nearly 1 percent (boy, we need that)
• A drop in consumption of half a percent (more domestic businesses going to the wall)
• Unemployment rising by nearly 1 percent (or an extra 20,000 on the dole queues)

And the fiscal effect? The reduction of 17,000 in public sector employment would reduce government expenditure by €1 billion (headline figure) but would only ‘save’ the government €492 million – less than half the headline figure.

Why is that? Because when you calculate the effect of the reduction on the economy (it is, after all, the economy, stupid) – the drop in output and consumption, the rise in unemployment – you don’t maximise the ‘benefit’ of the cut. In fact, you don’t even get half the ‘benefit’.

The second issue is the attack on the living standards of those on the lowest incomes. This is largely but not confined to the income of social welfare recipients; however, they take the brunt. A cut of 5 percent is only the start but let’s stay with that. The Report claims a ‘saving’ of €850 million. But would it actually ‘save’ the Exchequer this amount? Hardly – and the Authors know this.

Unfortunately, the ERSI did not calculate the effect of reducing social transfers. But we can make logical deductions. Given that those on low incomes have the highest propensity to spend, any reduction in that expenditure will

• Reduce spending tax revenue
• Lower consumption (purchasing goods and services from domestic businesses) which will,
• Decrease business profits tax revenue, and lead to
• Either wage freezes in the business or even job losses

The €850 million is therefore a misleading ‘saving’ figure.

However, the Report is full of deflationary attacks on people’s living standards – beyond just reducing social welfare rates:

• Reducing the numbers on the medical card schemes and requiring those with one to make payments for prescription medicine
• Increasing thresholds for the Drug Repayment Scheme (which will impact most on low/average income groups)
• Reducing childcare subsidies to low-income families
• Means-test the elderly’ Homecare Packages
• Increase school transport charges

All these will have a deflationary impact.

Could the Committee have made an economic impact assessment of all their recommendations? You bet. The ESRI has the computers, the software and the trained personnel to do so. Would it have been conclusive? Not necessarily. But they would have been indicative and given us some parameters to asses the impact.

So why didn’t the Committee do this? Quite simply, because it would have undermined their whole approach and opened it to general public ridicule. Here’s why.

If, say, that the entire cuts package actually only produced savings of 60 percent of their headline figures, then the €5.3 billion ‘savings’ would have melted away. We would be talking about €3 billion. And the simulations would have clearly shown what we intuitively know.

That The Report’s proposals, if implemented, will lengthen and deepen the recession, will cause further job losses, will further reduce consumption and spending.

And after all the pain, what would be the fiscal effect of implementing every one of The Report’s proposals?

It will reduce this year’s Exchequer borrowing requirement from nearly €26 billion to €23 billion – maybe, if we’re lucky, if the combined effects of the cuts are not greater than their individual parts.

Can anyone claim that this is anything more than rearranging the deck chairs on the good ship Ireland?

That is why The Report should be metaphorically placed in a large manila envelope, sealed and stamped with ‘Return to Sender’.

Posted in: Economics

Tagged with: Bord Snip Nua

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.