Here's to economic recovery

Michael Taft: Maybe Colm McCarthy doesn’t drink Carlsberg. He certainly has not taken on board their recent ad campaign which suggests:

‘It’s not just A or B. There’s probably always a C.’

On News at One, McCarthy gave us the A and the B:

‘We have to get the borrowing down. There’s only two ways of doing it. One is by increasing taxes . . and the other is by controlling expenditure far better that we have been doing in recent years.’

Of course, there are problems with A and B. Increasing general taxation on low and average income earners and cutting public expenditure, especially social transfers, are deflationary and potentially self-defeating. What’s more, seemingly substantial tax increases and cuts may have little impact on the fiscal deficit – the very reason for income levies and An Bord Snips. Indeed, the piece de resistance of the McCarthy Committee – reducing public sector employment by 17,000 – will deepen the recession, cut consumption and increase unemployment; but it will only reduce the fiscal deficit by 0.2 percent.

So is there a C? Yes – and here it is in shorthand. According to the ESRI’s latest quarterly report, Ireland will have a gross/debt ratio of 74 percent in 2010 (this doesn’t include provisions for NAMA) while the net/debt ratio will be a mere 58 percent after Pension Fund assets and the NTMA’s free cash balances are included. Compare this ratio to the Eurozone’s which is expected to average 84 percent according to the EU Commission’s Spring Forecast.

So just at the gross level – Ireland could borrow €16 billion over the two years and still be ‘average’ in terms of debt. With this sum, Ireland could invest it into physical and social infrastructural modernisation and enterprise development measures. This would not only stimulate growth and improve our productivity – it would create thousands of jobs in the process. This would increase tax revenue, lower social welfare costs and stimulate consumption – assisting enterprises reliant upon domestic demand. We could turn a vicious cycle into a virtuous one.

This is admittedly a simplified version of an investment stimulus programme (but no more simplified than McCarthy’s A and B options) and it would also face problems – chief of which is, could we ensure that such investment would be efficiently and forensically spent with minimal leakage and maximum benefit?

But it does constitute a third option – one that almost all other industrialised countries are pursuing in one form or another. However, not to refer to it, even if only to dismiss it; to ignore it, to pretend it doesn’t exist as an option – and to continually insist there is only A and B is to do the public debate a grave disservice.

There is an alternative to what, essentially, are pro-cyclical policies – raising taxes and cutting expenditure in a desperate and ever failing attempt to close the fiscal deficit in the middle of the biggest contraction of economic output of any EU country since the war.

At least take a taste.

Posted in: Economics • Fiscal policy

Tagged with: stimulus • 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.