Marching for the economy

Michael Taft: Imagine you’re walking a high-wire. You’re nearly at the end of line. You’re doing everything possible not to fall – balancing with your arms, moving snail-like, praying; the last thing you need is for some messer to start shaking the wire.

That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget - shaking the wire.

With ICTU’s launch of a campaign to stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).

Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts – but after social welfare cuts, levy increases, and the pension levy, this is reasonable.

But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.

It appears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year. If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on the dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.

If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.

Let’s turn to the ESRI’s multiplier simulations. They modelled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?

• GDP would fall by a further 1.2 percent, or €2 billion

• Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.

And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have

• Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
• Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
• Degraded public services further just at the point demand is growing
• Cut people’s living standards and consumer spending
• Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)

All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.

There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:

• Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
• Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
• Increase unemployment by 6,600 (22,000 less than under a cuts strategy)

The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. It merely serves as an indicator.

Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.

But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.

That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?

If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment– then they will have done the economy enormous benefit.

If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.

Posted in: Economics • Labour market • Taxation

Tagged with: taxation • ICTU • cuts