How not to reduce the fiscal deficit

Slí Eile: Today's opinion poll in the Irish Times is odd. One of the questions is: 'Asked if the Government should stick by its target of reducing the budget deficit by €3 billion or doing more as suggested by Mr Lenihan, 54 per cent opted for the €3 billion target, while 26 per cent accepted that it should be more.' According to the print version of the newspaper, the question is introduced as follows: 'The Government has signalled that the gap between national income and expenditure will be reduced by €3billion...'.
Clearly, someone is confused about:
the difference between national accounts and public finances
reducing spending, increasing taxes and reducing deficits.
The story says that 20% didn't know, 54% said same reduction and 26% said more is needed.
Well, I belong to the 'make reduction' of more than €3bn in the deficit by not cutting spending and directing some of the cash in NTMA to job creation in new green tech industries.
Put another way, cuts do not equal savings due to the dynamics and interactions between domestic demand, investment and tax receipt flows. The empirical evidence reviewed on this site and elsewhere suggests that the underlying deficit remains stuck not because the Government has not cut enough but because the economy is in a prolonged recession and, to some extent, domestic fiscal policy has made the situation worse.
The best way to embed the deficit is to continue cutting - especially on the capital side. That is exactly what Fianna Fáil and inter-party Governments did in the 1950s and they reaped a whirlwind of rising emigration, unemployment, poverty and stagnation.

Posted in: Economics

Tagged with: deficit