Tom McDonnell: It is claimed in an IMF paper ('Will It Hurt? Macroeconomic Effects of Fiscal Consolidation') that fiscal consolidation measures can be linked to increased unemployment.
Caution should be applied in the direct transfer of these findings to Ireland, as all country characteristics are different. However, we can look at some of the basic numbers.
The IMF paper states that "Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent."
Summarising this for Ireland, one could estimate the following:
- Ireland's GDP is €159 billion;
- 1 per cent of GDP is equal to €1.6 billion
- All things being equal, TASC's €3 billion of austerity measures equals 1.89 per cent of GDP, which leads to an expected reduction in GDP of 0.94 per cent (c.€1.5 billion).
- The suggestion that Ireland should 'frontload' a €6 billion austerity package in 2011, would have an expected reduction in GDP of c.2 per cent (c.€3 billion)
- The labour force is currently 2,152,700 people
- 0.3 per cent of the labour force is 6,458. This is the level of increase in unemployment expected for every 1 per cent of GDP worth of fiscal contraction
- All things being equal, TASC's €3 billion of austerity measures (mostly on the tax side) risks increasing unemployment by 12,206
- But an austerity package of €6 billion (an additional €3 billion) doubles this to an increase of 24,412 in unemployment.
Of course, all things are not equal. TASC argues in its Budget proposals that different types of cut and different taxes have different effects on the economy. And TASC's proposals are as growth-friendly as possible, with an Economic Recovery Fund to maintain and create jobs to compensate for the deflationary impact of taxation.
Another difference in applying the IMF study to Ireland is that emigration might occur more than people adding to the live register. Nevertheless, it is reasonable to suggest that frontloading €6 billion in cuts risks over 20,000 jobs.
Dr Tom McDonnell
Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.
Tom obtained his PhD in economics from NUI Galway.
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