As 'austerity' isn't working, what's the alternative?

Michael Burke: Tom Healey has made some very good points in debunking the myth that ‘austerity’ is working. In general the EU governments that have embraced the ‘austerity’ model – the transfer of incomes from labour and the poor to capital and the rich – are currently engaged in a game of blame the foreigner. The economic argument is that it is the turmoil in the EU which has caused the respective slowdowns. The British government repeats this mantra endlessly, even though British growth in 2011 was half of that both in the Euro Area and in EU as a whole.

The ESRI repeats this misdirected criticism. As the latest quarterly report shows, the growth rate of GDP was 0.9% in 2011. The Euro Area economy and the EU economy growth rates were significantly higher in 2011, at 1.5% and 1.6% respectively. Irish exports grew by 4.4% in 2011, according to ESRI projections. If they are right, exports will have risen by approximately €7bn last year in real terms. Without that rise GDP would have fallen by 3.5% in 2011. Clearly, the idea that the EU is the cause of the renewed Irish contraction is a fiction.

The actual cause of the renewed downturn is the policy of ‘austerity’. Household spending, government spending and investment (Gross Fixed Capital Formation) all reached new lows in the Q3 2011 national accounts data. The biggest single contributor remains the decline in investment. On an annualised basis investment has fallen by €26bn in the course of the recession (although it actually began before GDP ell). This compares to a decline of €17bn in GDP and €23.4bn in GNP. Declining investment accounts for more than the entire downturn.

For most Irish business this is entirely logical. Their two main customers are either the good or services they supply to government, or to the household sector. If both these sectors are cutting their own spending, why would businesses invest?

But this is not to say there is no capacity to invest, or to repeat the foolish mantra that “there is no money left”. In 2010, even as the economy was contracting by 0.4%, the Gross Operating Surplus (akin to profits) of Irish businesses rose to €71.2bn from €69.4bn in 2009 in nominal terms. Yet investment fell from €25.3bn to €19bn. Clearly there is plenty of money left. In fact, the entire contraction in both the economy and in investment could be made good just by accessing a proportion of those profits.

If the logjam of business’ unwillingness to invest is broken by higher growth, they will then willingly invest on their own account. All that is required is to break the logjam, which means the government taking control of some of those profits to invest them.

These temporary measures could be labelled windfall taxes, solidarity taxes, an ‘all in this together levy’ or whatever. But the money is there, and growing. Businesses are refusing to invest the profits they are generating. Government action is needed to reallocate these corporate savings towards investment. None of this contradicts the impositions of the Troika, as the terms Gross Operating Surplus or profits aren’t even mentioned in all the documents, bilateral arrangements, MoUs etc.

This is an Irish solution to the crisis. A national recovery based on the resources that are in this economy, and not beholden to foreign powers.

Posted in: Inequality • Investment

Tagged with: austerity • investment