Putting the 'Workable' Back into the Economy: The Recession Diaries - November 19th

One could despair. All the major political parties are supporting another round of fiscal contraction, though they may differ on the balance of tax increases and public spending cuts. In this respect, Fianna Fail has won that particular battle, we are just fighting within the parameters they have set. There is seemingly no challenge to the deflationary orthodoxy on the horizon. Except . . . .

Sinn Fein has published its 2009 pre-budget submission, ‘The Road to Recovery’. In short, it poses a more sophisticated approach to our economic and fiscal crisis. On the one hand, an investment stimulus to generate growth; on the other hand, a range of mostly taxation measures to start to repair the public finances. Sinn Fein proposes to use different instruments to attack the distinct parts of the deficit – the cyclical and the structural.

It’s a ‘walk-and-chew-bubble-gum-at-the-same-time’ fiscal policy; not only is it workable, it has the potential to bring the economy back to some sort of ‘workable’.

Let’s start with the investment stimulus, or the cyclical side of things. They are proposing a €3.9 billion stimulus, or 2.5 percent of GDP (pointing out that this is equivalent to the Anglo-Irish Bank give-away). The main components include:

• a job retention scheme with a potential to save 90,000 jobs
• increasing and modernising CE schemes
• Investment in state infrastructure (labour intensive work in construction, insulation, etc.)
• a National Development Scheme to directly employ people on ‘public works’
• a temporary ‘Front Line’ services initiatives to employ people in ‘civilianising’ work in the Gardai and nursing sectors
• The establishment of a state childcare and pre-education sector, along with employing a range of specialist teaching assistants.

These would be supplemented by a range of fiscal stimulus – reducing alcohol duty over the Christmas period, reintroducing the Christmas bonus, and a ‘cost of living’ package that would reduce everyday expenditure items (utilities, public transport, insurance policies, etc.).

There’s a lot of material here that would need to be developed. For instance, I’m not sure what modernising CE schemes would look like – especially with a National Development Scheme running alongside it. The Front Line services initiative looks extremely worthwhile – so much so, why make it temporary? This has the potential of substantially increasing public sector productivity. And Sinn Fein might have benefited from examining the ICTU/Fine Gael proposals for promoting public enterprises as an engine of infrastructural investment to raise long-term productivity (next generation broadband, green technology, etc.).

But the broad thrust is correct: public sector expansion (especially in the areas of education), job retention, infrastructural investment. This will boost output, create jobs and start the economy back on the road to recovery which, in itself, is the most sustainable means to bringing the deficit under control. That’s the ‘walking’ part.

Now for the ‘chewing gum’. Sinn Fein proposes a range of taxation measures and spending cuts to achieve savings of €7.6 billion – a larger amount than any other party is proposing. These can be broadly broken down into:

Taxation: a new third tax rate of 48 percent for those over €100,000, a wealth tax (or, as I like to describe – a comprehensive property tax), standard-rating tax reliefs while getting rid of property-related ones along with the private hospital co-location relief, abolish the PRSI contribution ceiling, increase the tax on ‘second homes’ along with other capital income measures, etc.

Spending Cuts: apart from a couple of innovative suggestions such as establishing a state wholesale distribution of drugs and the wider use of generic drugs (on top of saving money, it could actually be little money-spinner), this section mostly focuses on public sector pay and salary reductions, including politicians and professional fees.

There’s no sense in going over each detail. We can always find something to disagree with. For instance, I wouldn’t support capping public sector pay at €100,000; this would disadvantage the public sector in the specialist labour market and, in any event, as CSO researchers have shown, higher paid public servants suffer a wage disadvantage, especially males, compared to their private sector counterparts. And I would prioritise the effective over the marginal tax rate. But in the main, the proposals go in a positive direction.

Sinn Fein proposes to pay for their stimulus programme by: (a) taking a proportion of the revenue raised from their tax/spending measures (about €1.9 billion), and (b) dipping into the National Pension Reserve Fund (€2 billion).

Again, I would be cautious about resorting to the Pension Fund. There may well be a lot of calls on that fund through future bank capitalisations. I would have rather seen Sinn Fein make more of our strong debt profile – the combination of a relatively low debt level combined with our strong Exchequer cash balances. They did make insightful comments:

‘ . . . we should not be afraid to sustain some level of deficit financing – borrowing for infrastructural development – something which most other countries use as a matter of routine . . . The claims that we are over-borrowed, that we cannot sustain the current level of borrowing and that public spending is the cause of all fiscal ails, are untrue . . . ‘.

Nonetheless, to the extent that resources for stimulus can be obtained from low-deflation tax resources and public spending efficiencies, that is clearly an advantage. The argument for debt-financed stimulus has never rested on ‘we borrow because we can’, but rather, ‘we borrow because we must’. Stimulus that is partly financed from own-resources is preferable.

But let's take a step back for a moment. Because there is something more going on here than just a new calculation, a catalogue of different policies. Franklin Roosevelt once said, ‘There are many ways to go forward, there is only one way to stand still.’ At present, the current economic debate is standing still, stuck on this contraction. There is no dialogue, no conversation – merely a hectoring, a lecturing: how we must fact reality, how we must take the pain up-front, how hard decisions must be taken.

Sinn Fein is pointing to a new dialogue, one consistent with going forward; where more and more people are encouraged to present all sorts of ideas to grow the economy – from business supports to social protection measures, from state spending to incentivising private investment, from increasing taxes on some to decreasing taxes on others.

Not all of them will be good measures, not all of them will stand up to scrutiny, and not all of them can be accommodated. But to have a growing pool of walking-forward ideas – we would be engaged in a new dialogue, over what will work best 

Indeed, a new dialogue could have an energising effect, raise confidence and act as a stimulus in and of itself. We should never overlook the psychology of economies – of the people who work in them, of the consumer, of the investor. A new dialogue could produce, in the first instance, a substantial rise in the output of ideas. If that happens, material output will follow.

Now compare that to today, when every idea, every suggestion no matter how worthwhile is met with a ‘We’re broke, can’t do it, where’s the money coming from.’ My favourite is ‘We must cut our living standards to improve our living standards.’ That would depress any economy regardless of its potential.

Sinn Fein has provided, not only a clear and coherent alternative to the deflationary orthodoxy, a more sophisticated fiscal platform from which to launch recovery. They have demonstrated a new way of how we can talk about our economy.

All in all, not a bad day’s work.

Comments

[Marise]

You wrote:

"All the major political parties are supporting another round of fiscal contraction, though they may differ on the balance of tax increases and public spending cuts. In this respect, Fianna Fail has won that particular battle, we are just fighting within the parameters they have set."

Thank you for saying this. I have been asking about where the 4 billion euro number came from, why we have to cut that much, or indeed anything. But the meme has taken root.

My opinion is, Fianna Fail have no desire to address inequality and unfair structures. Indeed I see them as very much invested in the status quo. I see them as looking yearningly at Eastern European workforces and wishing we were still like that; that they had a cheap and pliant labour pool to offer up to the international bigwigs. I feel they are aiming for this whenever they aver that "living standards must fall" and "we must regain our competetiveness."

Are they thinking that way? Am I being unfair in assuming these dastardly motives? I don't know. But that's what I believe they're thinking. And that's sad.

[john]

Hi,

It seems that Sinn Féin are leading the way and are the only party putting forward realistic and deliverable job retention and creation policies. This is the elephant in the room that no other party seems to want to deal with. Unless we get this right more cuts and more tax increases will be neccessary and will will perpetuate the current downward spiral.

While I do not agree with all of their proposals the broad thrust is right. A combination of an economic (job creation) stimulas, cuts in spending, increased revenue and supporting struggling families is the current one. Their policies are the only ones that I have seen so far which are not deflationary.

Finally I have some reservations about the capping of salaries at €100,000 but at the same time I think one of the big problems that the Celtic Tiger created was wage differentials. When you see some at the top of the public sector on salaries 15 times more than those that the basic entrey rate (Brendan Drumm, Roddy Molloy etc) I think the proposal has merit. I am just not sure about the figure.

As you say all in all not a bad days work..

[Barry]

Nice to see Sinn Fein doing something other than robbing banks and murdering protestants.

[Proposition Joe]

"in any event, as CSO researchers have shown, higher paid public servants suffer a wage disadvantage, especially males, compared to their private sector counterparts"

Surprising that you should rely on the CSO study, given how it and the ERSI work were roundly dismissed by the left. Seemingly dodgy statistics do have a use after all :)

But if we were to follow your argument to its logical conclusion, it would require any public sector pay-cuts to be regressively graduated, given that the same CSO study showed the largest premium for lower-paid public servants. Which of course is not what you would advocate, but it does go to show how cherry-picking stats can lead in the wrong direction.

[Michael Taft]

Marise - I don't think it is so much that FF or others arguing a deflationary course are necessarily over-the-moon about a low-waged workforce or cutting social welare benefits or reducing the level of public sector services. I am willing to accept that they believe it is in the best interest ofthe economy and in the long-term will create those conditions for prosperity. It is just that they are wrong - demonstrably, verifiably and terribly wrong. The problem is that the debate is so 'shaped' that it is difficult to bring these arguments to a larger audience.

Proposiiton Joe - I'm not aware that the CSO study was roundly dismissed by the 'Left'. I know that at the time (and I may still do) do a blog on the paper by the CSO researchers that I linked to. I think it is a fair representation. There could be other factors taht could be entered into the equation that they didn't, but that can always be said.

And, no, that's the not the logic of my argument since I don't support cutting public sector wages.

Barry - I don't like deleting comments from the blog (that ol' American civil liberatarian in me) so I haven't deleted yours. However, that argument is best held somewhere else if you think it is a profitable line of argumentation.

[Barry]

Sorry Michael. Rush of blood to the head.