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September 23, 2010



If 3 Billion in cuts will undermine growth then why is Gilmore ignoring even the ESRI and rolling in behind Cowens Strategy

Michael Taft

Chris - we have to clarify some of the terms. Terms like 'fiscal adjustment' and 'fiscal consolidation' are neutral in terms of spending cuts or tax increases. The can also refer to any process that 'adjusts' or 'consolidates' the fiscal balance. For instance, an expansionary budget which might imply a higher expenditure on the ‘sheet’ may end up with a positive adjustment in terms of revenue increase and lower unemployment costs arising from investment. In the real world, however, these terms are taken to mean 'spending cuts'.

Labour has argued in the past for a strong mix of tax increases and spending cuts. In the last budget, they proposed that 40 percent of the adjustment come via taxation though that still left €3.5 billion in spending cuts with €1.4 billion reinvested via a Jobs Fund and Christmas Bonus.

Adjustments through taxation are better than spending cuts. But it should be remembered that any such adjustment is deflationary, though tax being less (depending on where it impacts – water charges would be particularly deflationary because it is so regressive). That is why the overwhelming need to promote growth and, in particular, job creation. This is now starting to come into the debate.

It would be helpful if Labour (a) dropped its commitment to reducing the deficit to -3% of GDP by 2014 (Maastricht guidelines). Nobody believes it will happen, it won’t happen and any attempts to do so will be unsustainable and only end up driving long-term debt; and (b) outlined an expansionary programme of investment; this would still retain a strong ‘consolidation’ element – but in the first instance it should impact on high-income earners as this is less deflationary. To date, Labour’s programme has addressed some elements of this – but not a full programme, yet.

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