Flying Pigs and the End of Austerity

Do you really believe that 2015 is the last year of austerity?  If you believe that fiscal pigs will fly, then, yes, 2015 will be the last year of austerity.  However, if you are even just a tad sceptical then read on.  For 2015 is not the end – it is just the end of the beginning.  After 2015 we will be into a new phase of real austerity.

The Government has produced a budgetary scenario up to 2019.  They emphasise that this is just a scenario.  They even underline it.

'Again it must be stressed that this is purely an illustrative scenario.'

So this is one possible future that the Government is considering.  However, given that they have published it twice means that this scenario is being serious considered – especially as they have not produced any other scenario. 

The key to understanding why real austerity will continue up to the end of the decade is the premise of this scenario:

'Expenditure is assumed to increase by 1 per cent per annum.'

Ok.  And how much do they expect inflation (GDP deflator) to increase by?  1.4 percent per annum.  So each year the increase government expenditure will not match the increase in inflation.  Therefore, each year it will be cut in real terms – that is, after inflation. 

Let’s run through some basic numbers – focusing on primary expenditure, which excludes interest payments.  This means we’re looking at expenditure on public services, social protection and investment.

There may be some slight variations due to rounding and small exemptions from the benchmark but this tells the broad story in absolute terms.  This confirms the Government’s assumption of maintaining expenditure below the rate of inflation.

Between 2015 and 2019, real primary expenditure will be cut by 2.3 percent, or approximately €1.5 billion.  This may not sound like much (and in comparison with what’s gone on before, it isn’t).  But this is coming off the back of massive cuts.  Between 2008 and 2015, primary expenditure has already been cut by a massive 18.5 percent in real terms.  And now, we’re in line for more up to 2019.

But this only tells part of the story.  For in that expenditure there will be certain demand-led programmes, expenditure that the government has no alternative but to increase.  The big category is the increasing number of pensioners.  There is no official estimate of this, but we can make a bit of a guess.

Between 2008 and 2012, there was annual increase of 3.5 percent in recipients of stat pensions (contributory and non-contributory old age pension, and widows’ pensions).  There will be a blip this year with the increase in the retirement age but long-term growth is probably around 3.5 percent. 

If this holds, then between 2015 and 2019 there could be an increase of between 75,000 and 90,000 in pension recipients.  In 2012, average pension payments were €11,900 per recipient.  On this basis, old age expenditure could increase by approximately €900 million.  And this doesn’t factor in any increase in pension payments.  Nor does this factor in increased demand on public services (health services, medical cards, eldercare, etc.). 

In short, increased pension payment could take up 50 percent of the assumed increase in public expenditure up to 2019.  If this holds, then expenditure on all other programmes – public services, social protection, and investment – will have to be cut further in real terms.  And when the demand on services is considered, the cuts will have to be even more severe.

There will be some benefits to public expenditure; namely, reduction in unemployment benefits.  There may be fewer primary level students, but there will be more secondary and third-level.  The Government may be successful in passing on health expenditure to households (forcing them to purchase private insurance).  So there are ups and downs.

But the bottom line is that expenditure will be squeezed, squashed and stuffed.  There will be real public spending cuts under the Government’s scenario.  Austerity will continue – but not because there will be actual cuts, though this could happen in particular programmes.  It will mainly happen by letting inflation do the cutting – that is, below the radar.

Why?    The Government is equally up-front about this.

• Frist, to reduce the level of tax revenue.  As a percentage of GDP, the Government hopes to cut tax revenue by 3 percent (and that’s with more people working and wages rising).

• Second, to run a budget surplus of nearly 1 percent by 2019.

So, reduced tax revenue and a budget surplus – it doesn’t take an economics department to figure out how you pay for that.  You can only do that by cutting public expenditure in real terms. 

There is one bright spot.  All this may be on the planning boards, but those boards can be discarded.  It is likely there will be a change of Government after the next election.  I would like to think one possibility would be a progressive-led government but that looks unlikely if Adrian Kavanagh’s estimates are anything to go by. 

However, there is a definite need to intervene in the debate – not only to highlight what’s being planned, but to provide an alternative; an alternative based on fiscal expansion, increased tax revenue and investment, growing efficient public services and providing a strong floor for all low-income groups whether in work or not.

This may sound all abstract – and that’s exactly what vested interests want you to think (‘oh, don’t you be worrying your little heads over structural balance assumptions, the experts are looking after you’).  But it’s not.  This is real – just as real as the nightmare we have had to endure over the last six years.

You may not believe in flying fiscal pigs but we had all better believing in fiscal sheep.  Because we’re being herded into a place we definitely don’t want to go.

 

Comments

[Ernie Ball]

A 'progressive government' led by what progressive party? Labour? Who exactly is responsible for the continuing austerity, the blackmail of Haddington Road, the mooted tax cuts? There is no evidence that Labour was anything other than a willing accomplice. This has not been lost on those who used to make up their base of support, which is why they are at 6%. Nothing differentiates them from FG or FF. A progressive gov't would be nice but there's no party to lead it (and, no, SF or the Socialists is not a credible option).

[6to5against]

On a small point, I don't see that there will be any significant decrease in the numbers attending primary anytime in the next 10 years. The current birth rate is 15.6 per 1000, which is down on the 2009 figure of 16.8. That represents a fall from about 75,000 babies to 72,000, so there will be a small decrease in the number of junior infants over the next few years.

But the cohort due to leave primary over the next few years were born in the years, say 2002 - 2006. in those years the birth rate was somewhere very close to 15 per 1000, which I believe equated to about 60,000+ births,

So - if I understand it right - each year for the next few years we will be adding over 70,000 to the primary population, while losing something just over 60,000.

The rate of increase is faling, but not the numbers.

And I think I'm right to say that the birth rate went from a record low in the early 90s to a record high about 2008/09, so the total number in education is due to surge at a record level of increase for 15 years+.

All of which - if I'm right - I believe bolsters your central point rather than undermining it.

[Niall]

@6to5 There is already a significant drop in the birth rate. Figures peaked at over 75,000 in 2009 and fell to 72,000 odd in 2012. The 2013 figure is likely to come in at 68,000 with below 65,000 forecast for 2014. Numbers should fall by around 5% pa for around ten years. This will mirror the fall from 1980 to 1994 when there was just 48,000 births.

Put another way when the class of September 2013, approx. 75,000 leaves for secondary school,it is likely that there will be just 50,000 to repalce them. A number of counties are already in decline, the most notable being Mayo.

Part of the problem is that the decline will not be even. Even now there is a massive surplus of primary school places in some parts of the country, including many urban areas.

Also current school numbers have been filled out by foreign born children. It is likely that there is net emigration at this stage and the recent DSP audit of child benefit seems to confirm this. It found that there approx.. 7000 children no longer in the State for whom Child Benefit continued to be claimed. I understand that this audit programme is to be extended considerably.

Back in 1994, Ireland and Denmark had a similar crude birth rate of 13.4. In the interim ours reached nearly 17 per thousand before falling to approx. 14.9 est in 2013 (CSO figures at the end on May). The Danish rate for last year was just 10.9.

Our excessive crude birth rate is part of our problem.

[The Dork of Cork]

I can't understand why there is not a conservative social credit movement to fill the Masonic / Talmudic centralization of power grab / coup which has totally destroyed this society.

I guess the society is destroyed so they have won the final battle....now what ?
The fool of the Dail (Oliver J) was dead right all this time.
People were so busy laughing at him when infact the real joke was on them for all this pointless inflationary & deflationary time.
How sad.

Congradulations to the left for giving us their euro vision / our nightmare.
I total propaganda victory on their part.