Debating on the Titanic

Michael Taft20/09/2010

Michael Taft: The confusion between fiscal contraction (i.e. public spending cuts) and reducing the fiscal deficit continues apace. On Morning Ireland, Caoimhghín Ó Caoláin, Sinn Féin’s Dáil leader was being interviewed on the budgetary options facing the Government. The very first question began like this:

RTE: ‘We know the Government is going to cut the deficit this year by around €3 billion ... some doubt about whether it will be a little more than that . . . ‘

This encapsulates all that is wrong with the debate over fiscal policy. For the Government is not seeking to reduce borrowing or the fiscal deficit by this amount or anything like it.

Leaving aside the impact of bank bail-outs – which should be treated as an ‘extra-ordinary’ (with special emphasis on ‘extra-ordinary’) – the Government estimates that net borrowing of central government will be:

2009: - €16,857 million
2010: - €17,346 million
2011: - €16,831 million

At best, if the Government hits its budgetary targets, central government borrowing will fall by €515 million – not €3 billion.

When we turn to the General Government Deficit (the instrument used to measure Maastricht compliance) we find the deficit falling from -€18,720 million to -€17,030. This is a fall of nearly €1.7 billion. Why the discrepancy then with the above figures? And doesn’t this show the Government is at least making some progress? Answer to the second question – no. Let’s answer the first.

The discrepancy is due to the treatment of the deficit in the Social Insurance Fund. In 2010, the Government expects the Fund to be in deficit by nearly €1.2 billion. This is factored into the General Government Deficit. In 2011, the Government expects the Fund to be in surplus again – largely because those on Jobseekers’ Benefit will have exhausted their benefit (they receive it for only nine months).

When we remove the Fund deficit, we find the difference to be approximately €500 million – the same as the Central Government borrowing.

Let’s cut to the chase: if cutting public spending resulted in an equivalent cut in the fiscal deficit we wouldn’t be having a public finance crisis. The Government has already cut nearly €9 billion from public spending. They intend to cut €2 billion plus in the next budget. If all these cuts equalled cuts in fiscal deficit, we wouldn’t be having these discussions about public finances – we’d be in clover.

The ESRI has already assessed the Government’s fiscal strategy and found it incapable of either repairing public finances (at least in this decade) or preventing the debt from spiralling out of control.

Debating a future of public spending cuts is like holding a debate on the decks of the Titanic. Equating public spending cuts with cuts in the fiscal deficit will do nothing to change the course of the ship or melt the iceberg waiting for us. There is only one option – change the captain and, for goodness sake, turn the wheel.

Posted in: EconomicsEconomicsPolitics

Tagged with: deficitpublic spendingcuts

Michael Taft     @notesonthefront

Michael-Taft

Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.


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