Invest, tax and restore spending cuts: Challenging the deflationary orthodoxy

Michael Taft23/09/2010

Michael Taft: Previous posts by Paul Sweeney and Sinéad Pentony refer to articles from two newspapers which occupy different ideological zones. Yet they point to similar conclusions that TASC bloggers have been discussing for some time – the failure of the Government’s deflationary policies. Even the ESRI found these policies would fail to repair public finances or prevent the debt from spiralling out of control. That said, what are the fiscal principles that progressives can unite around in the run-up to the budget – principles which would have the capacity to unite the broadest alliance for an alternative strategy?

I would propose five principles. The first two are general.

First, when in a hole, stop digging. Public spending cuts and tax increases on low-average income earners are not part of the solution; they are part of the problem.

Second, repairing the public finances is dependent on repairing the economy and, in particular, reversing the rise in unemployment. We can learn a lot from Keynes’ dictum – ‘look after unemployment, and the budget will look after itself.’ Grow the economy, shrink the deficit.

The next three are particular to the upcoming budget.

Third, investment, investment, investment. Through investment we can repair the major infrastructural, social and enterprise deficits in our economy – succinctly listed in the TASC open letter: physical infrastructure, public services, poverty and low incomes, defects in our indigenous enterprise base and carbon-heavy economic activity. Repairing these defects is not a cost – it is an investment which will return higher growth, productivity, incomes and, most importantly, employment.

Fourth, as the G-20 put it, implement growth-friendly fiscal consolidation. What does that mean? The ESRI has published two papers in the last year that puts the answer beyond dispute – taxation. Increasing taxation is less deflationary and, therefore, yields higher Exchequer savings than spending cuts. In the long-term, taxation will have to increase throughout the economy but for this year, at least, increased taxation must impact primarily on high-income groups – which will have even less deflationary impact than what the ESRI has measured.

Fifth, save, reinvest and remove the deflation from the economy. Where efficiency savings are made in public spending, where savings are made in reduced unemployment costs – take this money and start restoring deflationary public spending cuts. We can’t repair all the damage in one budget but we can make a start. I would prioritise reversing social welfare cuts, health and education cuts, and wage cuts to low-paid public sector workers. Remember: deflation depresses future growth. Therefore, taking the deflation out of the economy will liberate economic growth.

These five principles will not be easy to implement. The Government has painted us in a right corner. For instance, borrowing for investment purposes would normally not be contentious. But their fiscal and banking policies have made a mess of our debt profile in the international markets. Therefore, we will have to look to our cash and assets on hand which the ESRI estimates will amount to over €48 billion next year (or nearly 30 percent of our GDP – significantly higher than other EU countries). In addition, the Government has cut over €6 billion from current spending – that can’t all be restored. Scarce resources meeting high demand will mean some cuts will have to wait to be restored.

But already some organisations are starting to make the running. For instance, the Community Platform’s 4Steps2Recovery campaign – envisaging up to €3 billion in tax increases on the high income and wealth groups - is an excellent example of growth-friendly fiscal consolidation.

Identifying the key short-term investment priorities, drawing up a progressive taxation schedule, ascertaining real savings and productivity increases – and modelling all this to show beyond a doubt that an expansionary fiscal programme is superior to what the Government has been doing: this is the work that must be conducted in the next few weeks. Yes, there will be disagreements over details, priorities, programmes – but if we start from the same principles, those disagreements can be resolved.

The sooner we start, the sooner we can rescue the debate from the cul de sac it has found itself in.

Posted in: EconomicsFiscal policyInvestmentTaxation

Tagged with: Deflationtaxationinvestmentexpenditure

Michael Taft     @notesonthefront


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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