Leo Varadkar and Capital Programme Stimulus

13/10/2010

Leo Varadkar has an interesting piece in the Sunday Business Post, available here.

Basically he suggests that we get the fiscal changes over quickly (basically in one or two budgets), and he proposes almost all the changes come about through cuts, rather than tax increases. With everything done people would supposedly have something to look forward to.

What is interesting is that he makes a clear distinction between capital and current spending (something that I think has been missing from the debate). To offset the damaging effects of contracting current spending, he proposes increasing capital spending.

I disagree with Leo Varadkar in putting all the changes on the expenditure side (I would put most of the emphasis on taxation, and increase inheritance tax significantly), but I do agree with the idea of distinguishing between current and capital expenditure and using capital spending to boost the economy while getting current spending back on track.

I suppose it is important to further refine the idea, by getting the structural deficit, rather than current deficit, back on track. This would mean that for the next few years we would still run a deficit on the current side as unemployment is above the structural norm, so we would pay higher levels of unemployment benefit, and also receive a lower tax take. This would be just the normal reaction of the 'automatic stabilisers'. A problem with targeting the structural deficit is that it is hard to calculate, and it is affected by the actions we take today. If we allow long term unemployment to fester, then we will have larger structural unemployment resulting in a need to have higher taxes, or lower spending over the long run. But if we improve our infrastructure and long term growth potential this means we can afford higher current spending today. But in debating our fiscal plans I think its important to clearly differential between the overall fiscal deficit, the current deficit and the structural deficit, and be patient in explaining to people their differences.

So overall I think it would be feasible to create a plan that:
1) Gets our structural deficit back on track in one or two budgets
2) Achieves this mainly through adjusting taxes (really I mean increases, but I may as well get in on the political jargon)
3) Offsets the negative effects by increased capital spending
4) Allow the citizens to vote on the plan so its implementation gains credibility with the bond markets.

Posted in: PoliticsFiscal policy

Tagged with: stimulusLeo Varadkar

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