Notes on the Front

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU

Spending Cuts or Tax Increases – What would Jesus Support? The Recession Diaries – July 20th

Recession 254 Dan O’Brien – who is producing work at the Irish Times at a phenomenal rate – quotes approvingly from the Department of Finance:

‘In formulating policy, the Government took on board evidence from international organisations, such as the EU Commission, the OECD and the IMF, as well as the relevant economic literature which indicates that consolidation driven by cuts in expenditure is more successful in reducing deficits than consolidation based on tax increases. Past Irish experience also supports this view and suggests that confidence is more quickly restored when adjustment is achieved by cutting expenditure rather than by tax increases.'

You could write mountains of posts on just this one quote but I’ll just content myself with a small hill. ‘Relevant economic literature’ is one of those catch-alls – you can find just about any viewpoint, perspective, set of prescriptions from the economic literature you’re looking for.  And if it agrees with your viewpoint its ‘relevant’ and if it doesn’t its ‘irrelevant’. Increase spending, cut spending, increase taxes, cut taxes, increase borrowing, cut borrowing – it’s all out there in the ‘economic literature’. Take your pick. You can even discover that Jesus wasn’t so hot on the minimum wage if you look hard enough.

Fortunately, we have some really relevant literature to our current economic condition.  The ESRI assessed the impact of tax increases (income, property and carbon) and spending cuts (public sector wages, public sector jobs and public investment) on the economy and fiscal deficit. Here’s what they found for ‘consolidation’ packages worth €3 billion each.

Jesus and Spending Cuts Well, well, well. Spending cuts would cut GNP growth by five times more than tax measures; five times as many jobs would be lost through spending cuts as opposed to tax increases; but – tax measures would yield more savings than spending cuts – 50 percent more savings.

Let’s put some numbers on all this for 2011:

  • Spending cuts will result in a fall of €1.5 billion in the GNP more than tax measures.
  • Spending cuts will result in a fall of approximately of 24,000 more jobs than tax measures

That’s why spending cuts will deliver less net savings (after you factor in higher unemployment costs, less tax revenue and less economic activity) – over €800 million less than tax measures.

In other words, spending cuts will result in moe business failures, more unemployment and less deficit reduction.  Tax increases, on the other hand, have a far less negative impact and greater yield for the Exchequer.  These findings from the ESRI model were published eight months before the Department of Finance made that statement above. So this ‘economic literature’ was known to them. It’s just that it didn’t fit the viewpoint of the Government. Therefore, it was not considered ‘relevant’. Isn’t that convenient?

Now, I wonder what Jesus would say about spending cuts.

2 responses to “Spending Cuts or Tax Increases – What would Jesus Support? The Recession Diaries – July 20th”

  1. FERGUS O'ROURKE Avatar
    FERGUS O’ROURKE

    But, Michael, that ESRI graph is of the first year impact.
    That’s not much use for the purpose of assessing the claim made by Dan O’Brien.

    Like

    Reply
  2. Michael Taft Avatar
    Michael Taft

    Fergus – if you are referring to medium-term impact (e.g. 4 years), the ESRI provides that and the result is much the same. The combined impact on GNP for tax measures is -0.8% while for expenditure measures it is estimated at -1.7%. However, the spending cut, according to the ESRI, is an underestimate (something I forgot to mention in the post). That is because the cut in investment only assess the ‘demand-side’ – that is, the immediate impact on the economy of not having the activity of building the projet. It doesn’t take account of the ‘supply-side’ impact – that is, not having the product (e.g. road, power line, rail, etc.) for use in the future. They put it this way: ‘Thus the longer-term impact of this cut [investment) on output and employment would be substantially greater than shown here.’
    Of course, these are just estimates – and they are done on the basis of a single tranche of €1 billion each. If you combine and increase these together, they may have different results. For instance, the Government over a few months introduced and increased levies (which would act much like income tax) worth over €5 billion – or five times the amount the ESRI was measuring. There’s no telling what the impact would be, but it may be more than just multiplying the income tax multiplier by 5. Similarly, with spending cuts.
    Given that the collapse in GNP has been driven by domestic demand (our net exports have held up reasonably well all things considered), the impact – both general tax increases and spending cuts – would have added greatly to this collapse. An odd thing – a government cutting growth at the same time as the economy is in freefall.
    That’s why, going forward, we must seek to front-load investment in order to generate employment, growth and tax revenue. We can make a start with fiscal consolidation by increasing taxation on high-income groups (which would impact less on demand). But the first rule of fiscal policy in a recession and/or a tentative emergence from falling growth rates – is to consolidate growth.

    Like

    Reply

Leave a comment

Navigation

About

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU