Notes on the Front

Oliver Gilvarry of Dolmen Securities is writing in the Sunday Tribune in a column entitled ‘Straight Talking’. He has a solution to our problems. On his way to this straight-talking solution he quotes uncritically from a number of reports – a potted repetition of much of the real devaluationnist cannon which been dealt with here (pricey nurses) and here (pricey teachers) and here (pricey restaurant workers).

Oliver puts all this together (including his disappointment that flat-rate water charges and pension cuts have seemingly been removed from the Government’s agenda) and proposes that pay cuts and tax increases are vital to economic recovery.

Pop quiz. Sean and Maria are average income earners. They’ve been hit by income levies, health levies, child benefit cuts, etc. in the last 18 months. Now they’re heading into a period of wage cuts and more tax increases as prescribed by Oliver. What would happen to them?

First off, they would probably have no choice but to find ways to cut their spending even further – as they are not likely to have much in the way of savings.

Second, they may find the burden of their debt rising. Their disposable incomes would fall but their debt would remain the same.

How would this affect the economy? Let’s put this in some background. The ESRI estimates that consumer spending will fall by 12 percent between 2008 and 2010 (in the Eurozone average decline is less than 1 percent). Over €11 billion was lost to the economy in collapsed consumer spending. This collapse contributed to over 40 percent of the fall in the GNP.

The prospects for next year are modest, at best. The ESRI hopes that consumer spending will rise by 1.5 percent but the Central Bank is more pessimistic at less than 1 percent. Given this fragility, does it make any sense to hammer disposable incomes, turning this small advance into a negative? We will be inviting more businesses into creditors’ meetings and more people on to the dole queues.

And with wages falling, what impact will this have on tax revenue and, so, the deficit? The Government looks set to miss its deficit target this year. With falling wages, and most independent forecasters projecting more job losses next year, this will put more pressure on the deficit. Throw in falling consumption taxes (VAT/excise) due to falling disposable incomes; throw in spending cuts (which will reduce people’s spending power even further) – and you have a big pile of deflationary TNT.

Oliver has provided a solution that will cut consumer spending, cut business profitability, cut employment, cut growth, increase household debt burden cut tax revenues and increase the deficit. It makes absolutely no sense from an economic, fiscal or social perspective.

Any more straight-talking like this and the economy will surely blow up.