Stimulus and austerity

Peter Connell: Over on irisheconomy.ie there has been an enlightening discussion on one of our favourite topics – austerity versus stimulus. The discussion, at least in parts, seems to represent a genuine engagement between those who believe a stimulus package would be misguided given the state’s fiscal deficit and open economy (a belief espoused by the overwhelming majority of economists, journalists and politicians) and those who argue that a properly targeted stimulus can start to address the critical issue of mass unemployment, depressed domestic demand and the fiscal deficit itself (the position we’re pretty familiar with here on progressive-economy).

Up to now there has been no debate. Part of the reason is that it’s extremely difficult the get the pro-stimulus arguments into the public domain. Those who comment on economic issues in the national media almost all subscribe to the ‘fiscal austerity’ consensus. Those who put forward the pro-stimulus position are routinely dismissed as not understanding the gravity of the State’s fiscal position or promoting narrow sectional interests. During the week, Paul Krugman bemoaned the quality of economic discourse on both sides of the Atlantic. In Ireland we should be so lucky to have the kind of discourse that’s taking place in the US and the UK, for example! So, in that context we should welcome the engagement that’s taking place between Karl Whelan, Michael Burke and Michael Taft on irisheconomy.ie. It’s a start.

What’s less encouraging is the content of the interview given by Eamon Gilmore on the Pat Kenny show last Monday morning. In the interview, Gilmore firmly nails his colours to the mast by affirming the Labour Party’s support for a €3 billion fiscal contraction in the forthcoming December budget. He goes on to express support for the government’s stated target of reducing the deficit to less than 3% of GDP by 2014.

On the latter point, this seems an ill-advised position for a prospective Taoiseach to adopt. If, as most progressives hope, Gilmore is Taoiseach after the next election, then his stated commitment to meeting this 3% target may be one he regrets making as most independent commentators now accept that Ireland has little prospect of meeting it in 2014. The IMF recently predicted that our deficit will be 5.9% in 2014 (see page 30 of the report). The Ernst & Young / Oxford Economics survey suggests we won't reach Maastrich compliance until 2018/2019. Further, two days later the ESRI report (see page 79) implied that additional fiscal contraction beyond that already planned by the government would be required to meet the 3% target.

From a policy point of view the realistic (and sensible) thing to do is set this 2014 – 3% straightjacket aside. That opens out the debate and helps focus on the fact that the deflationary policies pursued to date are strangling the domestic economy and suppressing the growth in revenue which has to be part of any solution that addresses the deficit in the medium term.

Eamon Gilmore’s stated support for a €3 billion ‘fiscal correction’ in the December budget is even more unfortunate. In fairness, in the interview he indicates that the €1 cut in the capital programme would be supplemented by funds from the Strategic Investment Bank the party proposes to establish (hardly realistic in the context of the December budget) and part of the cut in current spending would come from the reform of property and pension tax allowances. Unfortunately, in terms of the public discourse on macroeconomic policy, these details will receive little prominence. By supporting the €3 billion fiscal correction, the Labour Party ends up being co-opted on to the side of those arguing that there is no alternative to fiscal austerity. The result is that the range of ideas that gain prominence in the public domain is reduced, and we end up with an even more lop-sided debate on how to solve our problems. The consensus reigns.