Tom McDonnell: It is claimed in an IMF paper ('Will It Hurt? Macroeconomic Effects of Fiscal Consolidation') that fiscal consolidation measures can be linked to increased unemployment.
Caution should be applied in the direct transfer of these findings to Ireland, as all country characteristics are different. However, we can look at some of the basic numbers.
The IMF paper states that "Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point. Domestic demand—consumption and investment—falls by about 1 percent."
Summarising this for Ireland, one could estimate the following:
- Ireland's GDP is €159 billion;
- 1 per cent of GDP is equal to €1.6 billion
- All things being equal, TASC's €3 billion of austerity measures equals 1.89 per cent of GDP, which leads to an expected reduction in GDP of 0.94 per cent (c.€1.5 billion).
- The suggestion that Ireland should 'frontload' a €6 billion austerity package in 2011, would have an expected reduction in GDP of c.2 per cent (c.€3 billion)
- The labour force is currently 2,152,700 people
- 0.3 per cent of the labour force is 6,458. This is the level of increase in unemployment expected for every 1 per cent of GDP worth of fiscal contraction
- All things being equal, TASC's €3 billion of austerity measures (mostly on the tax side) risks increasing unemployment by 12,206
- But an austerity package of €6 billion (an additional €3 billion) doubles this to an increase of 24,412 in unemployment.
Of course, all things are not equal. TASC argues in its Budget proposals that different types of cut and different taxes have different effects on the economy. And TASC's proposals are as growth-friendly as possible, with an Economic Recovery Fund to maintain and create jobs to compensate for the deflationary impact of taxation.
Another difference in applying the IMF study to Ireland is that emigration might occur more than people adding to the live register. Nevertheless, it is reasonable to suggest that frontloading €6 billion in cuts risks over 20,000 jobs.
3 comments:
Tom
the IMF study actually goes much further.
The 1:0.5 ratio is the modelled 'usual' response. It also states that under conditions where there is no room to cut rates, that ratio of cuts to lost output rise to 1:1. Where 'fiscal consolidation' is also taking place elsewhere that rises to 1:2, ie the loss of output is double the size of the fiscal contraction.
But all of these are only first year effects- over 5 years the effects treble. So a 1% fiscal contraction leads to a cumulative decline of 6% in output over 5 years.
The ESRI works with a rule of thumb (from the HERMES model) that every €1bn in lost output leads to 18,000 job losses. Whether they remain in Ireland or emigrate, they are all losses impacting taxation revenues (as well as individuals, families and communities).
Again a selection of ideas from the IMF report that is sufficiently one-sided to make the whole article valueless.
Here's an alternate quote from the report. "Fiscal retrenchment in countries that face a higher perceived sovereign default risk tends to be less contractionary."
So, since Ireland definitely faces a high perceived sovereign default risk, any fiscal retrenchment would have different and less bad short term impact that this article suggests.
Anon,
neither of us quoting 'selectively' from the same artcle can render it conclusions 'valuless'.
All quotations are 'selective' without reproducing it in full, and its value can only be determined by objective appraisal.
Your killer quotation that, "Fiscal retrenchment in countries that face a higher perceived sovereign default risk tends to be less contractionary", merely reinforces the central idea of the IMF research:
Even in high-default risk countries, fiscal retrenchment is indeed contractionary.
(Leaving aside how Ireland fell into that high-risk category via government policy), fiscal retrenchment remains contractionary.
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