Nat O'Connor: A wide range of Irish and international economists and commentators were interviewed for an article in last Saturday's Irish Times, including Nobel Prize winner, Joseph Stiglitz who warned about the historical evidence, which shows "There have been almost no instances of successful austerity. ... The prospect of austerity working in Ireland is very bleak. ... the probability of failure is huge."
Yet as Professor Karl Whelan from UCD argues in the same article, those proposing alternatives are "duty-bound to say where we would get the money."
Well, there is no magic solution, but there are increasingly detailed alternative economic policies being developed here and internationally.
I want to deal with three things in this post: (1) what I mean by 'austerity'; (2) what is needed at European level; and (3) alternative economic policies suggested in the UK and Germany.
(1) Austerity is unfortunately a loaded word. Technically, a policy of reducing the deficit through a package of measures to increase revenue and reduce public spending is 'austerity'. But the word is emotion-laden; cuts to education or welfare tend to be more often labelled austerity than measures to cut waste or increase taxes on higher earners, yet the latter measures are also potentially part of austerity measures.
So, to be clear, I am critical of current austerity policies because they have unfairly targetted lower earners and the services upon which they rely; and because the austerity measures are strangling the economy due to insufficient measures to sustain and increase demand to boost economic activity. An alternative economic policy must still deal with the deficit and the national debt. As such, this will involve some 'austerity'. However, any cuts should be balanced by higher public spending in other areas. And increased taxes should target people who can better afford to pay. What would also be different is measures to boost demand, foster sustainable jobs and protect people who are vulnerable.
(2) The Government's reported involvement with an initiative to boost trade and growth in Europe is welcome, but this should not overshadow more profound changes needed at European level that have - to date - been absent from the crisis talks and treaty proposals. For example, the European Central Bank should have a mandate to boost sustainable economic output and maximise employment, similar to the US Federal Reserve. This, among other effects, would allow for inflation targets to vary from the current two per cent to higher levels (maybe four or even six per cent) when this serves Europe's economies better. Controlled higher inflation would help reduce the extent of national and private debt across Europe. Other elements of possible enhanced European co-operation that seem to be missing from the proposed treaty are Eurobonds and a Europe-wide financial transactions tax.
When the final text of the proposals is revealed it will be possible to say more about what exactly they imply.
(3) I recently noted that President Obama's state of the union address echoes some of what has been called for by opponents of Irish austerity policies. The above-mentioned Irish Times article opened by reference to our call for a Plan B.
In a similar vein, Compass in the UK are promoting their own Plan B (published in October 2011), subtitled "A Good Economy for a Good Society".
In summary, Compass is calling for:
- A halt to public spending cuts;
- Quantitative easing to invest in a Green New Deal;
- Tax reform to curb avoidance and increase progressivity;
- Strategic Government support to business (such as a state investment bank);
- Better regulation of banks (including the full separation of retail banking from financial investment banking);
- Social investment, with a focus on prevention;
- A move to shorter paid work time;
- Raising the minimum wage;
- Tackling high pay;
- More employee participation in corporate governance;
- Public service reforms.
In their words, "Plan B shows there is an alternative, not just to cuts, austerity and stagnation, but to a return to business as usual and all that means for growing inequality, climate change and people's well-being."
Another report on similar lines is from the German Friedich Ebert Stiftung. They released a policy paper in January 2012 entitled "Social Growth - Model of a Progressive Economic Policy".
This includes a ten-point programme:
1. Guarantee a stable supply of credit with effective financial market regulation;
2. Use education policy to boost the forces of growth and expand opportunities for all;
3. Open up new areas of growth with industrial policy;
4. Strengthen the position of employees by means of minimum wages and codetermination;
5. Fund public tasks properly and fairly by reforming tax policy;
6. Stablilise the economy and the debt situation by means of an anti-cyclical fiscal policy;
7. Strengthen forces for growth in Europe by means of a robust public financial architecture;
8. Provide for more stability in the Eurozone by means of economic policy co-ordination;
9. Ensure decent work for all by means of European and global standards;
10. Manage globalisation by means of a new economic and monetary order.
Both the Compass Plan B and Friedrich Ebert Stiftung's Social Growth documents articulate in more detail the social democratic critique of current orthodox economics and the dead-end austerity policies it proposes. The alternative policies are not being presented as a panacea, but are suggestions for wide-ranging economic policy reform, built on extensive research and evidence. They represent a viable set of economic policies that governments can pursue to improve people's wellbeing, while restoring sustainable economic output and jobs.
In Ireland's case, we will still no doubt hear voices claiming that such policies wouldn't work here. Well, no doubt they would have be tailored for Irish circumstances. But there is still much of interest in what is being proposed, not least because the proposals see equality and sustainability as core attributes of economic reform, not 'side issues' to be addressed once some kind of mythical 'rising tide' is restored.
And Ireland has some resources that could be immediately mobilised, without altering the IMF/EU agreement. This includes using the remaing NPRF (c. €5 billion) for targetted, productive investment and likewise ring-fencing for investment any money saved from delaying payment of the Anglo promissory notes, which could be one or two billion euro a year for several years. Crucially, it is not just about substituting spending for austerity. There remains a need to reform Ireland's tax system, regulate banking, move public spending to where it is most needed, and a host of other things. While some of such measures may, technically, quality as 'austerity', they differ crucially from current policy in that they would maintain incomes and living standards, promote jobs and sustainable development and lead, ultimately, to a socially just and sustainable recovery.
Showing posts with label Plan B. Show all posts
Showing posts with label Plan B. Show all posts
Monday, 30 January 2012
Friday, 27 January 2012
There is an alternative
Tom Healy: A copy of a paper I gave at the Dublin Economics Workshop today is available here. The conference provides an opportunity for a large number of people to debate economics policies. The current workshop is part of a series of its kind on the economic crisis which goes back to January 2009.
A key focus of the paper is on unemployment - especially youth. The impact of fiscal austerity on the domestic economy is outlined and the implications of this for the future of public services here. Unless current economic policies are reversed Ireland will emerge with an even lower level of public spending and revenue than is currently the case. It is very unlikely that the Troika can succeed in reaching the 3% deficit target by 2015, especially as the European economy of the Eurozone heads into a new recession in 2012. In short we need a Plan B and we need it very soon.
A key focus of the paper is on unemployment - especially youth. The impact of fiscal austerity on the domestic economy is outlined and the implications of this for the future of public services here. Unless current economic policies are reversed Ireland will emerge with an even lower level of public spending and revenue than is currently the case. It is very unlikely that the Troika can succeed in reaching the 3% deficit target by 2015, especially as the European economy of the Eurozone heads into a new recession in 2012. In short we need a Plan B and we need it very soon.
Wednesday, 25 January 2012
The Debt Trap
Sinéad Pentony: The dust has hardly settled from the Troika’s departure when we are facing the repayment of €1.25 billion in unsecured bonds that are not covered by the bank guarantee to Anglo bondholders today.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Friday, 20 January 2012
Time for Plan B
Nat O'Connor: Austerity policies are not working. I was one of 59 signatories of a letter in today's Irish Times calling for Plan B.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
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