Budget 2013 – Despite everything, the Government has choices

In this week’s IMPACT blog, director of the Nevin Economic Research Institute (NERI) Tom Healy outlines an alternative approach to Budget 2013.

There has been a considerable media clamor in recent weeks about what may or may not appear in December’s budget. Speculation aside, the figures are stark. €3.5bn is the target the Government has set itself this year in order to achieve the Troika’s targets for deficit reduction by 2015.

It’s a big chunk of money to extract. Most of it will come from cuts in key services and income protection for low-income groups, and we’ve estimated that these measures will cost nearly 30,000 jobs. A loss we can ill afford.

The Government’s proposal to cut expenditure by €2.25 billion, of which €550 million would be from capital investment, and raising revenue by €1.25 billion, would lower GDP growth by 1.9% and reduce employment by 29,000 in 2013 compared to a ‘no consolidation’ scenario.

In the wake of an austerity drive which has ground domestic demand to a near halt and caused unemployment to soar, the Irish fiscal car is still very much stuck in the mud. More austerity is like pressing down on the accelerator pedal, grinding the wheels further into that mud. Going nowhere is not a real option.

Much of the commentary around the budget focuses on the fact that the Government has no options, and that what is coming in the next budget is a fait accompli. There is no magic bullet to fix the economy, but there are options open to the Government which would, first of all, do no further harm and, through investment, create the potential for 21,000 additional jobs. We call it ‘Plan B’ – a budget for growth and equality

This alternative budgetary strategy is possible within the terms of the Troika targets on government deficit and debts. Contrary to idea that our hands are tied by the Troika, the choice between taxes and spending is ours to make. And our alternative would still mean we could stay within Troika deficit targets for next year with no additions to debt as a result.

Spending

Our budget plan would maintain 2012 public spending levels (in social welfare, education and health) while increasing taxes on high income and high wealth groups by €1billion, investing in jobs and infrastructure and reversing capital spending cuts.

We recommend a smaller adjustment of around €2.7billion with €2.3bn of this achieved through a targeted increase in revenue (by one percentage point of GDP), mainly through a narrowing of tax reliefs and credits for high-income households.

The rest would come from reductions in the public sector pay bill, which can already be achieved under the terms the Croke Park agreement. In addition, we recommend a continuous review of all areas of public expenditure ‘line by line’ with a view to reducing waste and re-directing savings to additional public spending in priority areas such as early childhood education and care, mental health services for young people and the extension of training and work opportunities for school leavers.

Investment

There is a compelling case not only to accelerate investment in priority infrastructure areas but also to bring forward plans such as those to reform banking and to establish a Strategic Investment Bank as mentioned in the Programme for Government.

In order to make the investment in infrastructure, the key requirements are to raise revenue and hold expenditure at its current level of GDP. We have modeled an adjustment in Budget 2013 together with a special ‘off the books’ investment stimulus of €500 million in 2013 brought forward from the July investment announcement by Government. This would involve holding overall spending at 44% of GDP (or €73.3 billion) and raising revenue to 36.5% of GDP (or €60.8 billion).

We have estimated that the investment in infrastructure would result in 21,000 more jobs than the Government’s proposed consolidation.

Taxation

It is fair to say that most people have already taken enough in cuts to public services and wages along with increased charges. What we need instead is a strategy that begins to address the huge shortfall in taxes paid at the very top end of the income distribution. Such a strategy is not only equitable but also makes economic sense.

Those on lower and middle incomes spend more of their income. Their capacity to do that has shrunk in the last few years, weakening demand and contracting the economy. More taxes, charges and service cuts means their capacity to spend is further compromised, and the negative inward spiral of collapsing demand just gets worse. Therefore it makes more sense to level taxation on those who can better afford it. What we are proposing is a moderate hike in tax for very high-income households, including a levy of 1.5% on the top 20% of earners with the possibility of skewing this towards very high earning households with over €100,000 per annum.

Fragile

At this fragile state of economic development it is imperative, in our view, to avoid causing further damage to domestic demand and employment. In recent months voices have been raised to the effect that ‘middle Ireland’, let alone those in poverty or without work, cannot take any more. What NERI proposing could lead to the same deficit outcome (7.5% of GDP) as the Government’s current plan but it would protect existing levels of front-line services and social protection while factoring in reductions in the total public sector pay-bill. It would also avoid the likely loss in jobs estimated by us as 29,000 resulting from a spending-intensive large fiscal adjustment of €3.5 billion in this December’s budget.

The wheels of the Irish fiscal car continue to spin in the mud, and additional pressure on the accelerator of fiscal austerity leaves little impression on employment, output or consumer confidence. Instead we need a rubber mat of an investment stimulus under the fiscal wheels to allow a lift off from the recessionary mud. An export-led recovery towing van would certainly help if such were available but such outside help alone is not enough.

While the circumstances remain stark, it is nevertheless good to have choices.

Tom Healy, Director, www.NERinstitute.net

Tom Healy is Director of the Nevin Economic Research Institute (NERI). Tom has previously worked in the Economic and Social Research Institute, the Northern Ireland Economic Research Centre, the Organisation for Economic Cooperation and Development, the National Economic and Social Forum and the Department of Education and Skills. He holds a PhD (economics and sociology) from UCD. His research interests have included the impact of education and social capital on well-being.