Wednesday 24 July 2019

Brendan Keenan: After the crash Ireland and UK deliver a tale of two austerities

In the UK austerity was tempered by cuts in income tax, corporation tax and excise duty with welfare taking the brunt of the spending cuts
In the UK austerity was tempered by cuts in income tax, corporation tax and excise duty with welfare taking the brunt of the spending cuts
Brendan Keenan

Brendan Keenan

The new Garda Commissioner is inevitably on a very steep learning curve, but there is one area in which Mr Harris has all the necessary expertise - the endless search for money. In fact, he may find his new job easier in that regard, but very, very different.

A leaked report in Britain contained some remarkable figures on what has happened to UK police budgets. It came from the National Audit Office, a body with no direct Irish equivalent, although it has elements of the Comptroller and Auditor General and the Fiscal Advisory Council. The point is, it is not a party political body.

Yet any opposition party would have fallen over itself to deliver data like this. Spending on police has fallen by 19pc in real terms since 2010; mainly through job cuts, with the number of officers down by 15pc and those of police staff by 20pc. The report came as a 3pc pay claim was rejected by government.

The PSNI was far from exempt. Northern Ireland is a particular case, of course, but the £150m (€168m) budget cut over the last five years, and the reduction of police numbers by 1,000 in 2017 alone, looks a lot more than just a peace dividend.

How very different from our own happy jurisdiction. Ministers announced an increase of 1,600 in Garda numbers over the last two years, and plans to increase the force to 17,000 by 2021.

How to explain this difference - and not just in policing either - especially when the UK's budget deficit is bigger than Ireland's?

This being this jurisdiction, numbers fell short and the force was running out of money for wages in June, in yet another overtime explosion and unbudgeted pay rise.

The topic this time, however, is not how money is spent, but the glaring difference between more money being spent here, and less in the UK. Not just in policing either.

On this 10th anniversary of the fall of Lehman Brothers, that takes us right back to the crash and the arguments which still rage about the response to it.

There is though, a kind of emerging consensus in the torrent of analysis: that too much was done by way of providing cash for the banks, and not enough to help out their customers.

All fair enough, so far as it goes, but it is difficult to find any precise descriptions of what an alternative strategy might have looked like. Lehmans, the great inter-bank bank, was not rescued. Finally, and suddenly, executives in troubled banks realised that other banks could be in trouble too, maybe in worse trouble. So they all stopped lending to each other.

If that had been allowed to continue, system collapse would have followed and there would not even be a debate about austerity.

One cannot actually imagine what the situation would be. The controversy should not be about that, but about policy after the situation was stabilised, where central banks printed money to buy loans from banks (much of it loans to governments), rather than printing money to give to the rest of us.

The evidence is that the method actually adopted - QE - did promote economic recovery, but not as quickly or directly as the early claims made for it.

It did little or nothing to protect living standards. Ten years on, Britain seems to be a perfect example of the critics' complaints.

The UK was hit hard by the crash. The economy shrank by 4.5pc from 2008-10; which doesn't sound much from our perspective but was in fact the worst recession since 1945. Growth resumed in 2010 and hit 3pc in 2014. Growth since has been less than in France but, if one takes 2010-18, the total percentage increase is the same as Germany.

It is all very strange, and it does not end there. Despite this growth, there has been no increase in real wages. Actual wages have been declining since last year. It appears to be the worst performance since the 19th century - maybe longer. Yet employment rose rapidly and the unemployment rate is at a 40-year low.

The question will be as to whether less austerity might have made the recovery less strange and more widely spread? Whereas QE is about saving the financial system, austerity is about saving the value of the money in the system - including pensions and small savings.

Britain's budget deficit totalled 26pc of GDP in the three years from 2008. It is expected to be 1.8pc this year. The national debt is 90pc of GDP; not that far below Ireland 100pc of national income. Any major stimulus beyond that could hardly have been financed on the bond market: it would have had to be done with printed money, which might mean inflation and loss of purchasing power.

It is a rational choice, with savers losing more while debtors and those with no savings carried less of a burden.

It is more or less what happened in the 1970s. But that experience was so unpleasant that everyone vowed never to do it again. Which they didn't; but one can only spread the unpleasantness differently, not eliminate it.

Even so, the Irish experience - near fiscal balance, low unemployment and rising incomes - suggests the details of the austerity may matter. Ireland's response had to be quick and brutal to an extraordinary degree. Recovery came later but seems to have been more solid.

The British shied away from troika brutality but they also wielded the axe differently.

Austerity was tempered by cuts in income tax, corporation tax and excise duty. Welfare took the brunt of the spending cuts. This was almost the opposite of the Irish approach, where taxes rose across the board and pensioners and welfare recipients were protected from the full impact of spending cuts.

This is closer to the Keynesian idea that consumption should be supported. If the decision is made that government is not going to use funny money, what can be borrowed should go to those most likely to spend it; who are often those who most need it.

No two sets of austerity policies were the same, and no two produced exactly the same results. It is hard to escape the conclusion that the differing nature of economies had more to do with the outcomes than policy details, given that everyone tried, or was obliged to try to restore balance to their public finances.

The Irish economy was kept just above the waterline by the multinational sector, while the furious bailing out went on below.

Britain was hampered by a poor productivity performance, which many see as a reflection of lack of skills and severe regional imbalances. Value added per person is a bit over £20,000 in most regions, rising to £28,000 in the south-east, but is £44,000 in greater London.

Export shares have been in decline for 20 years and the dependence on services has grown.

All these factors may explain the desire for Brexit, as well as the curious UK recovery story, but they also portray a country exceptionally unsuited to going it alone.

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