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Marc Coleman: Further spending and debt won't solve this crisis

Perhaps the biggest lie in this referendum is the lie that says austerity doesn't work.



Like Christianity and capitalism, the trouble with austerity is that it has so rarely been properly tried. And yet last week David McWilliams, in urging us to vote 'No' on Thursday, described austerity (the fiscal compact treaty) as "Kamikaze economics".

Oh really?

Now there is a case to vote 'No', but the populist anti-austerity argument is not it. In theory, there is a good case for a 'No' vote in that it might give us a bargaining chip to cut a deal on our bank debt. Recently even ECB council member Patrick Honohan signalled that a deal might be justifiable.

Sadly, the Greek election has since then raised the risk of contagion were such a deal executed. On the other hand were Greece to stabilise or leave the euro, such a deal might be possible. But as neither will happen before next Thursday -- and as Greek instability could worsen -- this is a very high-risk strategy. Nonetheless making this argument is fair game in a referendum campaign.

The "anti-austerity" myth is not valid, however. Between 1982 and 1987 the woolly logic that "my spending is your income and your spending is my income" (as recently articulated by David) drove the centre-left government of the day to increase State spending from 47.3 per cent to 49.1 per cent of GNP by 1987. While Europe was booming, this drove our economy into deep recession with growth averaging a measly 0.3 per cent over the period. This "tax and spend" policy caused an average budget deficit of over 10 per cent and pushed national debt to 117 per cent, even higher than now.

In 1987 a new government did exactly what David and the anti-austerity camp oppose: it radically and decisively cut spending from 49.1 per cent to 42.6 per cent of GNP by 1992.

Addressing a National Forum meeting last March, both Alan Dukes (the former opposition Fine Gael leader who backed the minority Fianna Fail government's austerity programme) and then Finance Minister Ray MacSharry agreed that a similar arrangement -- but with Fine Gael in government backed by a Fianna Fail opposition --was what we needed. If the lessons of this era are not learned in the next budget, they might be on to something.

Compared with the disastrous recessionary Keynesian experiment, growth in the 1987 to 1992 period averaged 3 per cent, unemployment fell and the debt ratio plummeted, so that by 1998 -- the year we joined the euro -- our debt was below the 60 per cent threshold referred to in the current fiscal compact.

So, far from being hostile to it, achieving this debt target is proven by history to be essential to growth: it produced a decade of real solid growth and full employment between 1994 and 2004, an era brought to an end in 2004 by Bertie Ahern's conversion to socialism.

The doubling of personal debt and the 55 per cent hike in State spending in the ensuing half decade is what produced the crisis we have now. That some are daft enough to believe that more debt and spending will solve this crisis beggars belief.

Another rebuttal to the "anti-austerity" fallacy is the December 2009 Budget. By cutting spending and leaving taxes alone, it led to 4.8 per cent GNP growth in the last quarter of 2010. Then the two most disastrous decisions in Irish economic history (the 1977 Budget aside) -- the Croke Park deal and bank bailout -- necessitated another round of tax hikes. Within 12 months of that calamity, GNP had fallen by 7 per cent.

So what is failing isn't austerity. Where it has been tried, in Germany, properly planned austerity has produced an unemployment rate of just 5.6 per cent.

What is failing right across Europe is the Keynesian band-aid economics of higher state spending and taxes. Some infrastructure initiatives -- like the €2bn initiative announced by Nama last week -- may pay off in the longer term. But solve the immediate growth and fiscal crisis they will not. Nor will dreamland ideas of reflating Europe's economy with state spending, ideas that thankfully bit the dust in Brussels last week.

Germany's openness to eurobonds is, however, welcome. But, like the first bout of quantitative easing in the US, eurobonds can only be a solution as a once-off measure to stabilise Europe's banks and public finances: as the failure of subsequent US easing efforts prove, using them to kick-start growth would be disastrous and Germany is right to insist that a fiscal compact is put in place to prevent just that from happening.

The fragile debt-fuelled nature of US growth and the return of Britain's debt-laden economy to recession shows that the Anglo Saxon model of debt-driven growth is dead.

However isolated she is politically, Angela Merkel is economically right and Ireland would be well advised to stay the course with a stability- and export- -- rather than debt- -- driven growth strategy. The only country to pare back output and employment to sustainable 2005 levels that are not debt-driven, we are on a solid basis for sustainable real growth.

If we pursue proper austerity -- with spending cuts and not tax hikes -- then our impressive export performance can lead to domestic growth and jobs just like in the Nineties.

Finally, as well as the "anti-austerity" lie, another lie needs to be nailed.

Last week the EU Commission -- whose staff pay no income tax -- published a study saying Ireland had the "second lowest" tax burden in Europe.

Rubbish.

By using GDP instead of GNP and ignoring our lower defence and age-related health and pension spending needs (due respectively to our neutrality and young population), the study perpetuates the myth that we should have similar tax and spending as ageing Nato members like Germany. Donal de Buitleir and Pat McArdle have already twice debunked this myth. Yet it was pounced on by Vincent Browne last week as "proof" that we should pay more tax. With deepest respect to Vincent, it is nothing of the sort.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm. Follow @marcpcoleman

Sunday Independent