Friday 24 January 2020

It is time to worry when employers and unions start voicing the same concerns

Minister for Finance, Michael Noonan
Minister for Finance, Michael Noonan

A meme (pronounced 'meem') is an idea that spreads from person to person within a culture. Memes are all over the place, and often hard evidence can't displace a meme when it takes hold. Memes don't need to be true, and they don't need to be real, either. Think of the baseless anti-emigrant sentiment sweeping the UK at the moment: not a shred of evidence backs up the meme that foreigners are "taking our jobs" or overrunning social services, but polls show a majority of Britons believe the meme to be true. Three quarters of people polled in July 2014 in Britain favoured reducing immigration.

A meme is forming in Ireland that austerity has 'worked', the job is done, and it is time for the government, at the next budget, to share out the surplus of sweeties generated by the economy. The government itself created this meme on the eve of the last budget, when Minister for Finance Michael Noonan told Miriam O'Callaghan on Prime Time that the plan was to cut income taxes at the next budget if the money was available to do so.

Minister Noonan's qualifier - "if I have the money" - really doesn't mean anything to the electorate. The moment the expectation of tax cuts got lodged in the public mind, electoral timing meant Noonan needed to deliver that income tax cut.

It is increasingly clear he will, probably as part of a broader rebalancing of the way taxes are collected, away from income taxes and towards taxes based on carbon, water, and property, which are more resilient when times get tough and employment levels drop.

Unfortunately, the pre-budget debate is now framed in terms of the magnitude and composition of the income tax adjustment rather than managing the end of the EU/IMF-mandated programme of austerity. The logical result of framing the debate this way is the encroachment once again of powerful interest groups working to direct the resources of the State their way. A return to the formation of policy as the minimum between what is acceptable to various interest groups and the electorate is a return to the politics that bankrupted the State. At all costs this return should be avoided, precisely because the cost the last time turned out to be nearly 40% of our national output.

Sadly, that's exactly what we are seeing. This week both the employer and employee representative groups came out suggesting the government could dispense with this austerity thing altogether as the tax receipts from the economy's growth would be sufficient to make the targets set us by the EU and IMF.

Nothing should make you more worried than two representatives of essentially opposite concerns voicing the same opinion. Something else is at play. I'm no fan of austerity, as readers of this column will know, but once a country starts on the path toward a positive balance between government expenditure and revenue, which always needed to happen, all of the research done on the subject suggests the faster the consolidation is done, the better. Every agency tasked with fiscal responsibility has re-iterated the need to get the nation's finances right now rather than later. The Government isn't listening.

The economy is not yet in good health. Even accounting for the huge pile of cash on the country's books, which reduces the 'net debt' we owe the rest of the world, we still need to hit that primary surplus between government expenditure and revenues, for a long period, to pay down the stock of debt we have, which is the second highest in the Eurozone. The Government should not get drawn into the talk of record-low bond yields, this is nothing more than the market's irrationality expressing itself in a different way, thanks to ECB President Mario Draghi's "whatever it takes" speech in July of last year.

Austerity has hurt the working middle classes and those relying on services from the government most: those in receipt of social protection expenditure and those on pensions were relatively untouched. The distributional consequences of a small open economy voluntarily deflating itself through the wage channel are still unclear.

Austerity is not a good idea, but once committed to the policy, abandoning it halfway is not in the nation's interests. What is clear is the need to meet and exceed the targets that official funders set us while the economy is growing. Relying on positive momentum from the State's coffers to avoid further austerity is a gamble, pure and simple, that we needn't take.

Irish Independent

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