Assessing the impact of Budget 2014

Posted on October 15, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

An economist was once asked to assess the impacts of the French Revolution of 1789 to which she replied 'it is too early to say yet'. Budget 2014 may very well fall into this category.  In some ways like an impressionist painting in the Art Gallery the viewer has to stand back and ponder it all. Much detail, many tax cuts for businesses, lots of nasty cuts for some and universal cuts for those who are sick, elderly or young unemployed.  How do we assess the likely employment, output and public finance impacts of this Budget?

We need to see the entire picture including the 1,000 of consequential cuts and withdrawal of services, revisions of eligibility and slow gradual pairing away of rights and eligibilities which will flow from general grant allocations and expenditure programmes. A careful study of all the documentation and especially that which is not documented but will be the subject of subsequent queries, parliamentary questions and clarifications by Government is necessary. In focussing on Budget 2014 it is easy to forget about the gradual impacts of Budgets 2013 and 2012 and 2011 all the way back to our first austerity budget in 2009 if the expenditure restrictions of July 2008 are not included (7 austerity budgets if you do not include the latter adjustment).

As a rough rule of thumb every one billion of fiscal adjustment (higher taxes or lower spending) lowers the level of employment by around 13,000 over a two year period). So, a claimed adjustment of €2.5 billion is likely to impact on employment by over 30,000. Further detail will be provided in the near future in a NERI Wroking Paper by my colleague Rory O'Farrell.

A key concern is still investment, growth and jobs. Budget 2014 removes a total of €2.5 billion from total domestic demand. Unless personal consumption and private investment increase to cancel out the negative effects of fiscal contraction the result is likely to be negative in terms of retail sales, employment and recovery. The big picture which emerges since 2010 is one of relatively stability in output, employment and retail sales with relatively small recoveries followed by downturns. Employment has increased by around 30,000 in the year ending June 2013 but it remains to be seen if this is sustained as output has remained depressed in recent quarters.

The biggest missing element in Budget 2014 was a sustained, large-scale and front-loaded capital investment stimulus led by the State and mobilising funds from private and European Investment Bank sources to address our serious investment crisis and under-investment in renewable technology, retro-fitting, broadband and social infrastructure such as early childhood education and care.

It is to be hoped that the announcement of free G.P. care for young children will be implemented as promised and sooner than late 2014. This first infant step to universal health care is very welcome.  It is important to defend and advance the personal, community, social and economic benefits of universalism in an increasingly mean and individualistic world ethos.

[For NERI Press Release on Budget 2014 see here]

Posted in: Government SpendingInvestmentTaxation

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