A visitor from outer space might be forgiven for concluding that the only or main economic problem confronting European States was deficit and debts - Government deficits and debts. The corollary of this problem is - of course - austerity to cure the ailment. Or is it? Lets compare the Government deficit to a household with a combined income of €40,000 a year and with a total mortgage and other debt amounts totalling close to €50,000 and an annual interest bill on all of its debts of around €2,000 without any mention of paying back the total debt of €50,000. The household spends around €43,000 a year leaving a gap between total spending and total income of around €3,000 a year. The household borrows an additional €3,000 a year to cover this gap.
A household in such a situation might have a number of options:
- Cut back on its planned spending by €3,000;
- Increase its income by finding additional income;
- Continuing to borrow an additional €3,000 a year.
- Enter an agreement with its bank or credit union to temporarily reduce its interest payments (and possibly also reduce some of its outstanding debt by mutual agreement).
A sensible household will adopt one or other of the above courses of action depending on its circumstances and options. It is sometimes assumed that Governments ought to work in the same way - balancing its books by cutting spending or raising taxes or both - especially if its official creditors and market lenders are putting pressure on them to do so. What makes sense for households does not always make sense for Governments especially if the economy as a whole is in recession along with other countries. Unlike households, every time a Government cuts spending or raises taxes there is a significant impact on what people spend on current goods or services or invest in capital. When all or most Governments in a trading area do the same thing matters get worse for many countries because demand for the goods and services of another country is reduced. So, Governments attempting to 'balance their books' need to act prudently in a way that does not make the situation worse by adding to economic decline. There is rising evidence that the 'austerity' measures coordinated and practiced across much of the European Union are making matters worse especially for countries in severe difficulties such as Greece, Portugal and Spain (but also France and Italy).
When recessions are deeply embedded, as they are now, Governments need to spend more and not less because (a) private demand is too low as consumers and companies either cut back or increase their savings; and (b) the demand for public services and income supports increase. Governments, along with private investors, also need to continuously invest in research and development as well as in human and physical capital in order to equip economies to grow out of recession and sustain growth in the long-run. Failing to properly invest is a false economy that risks generating lower long-term living standards. Moreover, Governments that engages in pro-cyclical 'fiscal austerity' risk choking off or delaying recovery.
Most of the above is widely accepted and uncontroversial even among a growing number of conservative economists and politicians internationally. The story, however, changes in the case of Ireland where, it is strongly asserted, the Government has no alternative because:
- The public deficit/debt levels are far too high and need to be brought down reasonably quickly and as a matter of priority;
- The impact of any 'stimulus' (Governments spending more or taxing less) is extremely limited in the case of a 'small open economy' such as Ireland where most of what is spent 'leaks out' through purchase of imported goods and services;
- The Government, here, has no alternative anyway because of the market, institutional and political constraints imposed on the country directly as a result of the 'bailout' programme involving the Troika as well as the on-going monitoring and enhanced supervision of Irish public finances by the institutions of the European Union of which Ireland is a full part already and which will continue after Ireland (hopefully) exits the bailout programme soon.
Available on this website are a number of reports, working papers and the Quarterly Economic Observer since March 2012, which illustrate that there is scope for alternative budgetary and economic strategies that:
- Reduce the level of public deficits and debt;
- Impact favourably on employment and growth in GDP and public finances; and
- Are likely to achieve budgetary deficit outcomes that are at least as good as, if not better, than those agreed between the Irish Government and the Troika.