Alternative Fiscal Pathways Contribution made at Dublin Economic Workshop, 12th October 2012
AuthorsTom Healy and Rory O'Farrell
Public sector deficit reduction has become an overriding concern and preoccupation of policy-makers across Europe. The situation in many countries is acute given the high level of general government debt and the continuing high level of government deficits half a decade into the current economic crisis. The prospect of a lost decade and even a lost generation looms in the case of Ireland.
The objective of sustainable public finances in Ireland is strongly related to regenerating economic activity in the immediate years ahead. With a prolonged delay in returning to 'normal economic growth' it is important to explore what choices exist to change the level and composition of public finances in Ireland. In this paper, our focus is on the possible options for moving towards a smaller government deficit given different scenarios at world and domestic levels. Our central theses are:
- There is some scope for pro-active domestic fiscal policies to generate growth, at least by ceasing to cause further harm by excessive or unnecessary fiscal contractions.
- There is considerable scope on the part of domestic policy to change the composition of fiscal consolidation.
In this paper we have drawn on the NERI implementation of the HERMIN macro-economic model to explore the possible impact on (i) public finances (ii) employment and (iii) total output assuming the following:
- Slow economic recovery in the key trading partner economies
- An economic slump in partner economies
- A rapid recovery following a slowdown or recession in the second half of 2012
Domestic fiscal responses
- 'Plan A' as outlined in the most recent Stability Programme Update (April 2012) and incorporated into the Memorandum of Understanding with the Troika and subject to change and adaptation depending on which global scenario prevails.
- 'Plan B' as outlined in this paper and subject to adaptation depending on which global scenario prevails. Plan B places greater emphasis on increasing taxes and greater investment.
Our results show that a tax based consolidation allied to an investment stimulus could return Ireland to fiscal stability and be less destructive in terms of GDP growth and employment. Such a policy approach should not take from the urgent need to debate how Irish society needs to position itself in terms of institutional reform, enterprise, taxes, public services and global competiveness.