The Irish Times editorial considers the UK fiscal stimulus package, or at least half of it. November 26, 2008Posted by WorldbyStorm in Irish Politics.
Can I dovetail this with Michael Taft’s thoughts which you’ll find above… it’s odd reading the Irish Times editorial yesterday. It’s not so much what is said as what is not said. Consider that, under the heading ‘Borrow and spend’ the IT argues that…
BRITAIN’S CHANCELLOR of the exchequer Alistair Darling hopes the country can spend its way out of recession. In his pre-budget report yesterday, he announced a temporary indirect tax cut by lowering the standard VAT rate to 15 per cent from 17.5 per cent from next month.
Ahah. That must be the spend bit… sort of. It continues:
His aim in this mini-budget is to stimulate demand by encouraging consumers to shop and thereby reverse the economy’s slide into a deepening recession. This fiscal stimulus – via lower taxes – represents a calculated gamble. Given the weak state of the British economy, however, the risk is worth taking.
Yeah, except of course if we read the Guardian we see that…
The chancellor unveiled a clampdown on public spending growth, increases in the top rate of income tax to 45p for those earning more than £150,000, and a 0.5% rise in national insurance contributions costing everybody earning more than £20,000 a year around £3 a week from April 2011 onwards.
Okay, so not quite ‘via lower taxes’… And lest one get overly enthusiastic consider harpymarx’s words on same. But back in the Irish Times what of the borrow bit?
The tax cuts to boost consumption will be financed by increased public borrowing. Mr Darling expects that when economic growth resumes in a couple of years, large budget deficits will be quickly reduced and budget balance restored. In an economy that is undergoing something of a deflationary spiral, with prices falling, consumers have changed their spending habits. Shoppers are slower to spend today as they anticipate lower prices tomorrow. But a 2.5 percentage point reduction in the VAT rate may not change their psychology. So far the pre-Christmas sales on Britain’s high streets, with price discounts of 20 to 25 per cent on offer, have failed to persuade shoppers to open wallets.
How much public borrowing though?
Alistair Darling yesterday gambled the government’s political future on a “spend now, pay later” £21bn package of tax cuts and spending increases designed to lift the economy out of recession by next summer.
Insisting that he was not prepared to ignore the suffering of families in “exceptional circumstances”, the chancellor said in his pre-budget report that he would borrow £78bn this year and £118bn next to fund a 13-month VAT holiday, cuts in income tax, more generous payments to pensioners and parents, and a £3bn boost to infrastructure.
Now a rough reckoning makes £118bn to be over 7.6% of GDP. Risky stuff, no doubt, but a risk that Darling considers well worth taking. Not least because as Will Hutton noted yesterday ,on hearing the news “…the FTSE jumped nearly 10%. Incredible times”.
So, as the Tories noted yesterday, the ‘borrowing’ element is pretty significant and considerably more so than the Times dry ‘increased public borrowing’. This is a level of borrowing unheard of under New Labour. And is entirely anathema to the Conservatives.
But what of our state? The IT notes that this isn’t unqualified good news for the RoI.
…In Border areas the continued weakness of sterling has made British goods much more competitive. To visitors from the Republic, a 15 per cent VAT rate makes cross border shopping increasingly attractive with the prices of some goods (groceries, alcohol and clothes) up to 30 per cent cheaper. A much lower UK VAT rate opens a huge indirect tax differential between Britain and Ireland. It has happened just as the Government is raising VAT by half a percentage point (to 21.5 per cent). And with sterling likely to weaken further as a result of yesterday’s fiscal package, that disadvantage seems set to increase.
And also that…
The mini-budget response by the British government, as indeed by many other governments, highlights the very different policy response adopted by the Irish government in tackling the challenge of economic recession.
Where other countries have favoured tax cuts as a means of stimulating demand, the Government has raised taxes in a bid to control a soaring budget deficit – but without much obvious sign of success.
I really don’t want to be unkind, but I don’t read that at all in the data available from Darling’s pre-budget report. The emphasis is balanced between tax and borrow, not shifted over to tax alone. Moreover it completely ignores the increases in tax in the UK, not least those in national insurance.
It’s weird, all the time it as if the editorial writer, in tandem with their political and economic commentariat, are unable to visually process the word ‘borrow’, or see the word ‘tax’ without it having ‘cut’ appended to it.
But the IT becomes more egregiously odd as it continues…
No economy has experienced such a rapid reversal of fortune as the Irish economy over the last year as the property bubble burst and property related tax revenue collapsed dramatically. That has left the Government struggling to contain a sharp deterioration in the public finances. Next year, a planned general government deficit of 6.5 per cent of GDP, which is twice the borrowing limit set for euro zone economies, seems likely to be exceeded. Ireland finds itself paying more to international lenders to finance a soaring budget deficit and this risk premium partly reflects the rapid deterioration in the public finances. The Government has left itself with less scope to provide a fiscal stimulus of the kind provided by its British counterpart.
But this analysis, that we have ‘less scope’ only holds true if we believe that ‘tax cuts’ are the only way forward, that 6.5 per cent of GDP as a deficit is somehow anomalous in the current economic circumstances – at least in European and global terms. And it simply isn’t. Furthermore, while it is true that the borrowing limit for euro zone economies has been breached this isn’t unique to this state, nor – once more looking at our partners in Europe – is this per se a bad thing. Incidentally the ominous warnings about the EU on this issue can be contextualised by the following:
The Maastricht Treaty has set out the reference value for government deficit at 3 per cent of gross domestic product (GDP). Taking into account the Commission’s opinion the Council decides, by a qualified majority, whether an excessive deficit exists establishing a deadline for effective action to be taken. If no effective action is taken, the Council may give notice to the Member State in question to take measures to reduce the deficit. Then, if no effective action has been taken in compliance with a notice, the Council may decide to impose sanctions which take the form of a non-interest-bearing deposit with the Community.
Nor will we be alone…CNN reports the EU Commission…
…say[ing] France and Ireland will break EU budget rules in 2009 by running a yearly government deficit of more than 3 percent of GDP. The ceiling is intended to keep their shared currency stable. Britain, Latvia, Lithuania, Romania and Hungary will also likely exceed the limit.
In 2005, the governments with the highest public deficit figures were those of Hungary (6.1% of GDP – 5.4% in 2004), Portugal (6.0% – 3.2% in 2004), Greece (4.5% – 6.9% in 2004), Italy (4.1% – 3.4% in 2004), Britain (3.6% – 3.3% in 2004), Germany (3.3% – 3.7% in 2004) and Malta (3.3% – 5.1% in 2004). Meanwhile, Belgium, Denmark, Estonia, Finland, Ireland, Latvia, Spain and Sweden registered a government surplus in 2005.
And two years ago in 2006… ‘Currently 12 EU states face disciplinary action for breaching this limit.’
Now there’s a fair bit of chat about how Lisbon has changed the EU perception of Ireland, but that – I think – works both ways. When the IT, and other commentators within it and elsewhere are having cold shivers over our breaching the limits perhaps it’s time (and I say this as one broadly pro-EU and a pro-Lisbon voter) the EU sat back and afforded us the same courtesy, not to say facilities, as was extended to that list of reprobates above. And that our economic bien-pensants who cheerleaded our economy to just this pass started to reexamine their own thoughts on these matters.
It’s not that 6.5 isn’t high, but that it isn’t entirely disastrous. That in a global financial crisis this is sustainable, and may require something a little bit more determined than the same old song about ‘tax cuts’…
But then the Irish Times view of the world, as expressed day in day out is one where tax cuts are the only way to economic purity and borrowing and deficits are inconceivable. In a world which has begun to set its face to that sort of certainty there is something archaic about the view. Unfortunately, though, we must continue to live within a political establishment utterly unable to see beyond that philosophical and political limitation.