IBEC and low taxes

Danny McCoy writes in the Sunday Business Post at the weekend that:

The government’s new four year fiscal plan sets out a credible approach for getting the public finances back on track, and provides greater clarity on the way forward. It nevertheless gets it wrong on a number of fronts.

And:

As a road map for recovery it relies far too heavily on tax increases, rather than current expenditure reductions in reaching budgetary targets. This has the potential to damage economic growth which is so crucial to correcting the public finances and regaining economic sovereignty.

And later he argues:

Some 42 per cent of the adjustment will be made up of tax increases and 38 per cent from current expenditure reductions – the remainder will be made up of a reduction to capital expenditure.

And…

While the scale of the adjustment is broadly right, the planned split between revenue raising and expenditure cuts is skewed far too much in favour of tax increases. Reducing expenditure, particularly current spending, is less damaging to economic growth than raising taxation.

Even if one agrees that economic growth is all – and that social provision can be reduced without damage to the social fabric, two highly contentious propositions, is his central point correct though? The IMF itself – as noted here – argued some while back that:

The research suggests that members of the eurozone suffer a bigger than average impact from fiscal correction. This could be because the ECB is not able to respond in the way a national central bank could, by cutting interest rates.

A €4bn adjustment in next year’s Budget would probably knock €2bn off economic growth, (the IMF research) suggests.
Although the research does not deal specifically with Ireland, it found a consistent pattern across 170 historical episodes that a 1pc of GDP adjustment produced a 0.5pc fall in growth.
The example of Ireland in 1987 — and Denmark in 1983 — where budget correction was followed by growth, appear to be exceptions. They may even be the only two of their kind.

The reason why Ireland was an exception may be as follows:

We don’t really know the reason,” Daniel Leigh, one of the IMF researchers said yesterday.
“There are suggestions Ireland was helped by the ‘Lawson boom’ policies of Chancellor Nigel Lawson and by a devaluation of the Irish pound.”

And if one reads the rest of the data it appears that spending cuts are only very marginally less injurious than taxation. Now, the point, as was made in the original piece linked to above was that if the differences are in economic terms near enough negligible surely the best approach would be to minimise the negative effects upon those most vulnerable, ie those likely to suffer from spending cuts. But curiously that argument gets lost in the wind of a discourse where expenditure cuts good, tax not good is a given rather than a statement that should be parsed out.

What’s interesting about McCoy and IBEC is that they straddle a line somewhat on the left, to use the term very loosely, of much of the orthodoxy, and sure why wouldn’t they? They have to have at least some regard as to the realities of the economy – their members sell into that economy and if there’s no money floating around…

Therefore McCoy argues against the €4.4 bn adjustment proposed by ‘austerity hawks’ because ‘it would have risked further damaging the already fragile domestic economy’. But there’s still room for a lash at the public sector – ‘the need to seriously reform the public sector and eliminate waste’.

And I wouldn’t go to McCoy looking for sympathy. Check out the following where once more the great totem ‘confidence’ is offered obeisance:

The fiscal plan fails to recognise that, while demand in the domestic economy has collapsed in recent years, it will claw back much of this lost ground once confidence returns.

Which is good news for some… but for others…

While, sadly, many individuals and households will be stifled by their debt burden for some years to come, others – particularly some older age groups and younger people without mortgage debt − are saving far more than they typically would. Many are struggling to get by, but others have deferred purchase and investment decisions.

I don’t know. It’s clear some are getting by, and there’s a real danger of projecting from the anecdotal, but most people I know are finding the going fairly to very tough. The idea that the round of cuts and taxes ahead give ‘confidence’ seems wide of the mark. The idea that there’s lots of unspent income out there also seems unlikely.