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Economic crisis: Sobering thought of the day… August 29, 2012

Posted by WorldbyStorm in Economy, Irish Politics, The Left.

I’ll just post this up as a sobering thought of the day from CMK who wrote the following comment here (I’ve edited it down just a little).

My understanding is that the government will keep cutting/increasing taxes & charges until they reach the deficit target of 3% of GDP agreed with the Troika under the bailout. And, when they get there, they’ll then have to implement the Austerity Treaty (thanks, Labour) and keep cutting/taxing until we get to the .5% target under THAT treaty. Oh, and while we’re trying to get there we’ll have to start paying down the colossal national debt at a rate of 5% per year in a context where our GDP and GNP gap is about 23% and we have to use the resources of the smaller measure (GNP) to meet targets denominated against the much larger measure (GNP) (EDIT: CMK has amended that to read as follows: The debt reduction under the austerity treaty is, I think, a twentieth every year of the difference between the national debt and 60% of GDP. Not 5% of GDP as I stated in my comment. The gap between GNP and GDP was covered recently by the ILR). It’s a case of the application of the old maxim, on an entire advanced society, of “the beatings will increase until morale improves”.

Let’s assume it pans out exactly as CMK says, it might be interesting to start a discussion here as to what people think the limits of this as practical achievable politics actually are in terms of whether any government can implement that and what sort of resistance to it we might expect (whatever about he economics which seem absurd in terms of meeting targets)

And note today’s latest growth projections from the European Commission, down yet again).

Even the Irish Times admits that:

The forecast cut raises fresh doubts as to whether the economy can grow fast enough to service large debts. Ireland, which returned to long-term bond markets ahead of schedule last month, has avoided joining most of the euro zone in recession but needs growth to accelerate to tackle debt set to peak close to 120 per cent next year.

And what of this gem.

Looking ahead to 2014 and 2015 for the first time, the commission sees GDP growth of 2.5 per cent and 2.8 per cent respectively, similar to government projections as it predicts unemployment will fall to a still-high 13.1 per cent from 14.8 per cent this year.

‘Still high’?


1. Nessa Childers - August 29, 2012

3. Nessa Childers – August 29, 2012

I’m moving my comment below from the other topic as I am trying to get home.
remember that I am not a member of the government or the oireachtas so I don’t get told of such plans. I represent mostly the ethos of the Labour Party as an MEP in the Socialist Group. The plan b IMOP is enunciated by Colm McCarthy, who speaks a kind of terrifying truth. Form last Sunday: ” There will be debt relief anyway in whatever eurozone countries are unable to regain market access at affordable interest rates. They will default. In addition to a second default for Greece, market bond prices reflect high risks for Portugal, Spain and Italy, as well as Ireland. ” My worry is that governments think they CAN implement these programmes. To do so is not only immoral beyond a certain point but also economically absurd. It is especially so for social democrats.
CMK puts it more descriptively. In relation to political feasibility it is also unthinkable particularly for Labour but I am told there is just as much chance of FG rebellion in the centre right direction, ie, send PS to the guillotine etc. I wouldn’t bank on SF doing any miracles but some will . That’s when the unrest will start. My hope is that we pull out the plug on the troika before the damage is too great. A default like McCarthy suggests will be painful enough and the scales are marginally tipped against it at this moment. But it will be OUR pain . I suppose having sent ten days in Iceland I may see things differently.


LeftAtTheCross - August 29, 2012

Nessa, I don’t doubt your bona fides for a minute but I would ask you the question who the “we” is in your assertion that it will be “our pain”? I suspect that most people here reading your comment would be more than a little concerned that the pain will inflicted on exactly the same section of society regardless of whether it is the Troika or a national centre-right government inflicting that pain.


Nessa Childers - August 29, 2012

One would hope that it would not be a centre right government managing any default. That is a risk of default. Remember too that FG are still in the lead in the polls. How do you expain that? And FF At 20% ? Bone fides aren’t enough of course. An MEP has no power except a voice. This is immensely frustrating. My constituency is nine Dail ones and the debris is everywhere . Just so you know I will feel pain too, no seat, no pension ( until 65 1200pm) no job. Better then some but not a protected species. I am no doubt driven in part by fear myself.
I do feel there is a chance that there is a plan of some sort. The economics of this are not credible . The plan would have to involve escalting threats that are still secret. Perhaps the questions addressed to the Council prior to the FCT are being held back because they contain such demands. Or else a refusal of them……


Tomboktu - August 29, 2012

An MEP has no power except a voice.

That could be said of any individual member of any parliament or legislative assembly (with rare moments when tight votes arise). But you are a member of a collective, the second largest one in the European Parliament, and the EP does have power in the system (not the highest power which is in the hands of the treaty-making integovernmental council and, now, with the latest powers, the Council). I think it would be useful if you were to show us more of how you engage with the powers the European Parliament does have — both legal and as a voice that can shape debate. I think that would be both more useful and cast you in a better light than commenting on the limits of your powers (or your pension rights).

For example, it is now a few years since I monitoried the EP, but at the time, your colleague Pervenche Berès impressed me with what I saw of her work as an MEP. Although I would not agree with everything, I saw an MEP who saw her membership of the EP as an opportunity to try to shape the world we live in.


Nessa Childers - August 30, 2012

Ok. A lot ow work over here on our committees is detailed and difficult to explain. Pervenche is a member of the social affairs committee which, among other things, try’s to protect worker’ rights etc. with regard to the matter in hand, we do indeed have power. The so called six pack would have been a lot more savage if the socialist group had not influenced one of the reports. In relation to the possible change to the Treaty proposed by Merkel in Der Spiegel, it must go through the EP. This will be much more difficult for her, to say the least. Perhaps the most recent and imminent one is the European budget 2014 -2020. There have been strenuous attempts to cut it by the British Conservatives ( for domestic reasons) and some Nordic countries. The parliament, under co-descision, have resisted this and delayed ratification. Final negotiations will take place under the Irish presidency. This budget is a source of funding for all sorts of social protections . I myself work on a lot of health areas and environment. I am the shadow rapporteur for the pricing of medicines directive.
It is relation to national policies that I have no direct influence. But there are other kinds……


2. ejh - August 29, 2012

Talking of growth predictions, I am trying to get an economist friend of mine to plot the various growth predictions of various respected bodies against the actual growth figures achieved by the subjects of their predictions. I suspect that they will almost always turn out to have been extremely optimistic. Which fact, if fact it be, really needs to enter the public consciousness so that more people understand these growth forecasts for what they are.


3. reality bites - August 29, 2012

Not to burst any bubbles but the content of these plans have been outlined in the MOU and other Troika docs since November 2010, deficit is to be reduced to 3% of GDP by 2015 – thats the condition for lending us money. After that we will have to balance the budget, because we cannot continue to borrow money – thats what Greece did for the last decade. We need to move towards a balanced budget and start paying down the debt we’ve accumulated but enhanced economic growth will reduce that burden significantly, and possibly negate the need to pay down debt. A deal on the bank debt should also give us a lot more room to maneuver. Growth in the domestic economy, which is starting to flicker a little will also improve GNP – the gigantic decline in domestic investment is hammering GNP while export growth is boosting GDP.

A comprehensive summary of future economic direction is outlined in the Stability Programme Update from April

And full Troika docs and staff reports available here:

Reading the Memorandum of Understanding outlines the policy decisions to made each quarter until end of programme.

We already have second largest deficit in EU, we have to close that at some point – either through increased taxes or reduced spending.
At moment we are bridging with loans from Troika, about 16 Bn this year – that keeps piling up in terms of total amount of GDP.

We are doing a bit of both – cutting and taxing – eventually the gap will be closed. As a labour member I’d prefer to see more taxing, but FG won that argument at the GE.
Meanwhile our interest bill mounts as we fund current expenditure with borrowings.
You can’t continue to spend money you don’t have.

If you want to see real austerity, skip Ireland Portugal and Greece and look at what happens in US states when they have to balance budgets – entire departments, schools and social programmes are shut down and public sector workers compulsorily laid off.

The sad reality of our fiscal situation is government spending was permanently inflated from 2002 on with temporary revenues from a bank and building boom.

Now that those revenues are gone, we are left with a massive structural deficit, high unemployment and limited capacity to close it quickly, whilst fixing the myriad of problems the great recession has thrown up.

It is intellectually dishonest to ignore the fiscal reality of the Irish state – even stripping out the bank costs we are still screwed fiscally.

Putting the state finances on sound footing in a structural manner means introducing things like a property tax, a wealth tax and higher social insurance contributions.

We have some of the highest income taxes on wages in Europe already – what we lack is high social insurance contributions from employees and employers to fund our social welfare system freeing up income taxes for investment in education and health,.

A property tax will put local government on a sound footing and free up other central government revenues for infrastructural investments in transport etc.

Higher wealth taxes will help close the current funding gap, fund measures to improve equality acorss all Government spending heads, and pay down debt – Capital gains, capital acquisition tax and DIRT all went up 5% in the last budget to 30%. Charlie McCreevey had lowered these to 20% in the boom. They can go up more and a wealth tax on fixed tangible assets is needed but it is no silver bullet. Pension schemes are one of the biggest pots of accumulated wealth in Ireland, partly funded with generous tax breaks but look at the anger over the modest levy to fund the Jobs Initiative?

The vehement opposition to a property tax or water charges, all permanent fixtures in social democratic countries in Europe highlights the moral bankruptcy of political debate in Ireland. Meanwhile FG call for cuts in spending (but as long as it doesn’t affect anyone that votes for them).


ejh - August 29, 2012

It is intellectually dishonest to ignore the fiscal reality of the Irish state

What is actually intellectually dishonest is to continue to insist on prioritising deficit reduction when that policy demolishes, in plain view of everybody, the economy which is supposed to sustain the reduction in the deficit. The fact that labour people come out with this bug-eyed There Is No Alternative To Slash And Burn stuff is perhaps the most objectionable intellectual aspect of the present day.

It is one thing to observe that the troika insist on this. It is quite another to agree with them. This is so obvious it should not require saying.


WorldbyStorm - August 29, 2012

I think that’s it in one ejh. A policy which destroys any prospect for growth is quite pointless. Indeed it’s worse than pointless in relation to what the outcomes are in terms of expenditure cuts. Everything else in that context is an absurdity.


RosencrantzisDead - August 29, 2012

It is also intellectually dishonest to act as if the anger over taxes is down to moral bankruptcy. The problem with a tax increase is that many people are already stretched financially due to high personal debt levels. The figures on mortgage arrears give us an insight into these difficulties. This isn’t moral bankruptcy; it is actual, I-have-no-money-and-I-cannot-afford-to-pay, bankruptcy. This is an issue that the Fine gael-Labour government have done nothing to resolve. The best they offer is the rubbish Personal Insolvency Bill.

The old chestnut about ‘even taking out the bank debt, we would still have a deficit’ is probably the most intellectually dishonest of all. Take out that bank debt and we would have a much more manageable deficit. One that might even allow us to be free of the Troika.


Reality Bites - August 30, 2012

So are you proposing to ignore the deficit? Saying we need growth policies is one thing – how you fund it is another, at the cost of what else?

Meanwhile we pile up debt maintaining current expenditure, that debt is a drag on future growth, and the interest bill mounts.

The left completely fails to acknowledge the fiscal reasons for the deficit – employment and general economic activity in the state was artifiically inflated due to the construction and lending boom, tax revenues from that was used to inflate government expenditure. When one card collapsed, the entire deck did, leaving a large deficit.

How exactly do you propose to stimulate the domestic economy when we already borrow billions to not even maintain the status quo? The room to maneuvre is tiny.


WorldbyStorm - August 30, 2012

Actually saying we need growth policies is everything and talking about the deficit is an abstraction and a diversion when the policies to cut the deficit are actually seeing the economy contract faster than the previous projections. It is impossible for us to service the deficits in the current and foreseable context. That’s the core of CMK’s observations and that’s the issue here. That it is impossible to cut one’s way out of a recession.

Even accepting the logic of your proposition it remains impossible.

That’s why what you’re saying is so pointless. There’s no room to maneuver. There can’t be when the plans imposed by the troika are so unrealistic, and were from the off.

The answer? There’s no single answer, but a number of crucial steps have to be taken, primarily an acknowledgement from the troika that significant transfers from the centre will be required to tide us over – they’re going to have to pony up one way or another, increased taxation – a shift away from expenditure cuts in order to diminish the impacts on those least able to handle them, a reworking of the fiscal compact and so on.

BTW that’s entirely incorrect about the left failing to acknowledge the fiscal reasons for the deficit. Some take utopian approaches, but for example this site was arguing in advance of the crisis that taxation had to be raised to European averages and across a range of areas in order to start to fund social provision close to European norms. Michael Taft has argued strenuously from a position that takes account of some of the orthodoxy without being tied down by it for viable alternatives.


RosencrantzisDead - August 30, 2012

It is telling that a member of Irish Labour – the party of James Connolly – does not see themselves as part of ‘the left’.

Personally, I feel that parties like the ULA have focussed too much on opposing cuts. Although this is important, I would rather that they highlighted the paucity of ideas on what the country is going to look like once we emerge from this period. There is not out there: for example, people are still waffling on about a ‘smart economy’ – the same idea the EU proposed for the whole Bloc in 2000 and which is a failure by anyone’s reckoning.


4. CMK - August 29, 2012

Cheers, WbS. There’s just one error in my comment which I’m a bit embarrassed about. The debt reduction under the austerity treaty is, I think, a twentieth every year of the difference between the national debt and 60% of GDP. Not 5% of GDP as I stated in my comment. The gap between GNP and GDP was covered recently by the ILR: http://www.irishleftreview.org/2012/08/20/gap-gdp-gdp-illustration-irelands-tax-haven-status/


5. ejh - August 29, 2012

Hypothesis: there is no mainstream political trend more insistent on pursuing a mistaken policy than social democracy. Conservatives are far better at changing course. (“Discuss”:)


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