Austerity’s Hangover

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‘Austerity dug us into a deep hole which the recovery has yet to lift us out,’ says Michael Taft (above)

There’s been a lot of commentary so far on the 10th anniversary of the Great Recession: jobs, income, consumer spending, growth. One aspect that has been over-looked, however, is public expenditure.

Following the crash public spending – investment, public services, social protection – were all cut with bank-bailouts being the very big exception. Starting in 2014, public spending started to rise but it has not returned to pre-crash levels. We are still in a public spending recession.

The following measures primary public spending per capita (i.e. excluding interest payments) factoring in inflation. Of course, nothing is simple with Ireland’s national accounts.

While public spending – excluding the once-off bank bailouts – and population data are relatively straight-forward, inflation is not. 2015 was the year of the Leprechaun, so named by economist Paul Krugman when Ireland logged a massive 26 percent increase in GDP due to methodological changes.

In 2015, economy-wide inflation was recorded as increasing by 7 percent which is not a reflection of the true situation.

So, I have done a ‘Leprechaun-adjustment’, inserting consumer inflation in 2015 which was less than 1 percent.

In 2008, public spending per capita slightly exceeded €15,500. Within five years, this was cut to €13,700, or 12 percent. Since the trough in 2013, public spending has been on the rise.

However, in 2018 it will only reach €14,000. And according to the Government’s own projections, it will still be below pre-crash levels by 2021.

On current trends, we won’t exceed pre-crash levels until 2023 – 15 years after the start of the Great Recession.

Some will argue that 2008 levels of spending were unsustainable and there is some truth in this. Back then we had gone through a decade of cutting taxes and increasing public spending, relying on revenue from a credit-fuelled property-speculation bubble. It was always going to end in tears.

However, we are still living with austerity’s hangover – repairing the social damage caused by irrational austerity measures while privileging financial creditors over the productive economy: think housing crisis, hospital waiting lists, high levels of deprivation.

Austerity dug us into a deep hole which the recovery has yet to lift us out of. And on the Government’s own projections the pace of public spending could start to ease.

Under current projections 2018 will see the biggest increase since public spending started rising, tailing off by 2021. However, these are just projections contained in Budget 2018. The Taoiseach hints that tax cuts may not proceed to the same extent as they previously hoped (in the three years 2019 to 2021 the government intends to cut taxes by €1.8 billion).

This could be a recognition that under current projections, public spending may not be able to keep up with the combination of rising inflation, the elderly cohort and expectations. If more of the fiscal space is assigned to public spending, then we could exit the public spending recession earlier.

But as of now, our public spending is below the level when we entered into the recession. And there are a number of road hazards ahead.

We may be basing even our current depressed levels of spending on a corporate tax-revenue bubble. What happens to future budgets when that balloon is untied?

Then there’s Brexit and the danger of decreased revenue and increased unemployment payments if the economy is hit.

And don’t forget the prospect of future interest rate increases (at the end of this year? in the middle of next?) and the depressing effect this will have on consumer spending as people pay more for property and less on goods and services in the productive economy.

A slow-down will no doubt elicit calls to ‘control’ spending as part of that ol’ fiscal consolidation dance that exhausted us only a few years ago.

Let’s admit it – Ireland doesn’t do macro-economic stability very well. After years of pro-cyclical fiscal policy prior to the crash (fuelling a property-bubble), followed by more pro-cyclical years following the crash (fuelling the recession), we may be looking into another roller-coaster ride – though probably, hopefully, not to the same extremes.

What party or alliance of parties will rid of us this turbulent binge-and-purge cycle while promoting economic efficiency and social prosperity?

Michael Taft is economic analyst and author of the political economy blog, Notes on the Front.

Rollingnews

5 thoughts on “Austerity’s Hangover

  1. b

    Interesting data on the public spending per capita – have you got the chart showing the increase in the 10 years before 2008 too?

    I’m not sure using pre-crash levels as some sort of touchpoint is the right way to look at it – it’s arguable we were spending far too much per capita in the boom fuelled by property related tax revenue

  2. Cian

    You are being disingenuous with your figures when you say “Following the crash public spending – investment, public services, social protection – were all cut”.

    Social Welfare spending increased between 2008 and 2013.
    Social Welfare Expenditure (€m)
    2008 17,809
    2009 20,536
    2010 20,848
    2011 20,970
    2012 20,774

    Civil Servant pay was slashed from over €17bn before the recession to €14bn in 2014.

    A lot of the change in ‘per capita spending’ wasn’t cuts in ‘services’ but in pay (and an increase in population).

  3. curmudgeon

    Firstly I’d like to note that Mr. Taft’s return has been very welcome and indeed sorely missed. On to the matter at hand I simply cannot agree that essentially pissing away even more taxes is how to run a sustainable society. The ridiculous amount of public expenditure is how Ireland went bankrupt in the first place. Public sector benchmarking was a ploy to buy votes from state (and “semi”-state) employees with other peoples money.
    The Irish people pay extremely high taxes yet get extremely poor public services – the money is simply spent on their wages rather than the actual service. Witness the schools with Roankabins for classrooms or the “black hole” that is the HSE budget and as published regularly on the ‘sheet our above rteproach legal systems revolving door cash cow for repeat offenders. Heck yesterday’s Irish Times has an opinion piece from a University that the 3rd level institutes should have less oversight and more autonomy – the fact that the public accounts committee were told to mind their own business when it came to finding out how these same institions had staff living the very high life while they publicly lobbied for even higher student fees. That is only the tip of the iceberg, the point is we should be saving for the pensions of private sector workers, and have a root and branch reform of our state employees and their ivory towers.

  4. Kolmo

    +1

    Northern European levels of taxation (direct and indirect) with no corresponding levels of service, it’s a cultural change we need based on honour, duty and unbiased, thorough oversight (HSE, Garda, Central Bank, Planning etc…) of those employed to carry out services, specifically at management level – front line staff just follow the existing culture, when this happens then the services will pay for themselves, and will likely become more efficient, probably…

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