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Michael Taft, SIPTU post budget 2020 analysis 16 Oct 19


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Michael Taft, SIPTU made a brief presentation responding to aspects of Budget 2020

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Michael Taft, SIPTU post budget 2020 analysis 16 Oct 19

  1. 1. ANALYSIS of BUDGET 2020 Michael Taft, Research October 2019
  2. 2. Avoiding the R Word • GDP is not adequate to measure the economy. GNI* is increasingly used. However, it is selectively used. Budget projections showed that GNI* will go into recession next year. The Minister focused on GDP. • The R word is avoided. • Going out to 2024, GNI* will be sluggish. Growth will be at the level of Eurozone levels over the last four years. In Europe that growth has been called ‘stagnation’. 5.5 0.7 2.5 2.8 2.7 2.62.5 -1.4 2.0 2.1 2.0 1.8 2019 2020 2021 2022 2023 2024 Real Growth Projections: 2019 - 2024 (%) GDP GNI*
  3. 3. A Disorderly Scenario: A Big Gamble • The budget faces two ways. In a disorderly scenario, with the economy heading towards recession, the Government is putting all its counter- cyclical eggs in a €1 billion Brexit contingency fund. These supports are intended to limit the damaging impact of a disorderly Brexit and strengthen enterprises’’ ability to grow sustainably post-crisis. • But what if it doesn’t work – if the recession is longer and deeper than expected (the Department of Finance believes a larger impact is highly likely). There is little firepower left. Capital investment is higher than projected in the Stability Programme Update but this could reflect higher prices and costs (the National Children’s Hospital, the privatised rural broadband network). • The Government is taking a big gamble basing everything on the Brexit fund.
  4. 4. An Orderly Scenario: The Face of Prudence • But if a deal is done and the economy survives the next year relatively unscathed (even with a deal, there will be an economic hit) what are we left with? Real spending cuts over the next few years. • This is not a new projection. The Government has projected similar real cuts in the Stability Programme Update. 19.7 -2.8 -6.0 Investment Public Services Social Payments Increase in Real Public Spending per Capita: 2019 - 2024 (%)
  5. 5. The Price • The reduction in social payments is particularly worrying. Pension payments alone will increase by €1 billion every four to five years from demographic changes – not including payment increases. What happens to rate increases and other social protection programmes. • These projections show the Government to be ‘prudent’, cutting debt, taking the heat out of the economy while maintaining all that good productivity stuff (i.e. investment). • But this comes at a price. The majority of social protection payments will be cut by 1.3 percent in real terms. Public services will be squeezed . And minimum wage workers will have to wait. • The Government is postponing the minimum wage increase to avoid a burden on businesses under a disorderly Brexit. However, under current legislation employers with financial difficulties can postpone the increase for up to a year – so businesses already have an inability to pay clause. The postponement is aimed at businesses who can afford to pay the wage increase.]
  6. 6. A Triumph of Political Economy • The real news about the budget is not the details. Commentators used phrases like a ‘non-event’, ‘no-change’, ‘steady as she goes’, ‘safe’. This was a potential no-win budget given the Brexit unknown. In football terms, the Government scored an away draw. This budget won’t win votes but it won’t lose votes. There will be an election before any fall- out. And Fianna Fail was co-opted through the negotiations. • The Department of Finance listed three likely high-risks: housing supply, climate change and concentration of corporate tax revenue. And yet there was little blowback at the lack of housing investment; little criticism – apart from green activists – at the alarming lack of supply-side measures; and with the budget surfing on a corporate tax bubble, there was . . well . . . almost nothing done or said about it. • The Government got away with it. Budget 2020 was a triumph of political economy.
  7. 7. Upside Down Fiscal Cycles • Government helped by ill-informed commentary on pro-cyclicality. • We are lectured about pro-cyclical policies, how we should have started ‘cutting back’ when the economy started growing; how we should be running substantial surpluses. The application of this theory falls apart with Ireland’s fiscal cycles. • We are stuck in upside-down fiscal strategies. Yes, the right-side up approach would be to reduce spending increases and reverse tax cuts as the economy recovers (the temporary VAT cut and restoration was an example of that). • But you do that when fiscal strategy expanded during the preceding downward cycle. That didn’t happen here. We cut back during the recession.
  8. 8. Cutting in the Downturn • Therefore, public spending has struggled return to 2008 levels. • Current spending fell from 40% of GNI* in 2008 to 35% in 2018. • Some commentators suggested we should have been ‘slowing down’ and putting the counter- cyclical brakes on since 2015. Yet real current public spending only started rising in 2016. 0 20 40 60 80 100 120 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Real Public Expenditure per capita: 2008 - 2018 (100 = 2008) PrimaryCurrent Expenditure Public Services Investment Public Sector Payroll
  9. 9. Climbing Mountains • Since the recovery the Government has been attempting to climb two mountains: restore real public spending and reduce the debt. • To make matters worse, they added another smaller mountain – cutting taxes, especially during the early years of the recovery. • This makes the task of pursuing a rational cyclical strategy especially difficult. • The Government is stuck in a pro-cyclical trap – having pursued irrational policies prior to the crash and, then, during the recession. Pro-cyclicality has become embedded in public finances. This is the reason why the Government struggles with the deficit. • The Government has had to rely on a corporate tax revenue bubble to make the budget arithmetic work – but this is high-risk according to the Department of Finance.
  10. 10. Debt Success • The government has also been helped by exaggerating the dangers of our debt levels. Yet, in the last 7 years Irish debt has fallen by 66 percentage points. No Eurozone country can match that. • Some complain we have not significantly reduced deficit levels since 2015 – yet debt levels have fallen by 24 percentage points. • Excluding bank debt, our public debt levels would be lower than the Eurozone average. • . 87.1 85.2 104.4 80.4 Debt as a % of GDP Debt as a % of GDP (excl. Financial Institutions Support) Debt Excluding Financial Institutions Support: 2018 (% of GDP) Eurozone Ireland (GNI*)
  11. 11. Old-School Rules are the Best Rules • The Government’s approach to the pro-cyclical trap it is to suppress government consumption (public services) and social payments. • A progressive approach would adapt the Golden Rule to the current fiscal rules – balancing the current budget over the life-time of the business cycle while borrowing for investment. • Unfortunately, we will have to make do with a silver rule – since the Fiscal Rules require that most investment is financed by current income (similar to forcing households to finance home or car purchases out of current income; or businesses – financing expansion or R&D out of current income). • The Fiscal Rules allow us a one percent deficit as our debt is now Maastricht-complaint. We should take advantage of that.
  12. 12. Maximising Our Fiscal Space • The Government is intending to drive the balance well above the levels allowed by the Fiscal Rules. Over the next few years we will be allowed billions of Euros more in spending than the Government is providing for in their projections. • A progressive fiscal strategy would be rooted in maximising the fiscal space available, balancing different measurement such as modified income (GNI*), potential GDP, etc. -1 -0.8 -0.3 0 0.3 0.7 Allowable Deficit 2020 2021 2022 2023 2024 Government Projections Net Lending 2020 - 2024 (% of GDP)
  13. 13. The Government’s Rationale • So why is the Government not pursuing this space? From last year’s Summer Economic Statement: The fiscal rules are currently unhelpful . . . A full and literal application of the fiscal rules would involve the adoption of pro-cyclical policies not remotely appropriate to our position in the economic cycle. That is why fiscal space is increasingly an inappropriate concept. . . . the fiscal rules would damage our economy; that is why policy will no longer be formulated on the basis of ‘fiscal space’. We went from the Fiscal Treaty referendum where the Fiscal Rules were the only thing preventing economic Armageddon to a situation now where they are deemed dangerous. In truth, this position suits proponents of a small-state, low-tax, low-spend economy – using the Fiscal Rules to suppress social spending and abandoning them in order to continue that suppression.
  14. 14. An Alternative Strategy • Nothing inherently progressive about borrowing. It is a tool. We should use the fiscal space available to provide us the time to introduce reforms to sustain long-term macro-economic stability and growth.  Shift tax from labour and the productive economy to capital, wealth, property, and unearned income: net assets (wealth) tax, treatment of capital and labour income equally, substantial increase in inheritance and gift taxes, etc.  Shift towards higher environmental taxes combined with a withdrawal of environmentally damaging subsidies.  Shift from income tax to social insurance; to provide security to people in critical times of need: illness, unemployment, family life, back to education, old age, etc. A low-tax, high-insured economy.  Greater reliance on government consumption (public services) to drive living standards rather than private consumption.
  15. 15. A Supplementary Budget • In the event of an orderly Brexit, the Government should bring in a supplementary budget in the new year. Variables will change – higher growth, lower/no deficit, lower debt, more fiscal space. • There would be no bad optics for the Government – as they based the current budget on a credible worst-case scenario which didn’t arise. Main points of supplementary budget: 1) Increase social protection payments to at least the level of price rises, 2) More resources for public housing construction 3) Climate repair supply-side measures 4) Living Wage payments of childcare workers (the sector is at point of breakdown due to poverty wages and precarious working conditions). • There would be other needs and suggestions.
  16. 16. Beyond Fiscal Fundamentalism • A progressive strategy will go beyond orthodox fiscal fundamentalism– pulling tax-and-spend levers once a year to achieve long-term macro- economic stability. Such stability requires layers of institutions and practices that go beyond the budget. It requires structural change. • Workplace democracy – through collective bargaining and other initiatives - can help tackle low pay, precarious contracts and the gender pay gap. Outcome: higher revenue, reduced public subsidies and a more stable ‘wage-led’ consumption. • Further, it would drive productivity, innovation and efficiencies in the private and public sectors which would have a significant, identifiable and positive impact on fiscal policy. • If Budget 2020 does nothing else it should provoke progressives and trade unionists to take fiscal policy seriously.
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