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Dublin: 5 °C Friday 19 December, 2014

Column: 4 myths about austerity… busted

Ahead of an anti-austerity march, Michael O’Reilly argues that Budget decisions are being driven by false premises.

Michael O'Reilly

TOGETHER WITH OTHER civil society organisations – the Spectacle of Defiance and Hope, the Campaign Against Household and Water Taxes, and the Communities Campaign Against the Cuts – the Dublin Council of Trade Unions is organising an Anti-Austerity March on November 24. In advance of the Budget, we believe it is necessary to send a clear message to Government Buildings: not only is austerity damaging to society and individuals – it is resulting in a stagnant economy characterised by high unemployment and low growth.

Since October 26, as part of a 30-day countdown to the march, the DCTU has been issuing daily ‘Reasons to March’. They are all available here – but I would like to focus on four specific issues which contradict the narrative that has dominated political and media discourse during the past few years.

We could call them busted myths. Despite what we are told, the facts are that:

  1. Notwithstanding the EU-IMF deal, the Government has choices
  2. Spending cuts have a worse impact on the economy than tax increases
  3. Low pay is part of the problem – not part of the solution.
  4. Austerity is not cutting the deficit

The Troika has made it quite clear that its primary interest is in the bottom line – that is, reaching the deficit-reduction targets. How we, as a people, choose to do that is a matter of choice. The Government is free to introduce a Budget focused entirely on taxation increases, entirely on spending cuts, or a combination of the two. The only requirement is that the measure in question raises or saves the amount projected.

Unfortunately, the current and previous governments have chosen to focus on spending cuts – and the evidence is that spending cuts do more harm to the economy than other measures such as increasing taxes on wealth and high earners.

Economically inefficient

Both the ESRI and the Nevin Economic Research Institute have examined the relative impacts of spending cuts vs tax increases. The ESRI found that €3 billion in spending cuts will drive down the domestic economy by nearly two per cent.  On the other hand, €3 billion in tax increases will reduce growth by less than o.5 per cent. Because spending cuts are so much more damaging, they are less successful at reducing the deficit.  Again according to the ESRI, a package of €3 billion in spending cuts will reduce the deficit by only €1.8 billion.  €3 billion in tax increases will, however, reduce the deficit by €2.4 billion.

So the evidence shows that spending cuts are not only socially damaging – they are economically inefficient. Every time we cut a public service, or reduce a benefit, or raise taxes on low and middle income earners, we are taking more money out of the economy and out of people’s pockets – people who had very little to start with. That is why we need to focus tax increases on wealth and high income groups – rather than on those who spend everything they have in the economy.

Which brings us to another reason to make our voices heard on November 24: the claim that, four years into the crisis, we are all still ‘paying ourselves too much’.

That myth, too, is busted by the facts.

Low pay remains a major issue, damaging individuals, communities and the economy, in both the private and the public sectors.

Low-pay league

Irish hotel and restaurant workers cost their employers seven per cent below the average of other EU-15 countries.  When compared with the average of core EU-15 countries (excluding peripheral countries), labour costs here fall 16 per cent below average.  Retail and wholesale workers cost their employers even less. During the last two years, the gap between Irish and other EU labour costs has widened further.

Low-paid Irish workers are near the bottom of the European low-pay league. And that includes low-paid public sector workers. Clerical workers in the public sector have pay levels well below that of other countries measured by the OECD.  For instance, Irish clerical workers would need a pay increase of almost 50 percent to reach Dutch pay. And this was before the 2010 pay cuts.

Low pay is not just an issue for the individuals concerned: it reduces the amount of money people have to spend in the economy. And that puts business and jobs at risk.

We know that spending cuts are economically damaging. We know that low pay (and low levels of social protection) are economically damaging.

So it is not surprising that the current economic approach has not worked. It is driving up unemployment, emigration and deprivation while cutting incomes and living standards.

Policy failure

Yet supporters of austerity say this is the price we must pay to get our deficit under control.

But austerity is not even cutting the deficit.

Since the crisis began, depending on the calculation used, there has been between €24 and €25 billion in austerity measures – spending cuts and tax increases.  But the underlying deficit (that is, excluding special bank payments and income) has actually increased since 2008.  And since 2009, when the big austerity measures started, the underlying deficit has only fallen by just €3.5 billion.

Despite this spectacular policy failure, the austerity cheerleaders tell us we need to cut more.  That is because many supporters of austerity are using the crisis for their own political agenda – to cut public services, social protection and public investment. And to cut wages, in the mistaken belief that low wages equate to competitiveness.

The past five Budgets have been driven by false premises – by myths. We’re in a bailout and have no choices. We can shrink the deficit if we shrink spending. We’re all paying ourselves too much.

And the only reason austerity hasn’t worked is because we haven’t had enough of it.
Now, as we come up to Budget 2013, we need to send a collective message to the Government: austerity cannot work. Rather than continuing to shrink the economy and the living standards of ordinary people, we need to invest in growing the economy, putting people back to work and putting more money in people’s pockets. On November 24, we have a chance to make our voices heard.

Michael O’Reilly is the President of the Dublin Council of Trade Unions, and served on the Administrative Council of the Labour Party for ten years.

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