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We Can't Win

€4bn budget cuts mean €2bn drop in economic growth - IMF

Damned if we do, and damned if we don’t. We can’t afford to borrow, but cutting spending means double-dip…

NEW RESEARCH RELEASED by the International Monetary Fund (IMF) shows that finding €4bn in cutbacks in this December’s Budget will lead to economic output next year falling by €2bn.

Speaking yesterday to industry analysts on the findings of the IMF’s World Economic Outlook for October, researcher Daniel Leigh said that for every euro of a budgetary adjustment, GDP tended to fall by 50c as a result.

There were only two exceptions to this case, according to the research, where budgetary correction had actually led to a growth in GDP: Ireland in 1987 and Denmark in 1983.

“We don’t really know the reason [for these anomalies]“, Leigh said, according to the Irish Independent. ”There are suggestions Ireland was helped by the ‘Lawson boom’ policies of Chancellor Nigel Lawson and by a devaluation of the Irish pound.”

While the general findings are not specific to Ireland, they are likely to hold true given that Ireland cannot devalue its currency, being part of the euro.

“I think you have to assume that, if there is a fiscal correction it will affect growth in the short-term. The response of central banks may also explain why spending cuts seem to do less damage than tax rises.

“If the tax rises are on things like VAT and push up prices, the central bank may cut interest rates by less than with spending cuts, because of fear of inflation,” Leigh added.

The government is reportedly considering €4.6bn in spending cuts in this year’s Budget, and will have to massively rationalise public spending over the next four years in order to bring the budget deficit within 3% of GDP by 2014.

Under the IMF’s findings, a €4.6bn cut would mean GDP falling by €2.3bn – contributing to a 1.2% fall, and almost certainly guaranteeing that Ireland will fall into a second, ‘double dip’ recession.

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