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Column Austerity isn't working – so what alternatives exist for October's Budget?

Despite the growing number of voices criticising austerity as a method to meet deficit targets, the government has indicated there is more to come. This situation can’t continue, writes Rory Hearne.

MANY PEOPLE ARE unaware that the Budget is coming early this year. It will be in October rather than the usual December month that Finance Minister, Michael Noonan, and his Labour colleague, Brendan Howlin, will deliver the tax and spending measures for the coming year of 2014.

This is why debate on the budget has been taking place in the media in recent weeks, with Michael Noonan stating that they might use the proceeds of the savings from the Anglo promissory note to reduce planned tax increases. Either way, he stated it would be another ‘harsh’ budget.

This news will terrify people across the country, from those struggling with mortgage arrears, those in poverty, the young people looking for work in Ireland, those reliant on special education supports, those on public hospital waiting lists, and so on. But contrary to how Minister Noonan is presenting it, there is in fact another way of approaching the Budget that could avoid further cuts to essential social and public spending and avoid further tax increases for low and middle income earners.

The Government can decide its policies to meet the deficit target

The current ‘austerity’ plans for the Budget of a €3.1bn adjustment including €1.9bn in spending cuts and €1.1bn in revenue (tax) increases is required, according to the Government, in order to reach the deficit targets agreed with the Troika of 3 per cent of GDP in 2015. However, Social Justice Ireland and others have stated that in their meetings with the Troika, they have been told that the Troika are not dictating to the Government how the deficit target should be reached and, therefore, the Government can decide its own mix of policies, once they achieve the deficit targets. This opens the debate on whether austerity is actually an effective way of reducing the deficit and achieving growth.

So what is the evidence for austerity so far? We have had eight austerity budgets since the crisis began in 2008 of a total of €31 billion, €18.5bn of which was cuts. These have contributed to a marginal reduction in the deficit. It has reduced from 7.6 per cent of GDP in 2012 to a projected 7.1 per cent for this year, and is projected to reduce to 5.1 per cent for 2014. Falling, but unlikely to reach the targets.

Furthermore,  economists, social justice advocates and politicians in Ireland and, indeed across Europe, are making the case that we have reached the limits of the effectiveness of austerity, and in fact, it has become a counter-productive policy approach.

Austerity has failed to bring economic recovery

Most significantly, austerity has failed to bring economic recovery. The Irish economy shrank in the first three months of this year, pushing the country back into recession, according to new figures from the Central Statistics Office. Gross domestic product, the widest measure of economic activity, contracted by 0.6 per cent on the previous three- month period on a seasonally adjusted basis.

The decline was the third consecutive quarter of contraction in GDP. Economists define recession as two back-to-back quarterly falls in this measure of output. Domestic demand, a measure that excludes imports and exports, fell by 1.5 per cent, bringing the domestic economy to a new low. Similarly, figures in May revealed that the eurozone as a whole has been in recession for six consecutive quarters, the longest recession since the area data began to be recorded in 1995.

Austerity was not always the first policy of choice amongst policy makers.  As an economic approach, it was initially shunned after the crash in 2008 as governments in the US and Europe used Keynesian stimulus approaches that involved pumping government (citizens’) money into banks, welfare and investment programmes.

Change in policy

This worked and the economies began to recover. But then in 2010, it was argued that governments needed to retrench spending, and they pursued policies based on the analysis of Harvard Economists, Reinhart and Rogoff, and others, who argued governments with too high debt levels (such as Greece, Ireland, Portugal etc) would only achieve growth through slashing public spending. Of course this suited the (factually incorrect) analysis that blamed these countries for profligate government overspending in their economic booms.

The Nobel Prize-winning economistPaul Krugman has consistently argued that this ‘austerian’ approach was incorrect and instead governments should listen to the warnings of the great economist John Maynard Keynes who stated that the boom –not the slump –was the right time for austerity.Less austerity and government stimulus, Krugman argues, pumps more money into the economy, which supports domestic investment and consumption, and so stimulates growth. That in turn reduces budget deficits by increasing tax revenue and thus creating a virtuous circle.

Austerity not “reasonable”

The tide of consensus appears to be turning Krugman’s way. The IMF’s former mission chief to Ireland, Ashoka Mody, said the Irish approach in the bailout was a mistake and that complete reliance on austerity was not “a reasonable” way to go. Head of the IMF, Christine Lagarde, recently urged euro-area countries to focus on investment rather than budget cuts while European Commission president, Jose Manuel Barroso, has said also that austerity has reached the limits of political and social support.

Within the Irish Government, the Minister for Social Protection, Joan Burton, said she believed “we have reached the limits of austerity now”, adding that ordinary people “are shouldering too much of the burden”. While in April the methodology underpinning Reinhart and Rogoff’s austerity analysis was found to be incorrect and that no relation exists between debt and a lack of growth.

Austerity has benefited some sections of society. Corporate profits have bounced back, the stock markets are rallying, and the wealthiest 1 per cent are certainly not feeling the cold winds of retrenchment.  The burden of adjustment has been on low and middle income households. Austerity is working for those in finance, the large corporations and the wealthy, but for the majority of people in Europe, and in particular those in the peripheral bailout countries it has been a social and economic disaster.

Alternatives to austerity

So if we have reached the economic and social limits of austerity what are the alternatives available to us? Various organisations such as Claiming Our Future, Social Justice Ireland, ICTU, TASC and the NEVIN Economic Research Institute have been outlining such alternatives for a number of years.

In  June the NEVIN Institute outlined an alternative ‘growth-friendly’ and ‘jobs-rich’ approach to budgetary policy that would involve the full use of the proceeds of the ‘Promissory Note’ deal to reduce austerity by €1 billion, an investment stimulus from the National Pension Reserve Fund of €1.5 billion, and increases in taxation of €1.65 billion targeted at households in the top 10 per cent income bracket as well as capital assets of those who can afford to pay more than they are doing now. This is backed up by CSO SILC Data which shows that the top 10 per cent of households only pay an effective average tax rate of 25.6 per cent while many corporations are only playing an effective tax rate of 4 to 6 per cent.

The Nevin Institute outline in their detailed analysis that this approach is more likely than the current government budgetary strategy to raise output and employment, avoid further damage to public services and welfare supports,reinforce market confidence in Ireland through a policy founded on growth, investment and fiscal prudence, address some of the key social and economic infrastructural short-comings and, significantly reduce the government deficit to 3 per cent in 2015.

‘85% of the heavy lifting’

Whether or not you agree with their policy proposals, they do highlight that credible alternatives to the current austerity budget approach exist. Public debate is urgently required on this because, despite government claims that we have done ‘85 per cent of the heavy lifting’, and that there are ‘only’ two austerity budgets to come, the Department of Finance projections in the Governments recent Irish Stability Programme Update tell a different story.

That document outlines the fiscal plans to consistently reduce public spending into the future beyond 2015. This raises fundamental questions about what will be left of our public health, education, welfare systems in the coming years? The impact of cuts to communities, to special education needs, youth mental health services, lack of early childhood care will be devastating in years to come.Unemployment, for example, is still projected to be 12.5 per cent by 2016.

It is inaccurate and disingenuous of the government to claim that their strategy results in only two more austerity budgets. Furthermore, given the challenges of climate change and the footloose nature of multinational investment a debate is required about how we can achieve sustainable growth in both environmental and long-term economic terms.

The public are right to be cynical of government statements

Many people are rightly cynical about the pre-Budgetary time where Ministers make various ‘kite-flying’ statements about what tax or cut might happen but it is a vital part of the decision making process that determines the shape of our economy and society. This year, however, the failure of austerity means that the government has to take a radically different approach.

This is unlikely to happen though, given their recent statements on the necessity of more ‘harsh’ budgets, unless ordinary people get engaged with this debate and influence their local politicians to bring about a different outcome.

In Claiming Our Future, we are encouraging the public to get involved and to help facilitate this we are organising a free public event on July 13th in Croke Park which will outline alternative Budget proposals on taxation and employment creation. The Budget is a question of priorities and choices. It is essential that all the choices are heard and debated.

To find out more about the conference see

Dr Rory Hearne is a community worker, policy analyst, occasional lecturer and has been active in social movements and left politics for many years.  He is author of Public Private Partnerships in Ireland: Failed Experiment or the Way Forward for the State (Manchester University Press, 2011).

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