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Damien Kiberd: Austerity economics have us locked in Permaslump

“Families want to exit their own micro-bailouts too,” writes new TheJournal.ie columnist Damien Kiberd.

Damien Kiberd

HAS IRELAND BEEN turned into a fiscal laboratory to be used for the conduct of increasingly brazen experiments in austerity economics?

We’re already attracting what you might call austerity tourism. Davy invited top US economist Dr Pippa Malmgren to give the keynote speech at its annual dinner last week. Her upbeat message to the suits was accompanied by a warning that people in the eurozone should brace themselves for “twenty years of no growth”.

This sort of dystopian theorising makes the alleged argument between Michael Noonan and Brendan Howlin over the scale of next Tuesday’s budget cuts seem almost academic. So the combined spending cuts and tax hikes will be “ahead of €2.5bn” instead of €3.1bn.  Does it matter?

Why let a €500-600m spat among friends cause mayhem in a country which has shouldered almost €30bn in cutbacks and tax hikes since mid-2008?

“Less and less money in circulation”

The central problem is not the fine print of the 15 October budget. The conundrum is the pressing need to improve fundamentally the climate in which Irish business operates – and to do so without a functioning credit market and apparently with less and less money in circulation.

The monetary value of a year’s national output was €180bn when the rot began in 2008. It’s estimated at €168bn for 2013. If the economy had not gone off the rails the GDP, as it’s called, would by now be well in excess of €200bn.

We used to have 2,150,000 people in paid employment, available to be taxed by the government.

That number is now 1,870,000 – a drop of 280,000 in just five years.

Noonan and Howlin are trying to complete their maths homework for the Troika against an astonishing backdrop:

  • the cutbacks imposed by their government and by their Fianna Fail predecessors have reduced disposable incomes for Irish families by 10% to 15%;
  • for the families of public servants hit by pay freezes and pension charges the drop has been even higher at close to 25%;
  • a lot of families cannot afford to save, and the banks are paying derisory rates for deposits. But those who can save are saving so much that the ratio of savings to disposable income is well over 10%. Many people have stopped spending;
  • the banks claim that they are willing to lend money to families and to small firms. But households, in defensive mood, have reduced their debts to the banks by over €30bn since the crisis began. And the figures issued by the Central Bank suggest that the net credit provided by Irish banks for mortgages and for the working capital needs of small firms continues to contract relentlessly at the end of each quarter.

The politicians like to call AIB and Bank of Ireland the “pillar” banks. But what are these pillars actually supporting? And how precisely do you “deleverage” a “pillar”?

“Where’s the uplift going to come from on Budget Day?”

So if you can’t get credit from the bank and the government – with its PRSI, Universal Social Charge and marginal income tax rates of up to 55% –  is taxing you to death then where’s the uplift going to come from on Budget Day?

The government should get due credit for its hard work.

Whatever way Noonan and Howlin sort out their problem the general government deficit for 2014 will come in well below the Troika’s target of 5.1% of GDP.

We will achieve exit velocity needed to leave the bailout in 2015 unless international base rates explode and the global economy hits unexpected turbulence.

The Department of Finance and the NTMA have raised and stored away enough cash to pay the country’s bills next year and again in 2015.

All that is good. But the whole country needs a massive lift. Consumer spending, which collapsed after the banking crisis began, is still flat as a pancake.

“Families want to exit their own micro-bailouts too”

The same people who spent the bling years marvelling at the prices achieved for neighbouring houses now swap horror stories about default and repossession down at the local coffee shop.

Families want to exit their own micro-bailouts too.

The problem is that Noonan and Howlin have no money to give them in Tuesday’s budget. Instead taxpayers are looking at a full year’s property tax in 2014 and a rapidly approaching train marked “urgent-water tax”.

Our European masters might think we are the best boys in the class. They’ve given us a clean bill of health each time they’ve been asked. And they have also helped us to string out our debts into the distant future.

But that’s only because the Department of Finance is ready, willing and able to cough up €8bn a year in loan interest, almost four times the interest it paid in 2008.

The national debt will end the current year at 123% of GDP or €207bn. That’s why Dr Malmgren and other worthies fear we are locked into what economists describe as a condition called Permaslump.

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About the author:

Damien Kiberd

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