George Soros’ Open Society Foundation unmasked in a major leak 22:31 Aug 24 1 comments
Shell in court over major Corrib gas refinery flaring events. 23:32 Jul 28 0 comments
Eddie Hobbs: Largest act of larceny against Irish people 23:22 Jun 02 0 comments
CHASE Fundraising Events Calendar for June 23:10 Jun 01 0 comments
Threat To Fishing Communities is Laid Starkly Bare in New Film - Atlantic 20:04 Apr 10 0 commentsmore >>
Joined up thinking for the Irish Left
New Books Worth Reading Mon Sep 19, 2016 23:25 | Seán Sheehan
13 Billion ? Lucky for some? Mon Sep 05, 2016 13:04 | Tony Phillips
Rebuilding Ireland: Long on Promise, Short on Detail Mon Aug 29, 2016 22:20 | Eoin O'Mahony
Brexit and Other Issues: Comments on the Current Situation Mon Aug 29, 2016 21:52 | Brendan Young
Bin Charges: From Private Circus to Public Service Tue Jun 21, 2016 12:38 | Michael Taft
Electoralism vs Abstentionism (Or: Why You Should Run For Office) Fri Aug 26, 2016 17:07 | Slyvia Smith
Centrism extremism: how horseshoe-politics silences brutality Sat Jul 02, 2016 18:25 | yeksmesh
Of Tankies, Trots and Social Democrats Thu May 12, 2016 23:41 | Gavin Mendel-Gleason
Avatars of the Advanced-Capitalist Psyche â€“ Capitain America: Civil War Mon May 09, 2016 00:07 | Gavin Mendel-Gleason
Wailings about Left Unity Sat Feb 13, 2016 01:13 | James O'Brien
Life should be full of strangeness, like a rich painting
Notes for a Book on Money and the Irish State - The Marshall Aid Program 15:10 Sat Apr 02, 2016
The Financial Crisis:What Have We Learnt? 19:58 Sat Aug 29, 2015
Money in 35,000 Words or Less 21:34 Sat Aug 22, 2015
THE WRATH OF KANE: BANKING CRISES AND POLITICAL POWER 09:32 Fri Jan 30, 2015
ALWAYS THE ARTISTS: WEEK THREE OF THE BANK INQUIRY 23:11 Thu Jan 22, 2015
Farewell from NWL Sun May 19, 2013 14:00 | namawinelake
Happy 70th Birthday, Michael Sun May 19, 2013 14:00 | namawinelake
Of the Week? Sat May 18, 2013 00:02 | namawinelake
Noonan denies IBRC legal fees loan approval to Paddy McKillen was in breach of E... Fri May 17, 2013 14:23 | namawinelake
Gayle Killilea Dunne asks to be added as notice party in Sean Dunne?s bankruptcy Fri May 17, 2013 12:30 | namawinelake
Deflation’s End - A Reaction to the Emergency Budget
national | worker & community struggles and protests | feature Thursday April 09, 2009 08:43 by Michael Taft - The Recession Diaries
An article written especially for Indymedia.ie
I want to argue that Fianna Fail has essentially cooked (and I mean boil rapidly) the books - insofar as their strategy to bring the deficit under control by 2013 rests on numbers that cannot work in the material world.
I don't intend to list the outrages that Fianna Fail has perpetrated in yesterday's budget. We all have scars to show each other. And let's leave the bank bailout for the moment (but everything about it is one more argument for immediate nationalisation).
Let's get to the heart of the matter. What was this budget all about? Closing the deficit this year by a couple of percentage points? Proving our machismo to the international markets (if wiping 8 percent off the gross income of an average-income couple with two small children or abolishing the Christmas bonus isn't macho enough, I don't what will satisfy foreign hedge funds)?
The whole point of this budget is that, whatever happens (mass unemployment, increasing poverty, a hollowing out of our enterprise base, degrading an already degraded infrastructure), we must ensure, at all costs, that by 2013 the number that appears in the line item ‘General Government Deficit as a % of GDP' is -3 percent or less. It's that simple. Nothing else matters. -3 is the magic number. People can eat stale cake.
The fiscal reactionaries and budget fundamentalists tell us there is no alternative to the current deflationary strategy (though the different camps debate whether the emphasis should be on tax increases or spending cuts).
Here is the battleground. What I'd like to show, going through the Government's Macroeconomic and Fiscal Framework, is that even on their own terms - the deflationists fail. The strategy of deflating the economy will not achieve its stated goal of ‘balancing the books'. In fact, the only way it works on paper is by ignoring reality and cooking the books – which is exactly what Fianna Fail has done. If this can be shown, then the one and only ground the deflationists stand on will have been pulled out from under them.
This will leave the door wide open to progressives – if we have the nerve to walk through it.
It Will Get Worse Before it Gets Better Before it Gets Worse
The Government has been busy, producing three set of projections in the last six months: the October budget, the January Addendum and the April Emergency Budget. Let's compare the last two to see how Fianna Fail is whipping up its soufflé.
In both the January and April projections, the Government insists they will reach the magical -3 percent figure by 2013. But, because of the economic collapse, they have had to shift around the numbers to make this. In truth, they are making up the numbers as they go along.
In January, the Government projected the economy would decline over the two-year period by -4.9%. By April this has more than doubled to 10.6%.
The Government had no choice but to come clean on these short-term forecasts. In the last few days, a number of commentators, including the Central Bank, had forecast similar dramatic declines.
The real kicker is what the Government produced for 2011 to 2013. In January, they projected growth over this period at 8%. In April, they increased this projection to 10.8%.
So, the economy will collapse further but rebound higher. How does the Government justify these projections?
‘The projections over the period 2011-2013 are broadly similar to those contained in the Addendum . . . published in January, with one modification: because the current downturn is deeper than initially assumed, the amount of spare capacity is consequently greater. Therefore, once the recovery begins, growth is projected to be somewhat stronger than originally assumed as this additional spare capacity is brought into productive use.'
What the Government is banking on is a V shape to this recession – sharp fall, followed by sharp recovery. They provide no evidence for this, beyond a quaint belief in the power of markets to self-correct. The fact is the shape could be more like L – sharp fall, followed by flat-lining: high unemployment, sluggish consumer spending and investment, and marginal growth, if any. Let's turn to the elements that make up these projections to see if we can uncover what might really happen.
Whatever You Do, Do Nothing
If there is a rebound, it won't have anything to do with Government consumption expenditure – creating more jobs, issuing more procurement contracts, buying more staples and pens. In January, the Government factored in a mild stimulus – 1.3% up to 2010 and 0.4% in 2011. Even that mild balm has been removed. Now, the Government will contract it's expenditure by 0.4% this year and remove any increase in future years. If there's going to be a sharp rebound, it will have to occur despite reduced government activity. The mountain just got steeper.
Do the Spend Thing
We are being hit by a double whammy. More unemployment means a lot more people have a lot less to spend. At the same time, the Government is radically reducing people's disposable income (in particular, the key low to average income households who tend to spend almost all their income). Without people spending money, business declines, jobs are lost or short-timed, wages are frozen or cut – which sets off another round of deflation. And down and down we go.
The Government, however, is upbeat. In January, they projected personal expenditure to fall by -3.6 percent over the two years, followed by an increase of 5.4 percent. But, while accepting that personal expenditure will now fall by 11.5 percent over the two years, the Government projects spending to pick up even faster - by 6.1 percent in the following period. But hold on a minute:
So, there will be more people without a job and the rest of us with even less disposable income than was projected in January. But even so, the Government is confident we will actually increase our spending. They must be the only ones assuming this.
Export to Nowhere
Ultimately, long-term growth will depend on our ability to make and sell things abroad, whether goods or services. Again, the Government is upbeat.
They accept exports will take a hammering over the next two years (-9.2 percent) but afterwards insist it will pick up even more than their previous estimates in January. Hmmm.
Our export sector is taking an incredible hammering. There's the Dells, the Waterford Crystals, SR Technics'. Our food sector is bending under pressure with the sterling exchange rate. Multi-nationals, the bedrock of our manufacturing exports, are leaving, downsizing, weakening. And we have yet to get the full blast of the drop in financial service exports. When the recession has hollowed us out, we will be in a weaker position to earn a living off exports.
The Government has even accepted that, since January, our trading partners' economies have deteriorated. In January, they projected growth in all the countries in 2010. Now, they project growth in only one country – Germany; and that only marginally. Indeed, our main market for indigenous enterprises, the UK, is really heading south.
In other words, we will have a weaker export base with reduced international demand. So the question is – what and where will export at the level the Government is projecting.
The Bottom Line
Let's bring all this together. Some would argue that percentage increases cloud the picture because it depends on what your base-line is. Okay, let's move to the headline figures. And remember, the Fianna Fail deflationists couldn't muck about too much with this and next year's numbers. Too many commentators have passed judgement. But few venture beyond this two-year span – too many variables, too many unverifiable assumptions. This is the space where the Government is employing its dark arts.
In January, the Government projected nominal GDP to grow (at current market prices) by €21.4 billion between 2011 and 2013.
What are the new growth projections? What are they now projecting taking into account the deterioration since the January projections?
[I won't even get into the investment sub-category; when you have a category collapsing by over 40 percent you're more in the realm of a Kilkenny hurling score than you are in economics].
So after all that, the Government is projecting GDP growth between 2011 and 2013 to be: €21.2 billion. That's right. They've readjusted their calculations by less than 1 percent. It's as if today and tomorrow has no effect on the next day. Easter comes early with Fianna Fail.
This is what the Government actually did: they started with that magical number -3 percent and worked backwards, putting the economy on a procrustean bed to make everything fit. They didn't start from the here and now and proceed onwards. They started in make-believe land and just stayed there.
There's a good reason they did this. First, the Government has resorted to fiscal chicanery to make the next two years better than it would otherwise be by absorbing the pension funds of universities and certain state agencies. This gives an initial boost to the Government's balance sheet. However, pensions will have to be paid out of these funds and these will be counted as expenditure. There is no evidence that the Government has accounted for this sleight-of-hand.
Secondly, the budget has already caused one commentator to downgrade their projections for this year alone. Ulster Bank is now projecting a decline of -9.5 percent (compare that with the Government's -7.7 percent). If anything, given that the Government has taken €5 billion out of the economy in a full year, this might be a bit optimistic.
So already, the Government's deficit target has been blown off-course driving it back up to nearly -11 percent this year. Wait for this year's and next year's and the following year's budgets to kick in. GDP growth will weaken further and, so, the deficit will remain stubbornly high.
The Tasks Ahead
Even on their own terms, the deflationists cannot reach their goal of bringing the deficit below the magic -3 percent by 2013. That's because we are going up a down escalator – and the escalator is gaining speed.
We desperately need an alternative – one based on creating jobs, maintaining incomes, saving enterprises – especially in our critical export sectors. This means radical intervention by the state – creating jobs, boosting incomes, creating new public enterprises to invest, to expand and even save failing firms that would otherwise be profitable were it not for the recession.
We must dare to spend, dare to borrow, dare to invest and dare to intervene. There is no other option – unless decline, stagnation, unemployment, emigration and poverty are acceptable while we wait for the market to correct itself.
The problem is we don't have a stimulus framework. This is a major gap in the progressive critique. We must challenge the Government's framework with one of our own. Until then, our demands for stimulus will be aspirational and easily dismissed. Who's up for this hard graft?
Further, we must ensure the trade union movement remains independent of this government and not give Fianna Fail political cover. ICTU is scheduled to recommence talks with its ‘partners' after Easter. This must now become a matter of urgent debate.
And finally, progressive political activists must do everything possible to ensure their respective parties don't get ensnared by either Fianna Fail or Fine Gael. Fianna Fail may be toxic, but Fine Gael has no fundamental disagreement on the macroeconomic or fiscal targets, they merely dispute budgetary tactics. Rather than increase levies by 3 percent, they would increase them by less, fire 15,000 public sector workers and generally take a torch to the public realm. The game remains the same.
The deflationist orthodoxy controls the debate. So far, they even control the alternatives. Unless we have a clearly worked economic alternative, mobilising trade unionists and progressive political parties behind a political alternative, we'll be back here again, showing each other our growing scars.