Deflation’s End - A Reaction to the Emergency Budget

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.

This might seem a bit academic but this will show in a way that no one else has done that deflation cannot work at any level - not at the level of arresting economic decline, job losses, living standards; and not even the deficit. This is the real debate - can deflation work? Fianna Fail's own bookeeping shows it can't.

Reactions to the Emergency Budget

Connolly Youth begin a Sack the Government Campaign
People Before Profit say We Need an Alternative Government
The Workers Party Condemn Today's Emergency Budget
The Bolsheviks Call for a General Strike
The Communist Party say Dracula Budget Sucks Blood from Workers
Peter Fitzsimon says Supplementary Budget an Absolute Disgrace
Oxfam Ireland deplores today’s cut in Ireland's aid budget
Maura Harrington says the government is putting pressure on the people of Ireland
Eanna Dowling says Workers pay for Government and speculators’ failed policies category
Gregor Kerr says it's More of the Same, Only Worse

More of the Same
Michael Taft's blog - The Recession Diaries
Don't just sit there
Contact EVERY TD, Senator, and MEP about this - Contact.ie

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:  

• The Government accepts that unemployment is skyrocketing.   It projects it to be 15.5 percent by next year (in January they said it would be a third less.   Even by 2013, these ratios will remain the same – with over 11 percent unemployed (by the way, this can only work if there is substantial and prolonged emigration).  

• The Government has just slammed low and average income groups – radically reducing their spending income.   In addition, they have signalled further taxes spending cuts (taxing Child Benefit) in the years ahead.   This will reduce people's disposable income further.  

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?

• Lack of government consumption actually detracting from GDP growth
• Consumer spending being hit harder due to rising unemployment, tax increases and growing fears over the future
• An export being whittled away with our trading partners doing worse than previously anticipated

[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.