Two articles worth reading – in Monday’s Irish Times the Tasc / progressive-economy folks had an article published that attacked the government’s approach and outlined their favoured alternative (largely tax rises & increased government spending). Yesterday evening Constantin Gurdgiev responded with a masterful demolition of their arguments.
Quote from Constantin Gurdiev’s article..
Equally damaging have been the cuts in public investment at a time when private investment has plummeted. This has laid the foundations for a low-growth, high-debt future where unemployment will remain high and inequality endemic.
One can relate to this statement. The problem is that while some of the cuts were to productive investment, the real error of the Government policy has been the lack of systematic approach to assessing the value-for-money of various projects and freezing or canceling outright the ones that do not yield sufficient returns. For example, parts of road building programmes relied on the outdated and often utterly unrealistic expectations of development in remote locations. Binning these investments is ok they are the luxury we cannot afford. Ditto for Metro North which in its current incarnation is a White Elephant.
Another highlight – the Tasc approach seems to involve having our cake and eating it too. I.e. A roll-back of any spending cuts along with an increase in capital spending. Gurdgiev argues this isn’t possible & given the Greek Socialist Party are now implementing cuts does anyone seriously agree this is possible within the Eurozone?
The authors do not understand that increasing consumption by borrowing at 5-6% per annum to give the money to our welfare system and to pay public sectors obese wages is taking money out of investment. Instead, they seem to think that both: welfare payments increases and public sector wages can be sustained while increasing state spending on capital projects.
So do the simple additions. To maintain NDP investment at previously planned levels, on top of the current budget deficit we will need some odd 6-7 billion more. To return welfare payments to their 2009 levels, and to reverse pay cuts in the public sector and reductions in employment there, we will need additional 3.4 billion. These are all net of receipts. So the Exchequer will be borrowing some 29 billion this year – 18% of our GDP. What would the Greeks say with their current 12.7% GDP deficit and heading for 10.7%?
Update: Although in fairness to the Tasc position GDP would be higher under their expansionary route and thus the deficit may not quite scale the heights of 18%.
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm