2014 plan will damage economy and society

Dan O'Brien argues that abandoning the four year plan to reduce the deficit to 3% of GDP by 2014 would be insanity (Irish Times Oct 21 2010). He is wrong. By Eoin Ó Broin.

This policy consensus is shared by Fianna Fail, Fine Gael and Labour. If implemented, it will damage our economy and society. And ironically it will also do nothing to reduce the deficit.

To date the government has introduced three austerity budgets. On each occasion they have argued that we are living beyond our means and that they have no option but to cut public spending.

We are now being told that the real target for this December's budget could be in the region of €7 billion.

Cutting spending, they say, will reduce the State's borrowing requirement. Fiscal rectitude will also convince the markets that the Irish state is a sound investment and in turn reduce the cost of borrowing.

Unfortunately none of this is supported by the facts.

With each austerity budget the government has pushed the economy further into recession. Cuts to wages and social welfare mean less money in people's pockets. Less money in people's pockets means less money spent in the real economy. Less money spent in the real economy means more people out of work.

As unemployment rises tax revenues plummet –from €47.8bn in 2007 to an estimated €30bn in 2010- pushing up the deficit and the states borrowing requirement.

Despite calls from Sinn Fein, the trade union movement, the community and voluntary sector and independent economists, the government has refused to investment in job creation, opting instead to invest heavily in recapitalising the banks and cutting public spending.

While the deficit is officially 19% of GDP the real cost of the government's failed economic policies can be seen when you add the cost of the bank bailouts, revealing a staggering deficit of 32%.

It is this profligacy with the banks and the government's drive to drain money from the real economy through cuts to capital and current expenditure that have made the international money markets so nervous, pushing up the cost of borrowing to unsustainable levels. And it is this policy that runs the risk of bankrupting the state.

Rather than realise the error of its ways, the Government, supported by Fine Gael and Labour are determined to continue cutting public spending in order to reduce the deficit to the agreed 3% of GDP by 2014.

That this policy is being supported by intelligent and considered economists like Dan O'Brien beggars belief. Even worse, the scale of the cuts being proposed, if Michael Noonan is to be believed, may be as high as €7 billion.

While we will not know the scale of the adjustment until budget day, we already have a good sense of the options being considered. On the tax side it is likely that low- and middle-income earners will bear the brunt. On the current side social welfare and front line services will be hit hardest. Reductions in capital spending will also form part of the picture as will new service charges or property taxes.

These kinds of policies squeezed into a four year time-frame will have a devastating impact on both our economy and society. Unemployment will continue to rise. Tax revenues will continue to fall. The deficit will grow larger. The cost of borrowing will increase. And hundreds of thousands of people will be pushed further into poverty.

Ultimately such policies will jeopardise the economic viability of the state itself.

If the definition of insanity is doing the same thing over and over expecting to get different results, then this is it.

Despite claims to the contrary there are alternatives. In the coming weeks Sinn Fein will launch a detailed and costed pre-budget submission which will outline a credible alternative to the failed policy consensus of Fianna Fail, Fine Gael and Labour.

It will argue for a longer timeframe for achieving the 3% of GDP deficit target. It will outline how we would reduce government borrowing by €4billion in 2011 through reforming our tax system and reducing waste in public spending. And crucially it will outline how we would get the country back to work, investing in job creation and returning the economy to positive growth.

Austerity doesn't work. The 2014 deadline cannot be met. The government's policies are failing. We need a better way, one that stimulates the economy and reduces the deficit while protecting low and middle income households from a crisis that they didn't create.

Eoin Ó Broin is a member of Sinn Féin