‘Underbalancing the budget in a depression is not primarily a deliberate policy but a practical neccesity. I would venture the statement that, with few exceptions, a budget has never been balanced in a depression’
- Gunnar Myrdal, Economist, Social Scientist and Nobel-Prize Winner
Fine Gael say that they’re going to balance the budget. They’re not – because they can’t. And if they try, they will destroy the economy.
When a depression – or even a recession – hits, the budget automatically goes into deficit as tax revenues drop and social welfare payments rise. These are referred to by economists as ‘automatic stabilisers’ – and its a good thing they function. If they didn’t – and they certainly functioned less efficiently in, say, the 1930s – the effects would be catastrophic. Aggregate demand – that is, spending in the total economy – would plummet, prices would spiral downwards and businesses, especially small businesses, would close their doors.
To a certain extent this is already occurring in Ireland – with deflation dragging local economies into the pit. But this would only be the beginning if Fine Gael tried to suck even more money out of the economy by reducing spending.
In order for the deficit to fall, the economy needs to return to growth. In a recent post over at New Deal 2.0, my friend Marshall Auerback has highlighted this succinctly:
The bottom line is that growth is needed for the deficit to fall. Growth comes with spending. If the private sector doesn’t want to spend in sufficient volumes to promote growth, then the public sector has to. Otherwise you get stagnation and large deficits.
Fine Gael’s policies, however, will do precisely the opposite (as will Labour’s – as far as I can see). In their recent economic manifesto they’ve pledged to slash the budget while keeping most of what I referred to above as ‘automatic stabilisers’ in place. Should they pursue these policies, they will not see the budget deficit contract – in fact, they will probably see it widen.
They will then – if they are to stick to their current ideology – be faced with two options:
(1) They will have to give up on their election promises, increase taxes and decrease welfare payments and the like.
(2) Watch the budget deficit grow ever larger.
If they pursue the former, they will wreck the economy – and probably turn the electorate against them. If they pursue the latter – which I assume they will – they will have demolished their entire election manifesto, and will have shown themselves to be as ineffective and impotent as the present government.
Of course, there is a third alternative: to increase the deficit by instating a proper jobs program, as they did in Argentina after the default. This would quickly restore Ireland to prosperity and would, I think, go down very well with the electorate.
It would not, however, go down well with Europe. And Fine Gael have shown themselves remarkably weak when faced with European opposition on these issues. Recall that recently they said that they would give up fiscal sovereignty if Europe shaves a few pennies off the debt-burden – this would be a very dangerous policy maneuver as it would force the deficit to close, with all the nasty things happening that are highlighted above.
Neither Fine Gael nor Labour have any real vision for the economic future of this country. And because of this they will likely go down like a lead balloon once they get into power – and then who will the electorate have to turn to but the so-called ‘economic illiterates‘ on the far-left?
Obsessing over the deficit is nonsensical and ridiculous. Everyone who knows anything about economics knows this – they know that these policies are thinly veiled measures to float the Eurozone at the expense of this country, they know that the EU are trying to turn us into some sort of debt-slave, as the IMF have done to so many Third World countries in the past.
It’s time to forget about the deficit – and stop listening to Europe regarding these matters. In an interview I did with David McWilliams the other day on unemployment he summarised this succinctly. ‘It’s only money,’ he said, ‘And the world is full of money.’ No doubt.