Is the budget deficit a problem for the Irish Economy?

national | worker & community struggles and protests | opinion/analysis

Friday April 17, 2009 12:21

by PADDY HACKETT

rasherrs at eircom dot net

Must the budget deficit be eliminated

The Irish budget deficit has rapidly grown to an enormous size. The growing budget deficit is a symptom of the deepening global economic crisis. It is not the cause of it. The crisis can only be solved by eliminating its cause --capitalism.

Is the budget deficit a problem for the Irish Economy?

Paddy Hackett
Friday, 17 April 2009

The Irish budget deficit has rapidly grown to an enormous size. The growing budget deficit is a symptom of the deepening global economic crisis. It is not the cause of it. The crisis can only be solved by eliminating its cause. But a budget deficit, in itself, is not necessarily a problem for a particular capitalist economy. It largely depends on the economic circumstances embedding it. It is not unthinkable for a relatively strong and vibrant economy to have a budget deficit. There is no absolute prescription engraved in stone dictating that the state must, as promptly as is possible, eliminate its economy's deficit on the shoulders of the working class.

There have been two policies advanced as to how to deal with the growing Irish deficit. Both policies are advocated as ways to solve the problems of capitalism. Ultimately both policies serve the class interests of the bourgeoisie. The first policy seeks to rapidly balance the budget through a mixture of severe tax increases and spending cuts. The other argues that the best policy is to reduce taxes and spend more. It suggests that the deficit can be compensated for by increased borrowing. This policy suggests that the outstanding national debt can be largely cleaned up when recovery gets under way.

The first policy is being pursued by the Fianna Fail dominated government. In the short term it will inflict considerable pain on the working class and may even lead to an even bigger hole in the state finances. It may even lead to increased civil conflict. Demand may fall as a result of increased taxation and spending cuts. This reduced demand may lead to greater unemployment. This in turn may increase the size of the deficit. Therefore the policy of balancing the budget does not necessarily solve problems.

The growing Irish budget deficit is a manifestation of an acute global profitability crisis. It is only when this crisis is solved can budget deficits such as the Irish one be eliminated (not that this necessarily needs to be done). To think that the Irish budget deficit can be solved by balancing the budget is to promote a forced separation between the world depression and specific problems of the Irish economy. Specific economic problems are a product of contradictions within the world capitalist economic system. Generally speaking they are not a product of subjective factors such as what the government did or did not do. The budget deficit and many other economic problems are not independent of each other. The deficit in the Irish finances will only be “solved” as a result of ongoing world economic recovery. This is because it is inseparably connected with the current world wide depression.

The present strategy of the Fianna Fail led government is inflicting great pain on the Irish working class. It is a strategy not intended to eliminate the deficit. The deficit is the pretext for reducing the living standards of the working class and generally worsening its conditions of work. This, it is hoped, will make for a leaner and meaner capital that is more profitable. If Mr Cowan succeeds in achieving this he will have been a very successful Taoiseach (prime minister).

The second policy is advocated by elements within the Irish Left. It suggests that reducing taxes may tend to increase demand thereby partly compensating for the falling demand due to depression itself. It calls for increased spending, public works, as a means of providing a stimulus to the economy in a time of contraction. It claims that the resulting deficit can be made up for by borrowing from, say, the European Union. It also claims that in the period of recovery the deficit will tend to shrink and can more easily be paid out of state revenues.

Despite its plausible nature this policy is no more a solution than the previous one. In the short term it will tend to lessen the intensity of suffering inflicted on the working class. However it may tend to prolong the pain by lengthening the time over which the deficit is to be, supposedly, paid for by the working class. But there is a limit to borrowing. If this were not the case there would never be any need to be concerned over deficits. They could grow at any rate and to any size because borrowing can adequately compensate for both rate and size. The same understanding can apply to spending. Under these conditions there need never be depressions because money or credit can be flushed into economies to prevent the crisis from occurring.

Such an economic ideology fetishises money and credit. It falsely suggests that the quantity of money or credit is the panacea for economic evils. Money then is presented as the determinant of economic expansion. Production is mistakenly presented as the derivative of money –not the reverse. This is to mistake the appearance of capital for its essence. The valorisation process, the production of surplus value, is the source of economic expansion --not money and credit. This policy represents a more disguised way of increasing the oppression of the working class since borrowing and the interest on it is a form of future taxation. This means that the working class will be forced to yield more revenue in the form of taxation than straightforward taxation that is, say, independent of borrowing.

There are only two solutions to the economic crisis: The capitalist solution which is at the expense of the working class or the communist one which is at the expense of the capitalist class. There is no in between solution just as there is no such woman as a half-pregnant woman. The abolition of capital through social revolution is the only way in which the present economic depression can be solved that is not at the expense of the working class. Such revolution cannot be realised if confined to Ireland. It must have an international dimension.

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Comments (9 of 9)

Budget analysis

by Anoy

Tue Apr 21, 2009 18:50

Here is some analysis I had done the day of the budget if anyone is interested hope it brings something to the table here

According to the Minister economic recovery have has four main facets
1. Raise taxes and reduce public spending. This will clearly reduce the amount of expendable income in the economy but is I think a necessary step without arguing the detail or merits of whether there should have been further reductions in public spending and less increases in taxation or vice versa.

2. Investment in the "smart economy" and the export economy. As far as I can tell this is a dead business model, the government are predicting 10.5% fiscal deficits I think this is optimistic (a euphemism to say the least). Ireland's main trading partners are the UK and the US, both of which will probably continue to contract in the coming months (Japan being wedded to the US is a case of point of how much consumer demand has actually collapsed in the US), Ireland is virtually entirely dependent on export income now the property bubble has burst and so the real income from exports and manufacturing is likely to see further contraction and this of course will have massive effects on a struggling service economy and hence I think the fall in tax receipts will increase in the coming months rather then stabilize or decrease putting further pressure on the deficit.

3. Retention of a competitive tax base to maintain inward investment - I can not really see the IDA securing further inward investment to replace the lost jobs with US or foreign owned multinationals in the current international climate.

4. Recapitalisation of the two major banks AIB and BOI 7Bn Euro and that is not included in the projected 10% fiscal deficits.and the creation of a bad bank t(NAMA) o take toxic assets (property assets mainly I believe) off the books of the banks. This for me is really the most distressing aspect in the budget and I believe amounts to grand larceny on the Irish public. The Irish times ran a piece yesterday concerning the "bad bank" model and I will quote a portion of it

"Under the system proposed by the Minister impaired assets will be transferred from the banks to the new agency with the “purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced”.
He said this was to ensure a “sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy”.
Distressed land and development loans in Irish banks will transfer to the new agency as these “pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system”, Mr Lenihan said.
These assets will be purchased by using Government bonds, resulting in a sharp increase in gross national debt"

This of course does not mentioning the fact that many people in Ireland are completely underwater sitting on property assets which have lost upward of 40% of their value in some cases with no sight in end for where this devaluation will end, therefore it is unlikely a great deal of people will want or be able to access "credit" in the near future in Ireland.From the same article in the times it says

"Mr Lenihan said the cost of servicing this debt “will be offset, as far as practical, from income accruing from the assets of the new agency”.
He said the potential maximum book value of loans to transfer to the new agency was estimated at between €80 and €90 billion, although be believes the final amount paid will be significantly less than this.
However, if the agency falls short of recouping all of the costs the Government said a levy would be applied to recoup any shortfall. All borrowers will be required to meet full legal obligations for repayment."

So magically they are going to transfer nominal value euro 90bn assets/loans (purchased at a write downs I believe) which are on the books of the banks to this agency, and pay for them by increasing government borrowing.

The government hopes to pay for the interest on this borrowing from the "earnings" on the loans. If that falls short they'll introduce a levy on the banks. However it will be virtually impossible to price these assets now, for instance some of the so called assets may include stuff like green field sites around Dublin purchased for 100 Million plus - who is going to purchase these sites now for even a 75% haircut when the property market is dead and with surplus stock. Even more distressing is the fact that they may cover speculative assets outside of Ireland in the UK and elsewhere, when hearing this I was quite perplexed why they might be doing this regarding the purchase of assets outside the country? I am now thinking one possible reason might be the previous bank deposit insurance had a limit of euro 250k, the government back in September or October 08 guaranteed all deposits, bonds and other liabilities of the banks. At the time they said it would not cost a cent. When they did that, they effectively absorbed the 100% GDP losses (90 billion minus discount), they just didn't realize it at the time. So if the asset side of the bank balance sheet collapses, they've already promised to make the depositors and bond holders whole.

What is new is that this is the first time the scope of the problem is being noted in public ( nominal 90bn euro), even if only in a sideways manner. This may well will slip past the public, as everyone obsesses about the tax rate and the cancellation of the child benefits.....

This is such a rip-off of the tax-payer that it boggles the mind.

This is happening at a time when as I stated earlier fiscal receipts are likely to fall further, the plan for "recovery" assumes global conditions returning as they were previous to the Credit crisis and CDS swaps on Irish debt is widening, credit rating of the country falling making the servicing of the debt more expensive then it already is.

Daryl thank you for your thoughful comments - if you have any suggestions for groups on the net or otherwise I would be happy to hear from you

parallels and divergences

by Daryl

Tue Apr 21, 2009 18:11

There are economic parallels with the '30s sure. Then the US government intervened reluctantly (small government and Adam Smith market self-regulation being conventional capitalist philosophy) and went for the New Deal with some starbilled public expenditure projects like the TVA hydroelectric dams. Some historians say that the war economy after Pearl Harbour is what really got the US out of the depression. Since WWII Uncle Sam has been big government in its role of military contracts to the aeronautical, motor and computer industries (a hefty proportion of industrial jobs), but small government regarding the rest of the economy.

In Europe the widespread anxiety of the depression drove many impressionable people into the embrace of fascist collective-corporatist ideology one one hand, but into soviet-style collectivist-corporate ideology on the other. The practical implementation of both ideologies caused massive suffering. One was crushed by war, and the other collapsed like an empty shell about two decades ago.

I agree that history won't repeat itself but will rhyme. Where will Europe's mounting economic anxieties lead people to in the near future? The official consensus - a corporate or hegemonic consensus shared by unions and social democratic parties in addition to centre-right parties - voiced in the mainstream media hopes that the banking system can be bailed out and we can all return to another happy spending spree in a couple of years or so. Those diminutive voices outside this consensus - the radical ecologists, nonparliamentary greens, religious lobbies like CORI (not even a platoon, don't ask ironically about divisions), the fringe left groups (always scheming against each other) and a few isolated social thinkers/dreamers - wish for a different vision of economic happiness. Yet there are those on the left who want a consumer society that favours the low wage earners and marginalised. But I don't want to continue with analysis, so I'll take a rest from this thread.

Last post

Tue Apr 21, 2009 15:12

I had forgotten to add - Daryl I know your comment was intended as a request to tone down the hyperbole but I currently feel there are way to many parallels between the world today and the world in 1930 for comfort.

As the saying goes

Those who do not know history are doomed to repeat it.

Although I do not believe history repeats itself exactly it does rhyme. We may or not be on the precise but I think we should all be aware and vigilant considering the times of economic stress we find ourselves today and the path history has taken in such times before.

missing ingredient

Tue Apr 21, 2009 14:32

Hi Daryl

Your comments are well taken however I would beg to differ and I am sure I will catch flack for this comment because imo so many people are drinking the Hope cool aid

you say

"But to make Italy fascist it was necessary for there to be a Brilliant Leader at the head of the One and Only Party that Bound (fascio-fasci) the Nation together with a dominating ideology."

I don't know how much you know about American politics but I would assert the republicans and democrats are two head to the same party - they both follow virtually the same policies when it comes to the economy and foreign affairs the only substantial difference between the two being the "soaring" rhetoric.

Obama has failed to reverse any of Bushes draconian law (i.e the Patriot Act etc..), continues executive signing on new laws, continues with bailouts and expanded them via TARP, PPIP etc.. , retained some Bush staff in key positions e.g. Gates (secretary of defence), continues the long tradition of appointing Goldman Sachs and other Wall street insiders to key treasury and financial positions, refuses to hold people accountable for war crimes and torture, will escalate the war in Afpak and so forth. So at least in the case of the US your missing ingredient of a brilliant leader along with the dominating nationalist ideology bit has been fulfilled imo.

Tue Apr 21, 2009 13:20

Thanks for Il Duce's definition: "Mussolini defined fascism as a merger of state and corporate interests". Maybe that corporate state is fascism, although the Soviet merger of state and state capitalist interests was another version of corporatism with neo-medieval social characteristics. But to make Italy fascist it was necessary for there to be a Brilliant Leader at the head of the One and Only Party that Bound (fascio-fasci) the Nation together with a dominating ideology. That ingredient is missing from current western democracies. I think it would be better to leave fascist/fascism out of current economic discourse and stick to objective criticisms of economic policies as they affect the unskilled, semi-skilled and marginalised sections of society - sections whose fragile interests are not properly represented by prominent union leaders. Only CORI and a few other clout-less voices are raised in their support occasionally. How many divisions have they?

http://en.wikipedia.org/wiki/Fascio

Blaming the public sector for our current ills is a falacy

Tue Apr 21, 2009 11:16

Although I would agree Ireland needs to slash public expenditure considering our deficit is projected to be 10.5%, and growing by the day .Our main trading partners (US and the UK) are no longer importing, the US is running a trade surplus these days OMG. We may well be calling on the IMF or the EU soon for our own bailout, circumstances today in regard to austerity measures would look benign if that happens.

As for the globalisation philosophy to which our government subscribed to bring wealth to the nation i.e a small "open" economy with a low tax regime, much of that wealth was an illusion and the illusion is quickly disappearing as people net worth vanishes, mainly tied up in their home equity - however the debt associated with that illusionary equity has not vanished as many people around the country are finding out - they continue to have to service credit card bills, huge mortgages, reduced wages, the threat or actual loss of job , and now pay higher taxes which are redirected to the banks and others deemed to big to fail. It is referred to on wall street as "pump and dump" and has happened countless times before. In most recent memory categorised by the internet bubble, I am sure we all know people who traded at the time (circa 1999) and say "I had made a fortune but then lost it all and then some". Wealth transfer is the name of the game and we today are witnessing the largest pump and dump in history.

mixed adj

Tue Apr 21, 2009 08:53

it depends on how you define facism - Mousillini defined fascism as a merger of state and corporate interests. That is in my view what we see today.

mixed adjectives

Tue Apr 21, 2009 06:14

You describe it as a neoliberal fascist globalised economic system. I don't get the 'fascist' epithet in that description.

A capatilist system?

Mon Apr 20, 2009 22:38

We do not have a capitalist system in the world today we have a neoliberal fascist globalised system controlled by a vested financial and political oligarchy both at a national and supra national level (in the form of enormous multinationals), it is a system characterised by bailouts for the banks, bondholders or any one deemed too big to fail. This is hardly capitalism it is socialism for the rich and connected - we are imo currently only a couple of steps from a totalitarian government and heading there fast via the Lisbon treaty. To advocate to replace our current corrupt system with one which is already historical proven to lean towards totalitarianism i.e. communism, is madness in the extreme (that is said with all due respect to Marx and Das Capital who seems to have unerringly forecast the morphing of a capitalist system into its current incarnation).

IMO what we need is a more voluntary society and more individual social responsibility where we as individuals can exercise our own free will as to what is best for ourselves, our families and our communities, rather then more coercive systems. By all means feel free in such a country to setup a collective but do not attempt to hoist it on everyone else as our current so called "democratic" systems do, characterized by more draconian laws, more taxes, money to banks. privacy intrusions etc.. how many people even if they did vote for the current government feel they have given their consent for this behaviour .I would wager to say very few, yet politicians believe this to be the case because enough people put a tick against their name on a ballot sheet every four years.

We should in my opinion start to assert our own individual independence and refuse to cooperate with this grossly fradulent system maybe then our politicians will start to get that message that we the people will accept nothing less then root and branch reform and start to weed out these criminals.

Rant off

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Is the budget deficit a problem for the Irish Economy?

Comments (9 of 9)