Michael Taft's assessment of Sinn Féin's budget proposals.

Michael Taft is one of the most respected left wing economic commentators in Ireland. He is a supporter of the labour party, but has been a strong advocate of a broad left alliance in Irish politics. His assessment of the current Sinn Féin budget proposals is below.

As I have said before on this site I feel any Sinn Féin supporter with a desire to have a better understanding of economics, should read Michael's webpage on a regular basis.

His site is called Notes on the Front (named after a column written by James Connolly) The address is http://notesonthefront.typepad.com/politicaleconomy/

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Putting the 'Workable' Back into the Economy: The Recession Diaries - November 19th


One could despair. All the major political parties are supporting another round of fiscal contraction, though they may differ on the balance of tax increases and public spending cuts. In this respect, Fianna Fail has won that particular battle, we are just fighting within the parameters they have set. There is seemingly no challenge to the deflationary orthodoxy on the horizon.

Except . . . .


Sinn Fein has published its 2009 pre-budget submission, ‘The Road to Recovery’. In short, it poses a more sophisticated approach to our economic and fiscal crisis. On the one hand, an investment stimulus to generate growth; on the other hand, a range of mostly taxation measures to start to repair the public finances. Sinn Fein proposes to use different instruments to attack the distinct parts of the deficit – the cyclical and the structural.

It’s a ‘walk-and-chew-bubble-gum-at-the-same-time’ fiscal policy; not only is it workable, it has the potential to bring the economy back to some sort of ‘workable’.

Let’s start with the investment stimulus, or the cyclical side of things. They are proposing a €3.9 billion stimulus, or 2.5 percent of GDP (pointing out that this is equivalent to the Anglo-Irish Bank give-away).

The main components include:

~ a job retention scheme with a potential to save 90,000 jobs
~increasing and modernising CE schemes
~Investment in state infrastructure (labour intensive work in construction, insulation, etc.)
~a National Development Scheme to directly employ people on ‘public works’
~a temporary ‘Front Line’ services initiatives to employ people in ‘civilianising’ work in the Gardai and nursing sectors
~The establishment of a state childcare and pre-education sector, along with employing a range of specialist teaching assistants.

These would be supplemented by a range of fiscal stimulus – reducing alcohol duty over the Christmas period, reintroducing the Christmas bonus, and a ‘cost of living’ package that would reduce everyday expenditure items (utilities, public transport, insurance policies, etc.).

There’s a lot of material here that would need to be developed. For instance, I’m not sure what modernising CE schemes would look like – especially with a National Development Scheme running alongside it. The Front Line services initiative looks extremely worthwhile – so much so, why make it temporary? This has the potential of substantially increasing public sector productivity. And Sinn Fein might have benefited from examining the ICTU/Fine Gael proposals for promoting public enterprises as an engine of infrastructural investment to raise long-term productivity (next generation broadband, green technology, etc.).

But the broad thrust is correct: public sector expansion (especially in the areas of education), job retention, infrastructural investment. This will boost output, create jobs and start the economy back on the road to recovery which, in itself, is the most sustainable means to bringing the deficit under control. That’s the ‘walking’ part.

Now for the ‘chewing gum’. Sinn Fein proposes a range of taxation measures and spending cuts to achieve savings of €7.6 billion – a larger amount than any other party is proposing. These can be broadly broken down into:

Taxation: a new third tax rate of 48 percent for those over €100,000, a wealth tax (or, as I like to describe – a comprehensive property tax), standard-rating tax reliefs while getting rid of property-related ones along with the private hospital co-location relief, abolish the PRSI contribution ceiling, increase the tax on ‘second homes’ along with other capital income measures, etc.

Spending Cuts: apart from a couple of innovative suggestions such as establishing a state wholesale distribution of drugs and the wider use of generic drugs (on top of saving money, it could actually be little money-spinner), this section mostly focuses on public sector pay and salary reductions, including politicians and professional fees.

There’s no sense in going over each detail. We can always find something to disagree with. For instance, I wouldn’t support capping public sector pay at €100,000; this would disadvantage the public sector in the specialist labour market and, in any event, as CSO researchers have shown, higher paid public servants suffer a wage disadvantage, especially males, compared to their private sector counterparts. And I would prioritise the effective over the marginal tax rate. But in the main, the proposals go in a positive direction.

Sinn Fein proposes to pay for their stimulus programme by: (a) taking a proportion of the revenue raised from their tax/spending measures (about €1.9 billion), and (b) dipping into the National Pension Reserve Fund (€2 billion)

Again, I would be cautious about resorting to the Pension Fund. There may well be a lot of calls on that fund through future bank capitalisations. I would have rather seen Sinn Fein make more of our strong debt profile – the combination of a relatively low debt level combined with our strong Exchequer cash balances. They did make insightful comments:

‘ . . . we should not be afraid to sustain some level of deficit financing – borrowing for infrastructural development – something which most other countries use as a matter of routine . . . The claims that we are over-borrowed, that we cannot sustain the current level of borrowing and that public spending is the cause of all fiscal ails, are untrue . . . ‘.

Nonetheless, to the extent that resources for stimulus can be obtained from low-deflation tax resources and public spending efficiencies, that is clearly an advantage. The argument for debt-financed stimulus has never rested on ‘we borrow because we can’, but rather, ‘we borrow because we must’. Stimulus that is partly financed from own-resources is preferable.

But let's take a step back for a moment. Because there is something more going on here than just a new calculation, a catalogue of different policies. Franklin Roosevelt once said, ‘There are many ways to go forward, there is only one way to stand still.’ At present, the current economic debate is standing still, stuck on this contraction. There is no dialogue, no conversation – merely a hectoring, a lecturing: how we must fact reality, how we must take the pain up-front, how hard decisions must be taken.

Sinn Fein is pointing to a new dialogue, one consistent with going forward; where more and more people are encouraged to present all sorts of ideas to grow the economy – from business supports to social protection measures, from state spending to incentivising private investment, from increasing taxes on some to decreasing taxes on others.

Not all of them will be good measures, not all of them will stand up to scrutiny, and not all of them can be accommodated. But to have a growing pool of walking-forward ideas – we would be engaged in a new dialogue, over what will work best

Indeed, a new dialogue could have an energising effect, raise confidence and act as a stimulus in and of itself. We should never overlook the psychology of economies – of the people who work in them, of the consumer, of the investor. A new dialogue could produce, in the first instance, a substantial rise in the output of ideas. If that happens, material output will follow.

Now compare that to today, when every idea, every suggestion no matter how worthwhile is met with a ‘We’re broke, can’t do it, where’s the money coming from.’ My favourite is ‘We must cut our living standards to improve our living standards.’ That would depress any economy regardless of its potential.

Sinn Fein has provided, not only a clear and coherent alternative to the deflationary orthodoxy, a more sophisticated fiscal platform from which to launch recovery. They have demonstrated a new way of how we can talk about our economy.

All in all, not a bad day’s work.

http://notesonthefront.typepad.com/politicaleconomy/2009/11/one-could-despair-all-the-major-political-parties-are-supporting-another-round-of-fiscal-contraction-though-they-may-differ.html

It's all about the economy, stupid!

One of the things Sinn Féin has been criticised for has been its lack of understanding of economic issues and in truth our politics have focused on matters other than the economy and as a result we have been open to such criticism.

To me the leadership have attempted to deal with these attacks by putting forward moderate economic proposals, trying at all times to sound "reasonable" and falling in line with what other major parties are proposing. This in my opinion led to Sinn Féin failing to benefit from the shift to the left that happened in the recent local and European elections in the South.

However, there there is a growing socialist/social democratic economic analysis of the present situation and we on the left need to grow in our understanding of that analysis and use it to push for the changes we wish to see in Ireland. Sinn Féin members need to be able to be able to counter the arguments put forward that there is no alternative to the economic cuts and deflation that lies at the core of Fianna Fáil, Fine Gael and even Labour Party thinking. In order to do this we need to increase our understanding of economics.

Personally I have for a while now been trying to do this and an excellent source of information has been Michael Taft. He has a site called notes from the front about progressive economics. He has consistently argued the case against the government's economic policies and he has shown where they are taking us to.

Michael is a member of the Labour Party and works for UNITE and is on the left in terms of his thinking.

If anybody else has a site they would recommend then please let me know.

Below is an article from Michael Taft on An Bord Snip.

Histories At Dawn: June 30th The Recession Diaries

History is such a malleable thing. It can be twisted this way and that to support or oppose any contemporary position. Take An Bord Snip Nua – this is a grand thing altogether. How do we know this? Because, sure, its predecessor was such an outstanding success. Yes, it brought pain but it set the groundwork for the Celtic Tiger economy. So goes the history; if we gird our loins, cut and hack away, we too can replicate this outstanding success. Suffer a couple of years of fiscal pain, and economic paradise awaits.

But history is not so straight-forward and certainly not so reductionist. Was it really the case that the ‘cutbacks’ endured under Mac the Knife (Finance Minister Ray McSharry) were (a) successful and (b) set the preconditions for the growth explosion in the mid-1990s? Let’s take a look at some provocative facts for clearly there is a lot of myth making about that period – a period that ran from 1987 to 1989, encompassing three budgets.

First, how much was cut? In nominal terms, public expenditure wasn’t cut – it increased. During the three budgets, total expenditure increased. Current expenditure increased. Even excluding interest payments, current expenditure increased by over 5 percent. The main target of the knife was that ol’ standby – capital expenditure. Cutting investment is the easiest option. It doesn’t take away from what people already have – it only defers something we don’t have. This started a period of long-term chronic under-investment in our economic base.

But that’s only Irish public expenditure. Don’t forget – this was ‘begging bowl’ days, when Ireland was one of the poorer performing economies in the EU. So what about public expenditure in Ireland? Between 1987 and 1989 we received over £1 billion under the EU Social and Regional Development Funds - a substantial 38 percent increase in the previous three years under the hapless Fine Gael/Labour government. Now, £1 billion might not sound much but were we to receive the same proportional amount it would come to nearly €6 billion over the next three years. That would subsidise a lot of cuts, but it’s doubtful if the EU today would play ball.

Second, there is much talk about how the minority Fianna Fail government brought down the public spending/GNP ratio. In 1986 public expenditure amounted to 54.7 percent of GNP (if you think that’s because we had some kind of super-Nordic government, remember – it was largely due to interest payments and social welfare). By 1989, spending was brought down to 45.1 percent. But this was only the continuation of a trend that was already in place since 1983 when expenditure was over 62 percent of GNP.

But there was one thing that saved Fianna Fail’s bacon. The numbers on the Live Register started to fall. Was that because all this fiscal contraction started producing jobs? Hardly. Between 1986 and 1992, the economy was generating an average of only 14,000 new net jobs, and while unemployment didn’t rise it didn’t fall either. Between 1988 (the first year of the ILO calculation) and 1993, unemployment fell by less than 1% leaving nearly 16 percent still unemployed. So what happened here?

Yes, you guessed it: emigration. Between 1987 and 1989 over 100,000 emigrated. While not all of these would have been of working age, it’s a fair bet most were – the overwhelming majority. The numbers emigrating amounted to 8 percent of the entire labour force in 1989. To put this in perspective, we’d need over 180,000 to leave over the next three years to reach this level.

Emigrants are great. You don’t have to pay them any dole. They reduce demand on social services. They don’t end up clogging our jails. It’s a great solution, and it certainly gave the Government at the time a real dig out. Expansionary fiscal contraction? Try expansionary demographic contraction.

There is no question about the impact of some of the cuts during that period. But, as always, there were choices. Fianna Fail did choose – they chose to abolish the Land Tax – just as they abolished the Wealth Tax a decade earlier. When it came to patients being moved out of closed hospital wards or the IFA, Fianna Fail certainly knew whose side it was on.

Whatever about our ‘historians’ today, what did contemporaries think of this policy? They couldn’t ditch it fast enough. First to go was Mac the Knife himself – kicked upstairs to the EU Commission. During the 1989 election campaign – resulting from a lost vote on a non-economic private member’s bill – Charles Haughey apologised on an RTE phone-in show for not realising the damage being done to cutbacks in the health services (what’s new?). The election result put the seal on Fianna Fail’s historical anti-coalitionism, and for the first time they entered cabinet with another party – the right-wing PDs. What happened then? More of th same? Don't you believe it.

The Fianna Fail/PD government went on a spending spree. In the very first budget spending cuts were reversed – and how; public spending rose by 7 percent. In the three budgets under this government, spending increased by over a quarter while capital spending increased by a third.

And then there was that EU dosh. It really started flooding in – over £2.2 billion in the three year period. This was more than double the amount received in the previous three year period. Public expenditure in Ireland leaped and bounded ever upwards.

And this was done against a pretty bleak fiscal situation. While spending was being increased, the debt/GDP ratio was over 85%, though falling; interest payments on the debt soaked up a quarter of tax revenue and over 7% of GDP (compare that to payments in 2008 which made up only 1 percent of GDP). Still, they kept spending.
And then the 1993 devaluation – which made our exports cheaper.

And then the fruits of years of work by the IDA – the multinationals swept in, bringing mega-growth.

And the direct state investment into the high-tech domestic sector.
We never hear that narrative – one that poses spending, investment and public policy as the driving force in the emerging economic boom. Rather, all we get is a selective and reductionist recitation of history, skewered to fit a set of pre-conceived policies.

And just remember, when you read reports of today’s Bord Snip proposing cuts in social welfare, that throughout the late 1980s and early 1990s, social welfare increased every year. And public sector workers received pay increases.
History has much to teach us.

http://notesonthefront.typepad.com/politicaleconomy/2009/06/history-is-such-a-malleable-thing-it-can-be-twisted-this-way-and-that-to-support-or-oppose-any-contemporary-position-take-a.html