Tuesday, September 29, 2009

No Consensus

I was looking at Pat Kenny's "Frontline" Programme last night.

It was dealing with the forthcoming budget and the need to achieve dramatic cuts with respect to Government expenditure. As things stand the deficit will be about €20 bl. with revenue set to exceed €60 bl. and tax revenue not much more than €40 bl. So this gross excess of expenditure over income is clearly not sustainable and therefore needs to be controlled.

The audience was largely made up of public and private sector workers arranged in two separate groups. However it quickly became apparent that they were simply unable to address the overall financial issue. Everyone seemed completely locked into their own particular perspectives made even more rigid by a perceived sense of injustice with respect to the present situation.

Therefore there was no appetite anywhere for either a reduction in Government expenditure or alternatively for further increased taxation (as a means of closing the gap).

Based on the evidence of such reactions there is little scope for the Government to introduce major spending cuts in the budget through reducing public sector pay (which is the major component). So what is most likely to happen is that most of the cuts in practice will fall on capital expenditure.

This of course makes very little sense from an economics perspective where potentially the most productive expenditure is cut whilst the least productive - due to sectional pressures - remains largely untouched.

In the circumstances there would seem to be no likelihood of the Government's meeting its target of reducing the budget deficit back to 3% by 2013 (as required by EU rules).

On the contrary we are likely to see once again - as in the 1980's - a steep rise in the National Debt. Though the cost of financing this debt may not seem unduly prohibitive at present (due to the low climate of interest rates) this is not likely to remain with rates set to rise in coming years. On top of this - though technically the Government may be allowed to treat it as an off balance sheet item - we will face further increases in debt due to the NAMA proposals.

Due to the excesses of the Celtic Tiger, Ireland has become a very uncompetitive economy. We fooled ourselves into believing that there was an inherent strength to what was unfolding when in actual fact it was largely due to strongly artificial factors. One of these has now collapsed i.e. the property bubble. However the other artificial factor is perhaps of even more significance relating to the use of Ireland by multinational companies for tax diversion purposes. We are in fact - along with the Bahamas - the top tax haven for US multinational investment. It is no accident therefore that we have such strong company representation in the IT and chemicals sector (as these sectors can especially benefit from tax diversion through locating here).

At a deeper level we are seeing the futility now of trying to detach economic decisions from the moral behaviour of those making them. The present crisis is indeed revealing huge social injustices in the way our economic business is carried out and this in turn makes any attempted efficient mechanism to deal with such problems impractical.

Ultimately we cannot deal with economic without genuinely addressing moral issues for they are inseparable. Much of the injustice that festers throughout the system has arisen through ignoring this simple fact.

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