Your last para should have been the first. Ireland has surrendered control of its monetary policy (as have Greece, Spain, Portugal) meaning that Fiscal measures are all it has left.

Ireland had the opposite problem pre-crash: booming economy and rising inflation, but no control of monetary policy, so had to dream up innovative (and futile) ways to dampen demand.

Luckily the UK isn’t in the Euro, which is why we haven’t had to cut anything yet. For that we should be thankful.

Who is writing the headlines? We are not “heading there too”. We may very well be cutting more than necessary (we are, I’d guess), even perhaps to the extent of being self-defeating with respect to the goal of cutting the deficit.

Cutting now reduces growth and tax revenue and increases unemployment and welfare spending. It does not close the deficit in a sustainable manner.

come on Duncan, to know whether that statement is correct you need to know how much cutting will reduce tax revenues and increase spending by, and to compare that to the direct savings from the cuts. Then you need to know dynamics, if the hit to growth and revenues is short term but the cuts reduce spending longer run, then you are closing “the deficit in a sustainable manner”. And you don’t know these things. I know this is just a blog, but I don’t see why you cannot qualify your assertions a little.

Are you actually asserting that the deficit will not be closed over the medium term, because the cuts will just reduce tax revenues and increase welfare expenditure? Fine, perhaps you’re right, but at least acknowledge that forecast differs from consensus (sometimes that’s right).

Or are you making a weaker claim that the deficit will be closed, but mainly because the economy will recover by its own accord and the cuts themselves will not make a contribution to closing the deficit?*

* this being a forecast whose success it would be impossible to evaluate without running some model that permits counter-factual analysis that nobody will believe.

Luis,

Not my original headline

As for:

“Are you actually asserting that the deficit will not be closed over the medium term, because the cuts will just reduce tax revenues and increase welfare expenditure? Fine, perhaps you’re right, but at least acknowledge that forecast differs from consensus (sometimes that’s right).”

Yes I am.

Cuts and tax rises have a role to play in deficit reduction, but aren’t enough.

I’ve written about the dynamics of this several times over the past 18 months. (Sometimes in a more technical manner!)

Yes I am.

OK, well I admire your confidence. I don’t suppose we’ll remember to check back in 5 year’s time to see if you’re right.

Preventing us joining the Euro was Brown’s* single (only) great achievement.

*mine actually (© Ed Balls)

Luis you really should have your own blog so we can see your always lucid arguments in one place.

Luis,

My main hostage to fortune can be found here:

http://duncanseconomicblog.wordpress.com/2010/07/10/time-for-some-forecasting/

Britain will never end up in the same place as Ireland as the UK still has its own currency.

Duncan,

You have missed the other minor question: where would Ireland be now without having made the cuts? I’d suggest in a worse situation – the Irish government would effectively have ended up like the Greeks, having to continually borrow to deal with the cost of borrowing in the short term.

Also, there is the minor point that our current planned cuts apparently are either not really cuts or reduce government spending to 2006 levels at the most. Ireland did a lot more than that, as your examples show. So not sure about comparability there.

here is an easy to overlook contrast between the UK and Ireland. Our net direct cost of bailing out the banks is somewhere around zero (maybe even a small negative – i.e. profit), Ireland is spending c. 25% of GDP on Anglo Irish.

Sorry Duncan, but you’re not telling the whole story. Not even half of it, in fact.

Let’s first set out the stall. The Euro enabled Ireland to have massive pre-crisis growth based on cheap credit. It also means they can’t devalue the currency (external devaluation) to get themselves out of trouble, so when their massive economic bubble collapsed, they were forced into an internal devaluation, expressed as lower spending and wages, to regain competativeness.

This prudence was actually working out fine to start with – from initial crisis levels of Irish CDS at about 400, default risk expressed by this measure dropped to 125bp (compared with the Uk at 70bp). Effectively the market was saying that it expected Ireland too deal with its structural fiscal problems and begin growing again after a short, shapr recession.

We then had the news about AIB and AngloIrish banks. Collectively they have balance sheet liabilities larger than Irish GDP. They are loaded up with huge amounts of local boomtime debt gone rotten. No-one quite knows how bad the problems there are, but effectively both are near or in-solvent. CDS has spiked to all time highs of 465bp for Ireland, as the Irish state cannot easily afford to bail out entities effecitvely larger than itself. This makes either the Irish banking system bankrupt, or the state itself.

The Irish government now finds itself in a situation where the banks can’t lend, but it can’t easily borrow either. it also has to make the choice of borrowing to bail out the banks at the cost of spending on othr items, or ignoring the banks, letting them fail and risking the fallout that could entail. Not an easy choice either way….but saying that all Ireland’s problems are caused by cutting spending is simply not true. They have absolutely no choice, and until the truth about AIB and Anglo came out, their prudence was being rewarded by the markets by lower borrowing costs.

The recession there is inevitable. The choice now is to revalue the economy, have a short sharp shock and regain competativeness and growth, or to go with what Duncan is implying – borrow and spend more, which might allevaite some of the pain now but push that same pain into the future in the form of higher debt and lower long term growth. THere is no way to circumvent dealing with the debt, government or bad corporate/private debt as it may be. The typical left wing/Krugmanite model is to re-inflate bubbles. I would suggest that this has rarely worked in real life, apart from very rare specific cases (which tend to involve superpowers). Krugman himself argued in a NYT article in 2002 that the solution to the Nasdaq crash recession was best solved by inflating a housing bubble, allowing homeowners to orrow against their property to fuel consumption.

Now, how did that all work out for us?

Back on topic, Ireland can’t print money and can’t easily raise new debt now, so has no option but to cut spending. The UK can borrow easily still – but that doesn’t mean a debt fuelled crisis is best solved by more debt. I’d bet that the Irish economy, forced into more pain than that of the UK, will solve more of it’s underlying issues and emerge more competative.

Or, more simply, when will you lefties realise that debt has to be repaid and consistently spending more than we earn is a route to more serious woes then cutting our already inflated public sector and benefits system would entail…

((and before you start whining about evil regressive Tories, public spending has increased 50% ish in the last 10 years, is not actually set to decrease in the coalitions plans and welfare spending is currently about 200bn pa compared to income taxes at about 150bn pa. How is this sustainable, and what has all this extra cash achieved??))

The Irish case is a bad example to argue against austerity because there really was no alternative. However, the folks who cite it can at least point out it does disprove the nonsense that they would be rewarded by the market for pain.

The state are on on the hook for the full liabilities of their banking sector because they stupidly formally guaranteed the liabilities which are 400% of their GDP. The private sector are no longer financing the banking system and they owe 95 billion euros to the ECB. NAMA the state bad bank are bleeding losses currently 30 billion euros and could reach a third of GDP. Unless they renege on the guarantees or somehow the EU step in with fiscal financing they are heading for national bankruptcy.

Prices and wages are too high and will take years of deflation to adjust. They are tied to a currency which is 25-30% too high for the fundamentals of their economy. If they had their own currency it would act as a shock absorber and the adjustment would come through the exchange rate. The euro is to blame for the Irish mess.

Tyler

debt has to be repaid

I know some very right wing economist who would want to qualify that statement. Debt can be rolled over, and grown in absolute terms in line with GDP + there’s seignorage equiv to rate of real GDP growth so it’s not all tax financed.

Here is a very easy to read short primer on govt. debt maths:

http://www.nytimes.com/2010/04/09/business/09views.html?_r=1&dbk

it cuts both ways – worth reading to remind those relaxed about deficits how nasty public finances can turn

@12 Richard W

I would agree with all you have said bar the first point – the Irish were being rewarded by the market for the pain, until the true extent of their own banking crisis became apparent and CDS/Irish yields blew out again as it became apparent that without the ECB backstopping the bonds Ireland is bankrupt.

Wish I could post the bloomberg chart here – shows the situation beautifully.

“The Irish case is a bad example to argue against austerity because there really was no alternative. However, the folks who cite it can at least point out it does disprove the nonsense that they would be rewarded by the market for pain.”

I agree.

I’m not saying the UK is just like Ireland.

I’d also point out that pre crisis, Osborne was a big fan of the Irish model.

Osborne, 2006: “Ireland stands as a shining example of the art of the possible in economic policy-making.” http://to.ly/75fj

Also, Iain Martin at the WSJ today.

http://blogs.wsj.com/iainmartin/2010/09/23/irelands-trip-helps-labour/?mod=rss_WSJBlog&utm_source=twitterfeed&utm_medium=twitter

Tyler, their CDS first blew out after the state guarantee in 2008. They hit 400 at the beginning of 2009. Although they fell from there and were around 150 until blowing out again from May this year. Everyone else also fell in that period. They have taken a huge spike over the last few weeks but the problems have been obvious to anyone who looked at them for two years. The real problem is one of uncertainty as nobody really knows what the ECB and EU will do with Ireland and Greece.

thanks for link Duncan – although I shuddered at thought of Balls making same point 100s of times

We’d be heading there too, if we’d joined the euro. Not that you’ll find too many euro-federalists admitting that mind. Ireland gave up control of interest rates and the ability to devalue. The reason they are so deep in it is because they had one of the biggest booms – a direct result of inappropriate interest rates. We have the pound – we’re not going the way of Ireland.

In Duncan Weldon’s OP, unemployment is mentioned four times (three times in quotations).

In the eloquent posts that follow, unemployment is unmentioned.

If government is rebooting an economy (assuming that is possible), does unemployment matter?