Could Austerity be Over by October?

Five years of perma-crisis has sapped the optimism of many an economist, in Ireland and beyond. Some of these dismal scientists have prospered in one sense however, making a cottage industry out of doom and gloom. Some of the more thoughtful have offered some humility, realizing that the pre-crisis conventional wisdom was, at best, incomplete and, at worst, false.

For normal people, the age of austerity feels like it’s lasting an eternity. With unemployment still high and incomes stagnant, making ends meet is a constant struggle. Emigration is the path of choice for too many of our young people: enough people to fill Croke Park are leaving every year. The huge household and private sector debt burden means a large cohort of people can’t participate fully in our economy and in society. Unfortunately, none of this is going to change dramatically in the near term.

There is light at the end of the tunnel – and there is reason to believe that it isn’t the headlamp of an oncoming train. The recession is over. The economy is growing, however slowly. Employment is rising, however gradually. Ireland is back in the bond market, however tentatively. It is now almost within the grasp of government to make austerity history.

After seven straight hairshirt budgets since 2008, many have come to dread that day in December when the Minister for Finance piles on the pain. Everyone has taken a hit. Tax hikes and spending cuts have taken their toll. Austerity fatigue is pervasive. The debate on how quickly the deficit should be reduced and how the burden is shared is important, but is becoming increasingly academic… now that we are where we are. One may not agree with the premise of austerity, but it is an unfortunate fact of life given Ireland’s dependence on the ‘kindness of strangers’.

Doomsday is being brought forward to October this year. We can expect more of the same: public government wrangling and a grubby compromise that leaves nobody satisfied. The government has given commitments to the troika – who are paying many of our bills at the moment – to reduce the deficit by a further €3.1bn in 2014 and €2bn in 2015, or €5.1bn in total.

Two developments in early 2013 may have changed the arithmetic for the better, however. The Fiscal Advisory Council (FAC) has estimated that the combination of the promissory notes deal and the upwards revision in 2012 GDP has lessened the eventual austerity burden by €1.6bn, reducing the total required to get our deficit below 3% of GDP by 2015 from €5.1bn to €3.5bn. The full benefit of this €1.6bn relief should be passed on to citizens to bring a quicker end to austerity.

There may now be an argument for pulling the plaster off quickly: if the government increased deficit reduction measures marginally in October’s budget from what is already planned, by €400m from €3.1bn to €3.5bn, Ireland would have met its budget target a year ahead of schedule. Austerity would be over. Of course, some of the measures would not kick in fully until 2015 – e.g. some tax changes and other pre-announced measures – but all the key decisions would have been taken.

In theory, economic growth could do the rest of the heavy lifting to bring the deficit below 3% of GDP by end-2015. If growth falls short, further austerity should be avoided, in line with the IMF’s own thinking on the matter. The economy should then be allowed the time it needs to heal.

For the price of marginally more austerity in 2014, we would see much stronger growth in 2015 with austerity then off the table. This isn’t an argument for more austerity, but for less and for getting it over with as quickly as possible. Most importantly, Irish firms and families would have a degree of certainty and could start to make plans for the future. Finally, we could change the record, having endured austerity on constant loop for seven years.

Provided the economy grows as predicted – and this is a very big if – we could look forward to not having to take out the calculator on budget day. We could concentrate on everything else in our economy and society that needs fixing. We could begin working towards the longer-term aims of free GP care for all and universal childcare.

Technically, the recession may be over… but it won’t feel like its over until the age of austerity is at an end, hastening the return of strong job growth and rising living standards. The sooner the better!

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