Is austerity working?

NO, says Dr Seán Healy

AUSTERITY is not working. Since 2008, successive governments have cut spending, raised taxes, increased unemployment, lowered wages, decimated services, and let infrastructure deteriorate on the understanding that austerity would lead to recovery.

Austerity, however, doesn’t work in practice, doesn’t work in theory, and isn’t ethically fair.

In practice, austerity has produced structural unemployment, rising poverty levels, a sustained child poverty problem, ongoing adult literacy challenges, high emigration, lengthening social housing waiting lists, and declining physical and social infrastructure.

After five years of austerity and hitting all its goals on borrowing requirements, Ireland finds itself in recession. We were assured economic growth would follow the austerity approach set by the troika.

We now find that these assurances were not soundly based. Instead, after a period of very low growth, the economy has again got smaller in each of the past three quarters.

Further proof that austerity doesn’t work is supported by a little-publicised IMF study produced in June. The working paper, entitled The Distributional Effects of Fiscal Consolidation, shows that fiscal consolidation in many countries in recent decades has had significant negative effects by raising inequality, decreasing wage income shares, and increasing long-term unemployment. Yet, despite this evidence, Ireland is persisting with this failed formula.

The austerity approach adopted by the EU and promoted by the troika has not been based on any credible economic theory or sound research. The academic basis for this approach has been discredited.

The key academic study used to justify austerity in recent years in countries such as Ireland has been exposed as profoundly flawed.

The authors of the study made mistakes by omitting several countries that should have been included, by using an incorrect mathematical formula in its spreadsheet and by providing unusual weights to various countries. The end result is that, when corrected, the data shows the opposite of what was originally claimed.

This is more than a trifle ironic, as this flawed study has been cited to support the case for austerity by a wide range of policymakers, ranging from European Commission vice-president Olli Rehn to Timothy Geithner, US President Barack Obama’s treasury secretary during his first term in office.

Even worse is the fact that nothing has been done to ameliorate the damage already caused.

Austerity has also been exposed as morally unethical because poor and middle-income people have borne an unfair share of its consequences.

Its impact on Ireland is identical to what the expected outcome should be according to the IMF working paper already cited; to repeat: Austerity increases inequality, lowers wages, and increases long-term unemployment.

The IMF study shows the Government’s approach of taking more from expenditure cuts than from tax increases has a larger negative impact on income inequality in the medium term. It also shows expenditure cuts impact most on those on low and middle incomes. So why does the Government persist with this approach? Who is gaining?

In Ireland, austerity has protected the rich at the expense of the rest. In practice, it has produced the single biggest transfer of resources from low and middle-income people to the rich and powerful in history. The main beneficiaries of this transfer have been parts of the corporate sector (mostly multinationals) and wealthy individuals.

Social Justice Ireland has argued that a new approach is needed. In our policy briefing Budget Choices 2014 we show how the Government can reduce the deficit without imposing anymore expenditure cuts in the budget. A new approach is needed. As part of such a new approach, no corporation should pay less than 6% of its profits in tax.

Social Justice Ireland’s proposals would provide opportunities for economic development and growth while promoting social inclusion. Key proposals include:

* No more cuts in expenditure (except where they flow from reforms and do not damage the social infrastructure);

* A reduction in borrowing of €3.1bn in 2014 as agreed with the troika;

* A minimum effective corporation tax rate of 6% (ie, no corporation would pay less than 6% of their profits in corporation tax);

* A financial transactions tax of 0.01%;

* Standard-rating of the PAYE pension tax-break

* A universal state pension;

* An increase of €5 a week in the PAYE tax credit and in the basic social welfare rates;

* A capital programme focused on developing physical and social infrastructure;

* Elimination of the fuel dyeing process for agricultural and industrial diesel;

* 22 further initiatives covering a wide range of policy areas.

This approach would see Ireland’s borrowing cut as required, provide substantial targeted investment and introduce a maximum effective income tax rate. It would protect public services and increase the incomes of the working poor and those on social welfare. It would be fair and be seen to be fair. It can be done.

Dr Seán Healy SMA is director of Social Justice Ireland, an independent thinktank and justice advocacy organisation.

* Further details on these and on all Social Justice Ireland’s other budget proposals are available at www.socialjustice.ie

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