Will austerity budgets push the Irish economy into double dip depression?

patslatt

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For estimates of how fiscal consolidation through government spending cuts and tax increases have depressed economies in the past,see The Economist Economics focus: Cutting edge | The Economist

Quote:

"...a fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years,and to an increase of 0.3% in the unemployment rate. Spending cuts do less damage than tax increases.This is mainly because they seem to be associated with bigger declines in interest rates."

Presumably,many of these consolidations were done to rein in overheated economies,which is easier than applying austerity in an economic recession/depression as in Ireland's case.

The comment above about declines in interest rates has particular relevance for Ireland:should the huge premium on Irish government bond interest rate be restored to near the former small premium over Germany's,that would undoubtedly assure a strong recovery,if not a revived Celtic Tiger.

How much of a negative impact will the government's austerity programme have? With the structural deficit in the range of 8 to 10% of GDP (ie.the deficit that would remain even if the economy recovered fully),elimination of this deficit over four years would reduce the economy by 4 to 5 percentage points if the 1%/0.5% ratio in the above quote applied,but this drop of 4 to 5% is in isolation from the remaining economic trends. For example,if a drop in interest rates and increases in exports and consumer spending boosted economic growth by 2.5% a year,that would allow for economic growth of about 10% over four years less the austerity impact of 4 to 5%,for a net growth of 5 to 6% or about 1 to 1.5% a year.

This slow growth would make it difficult to eliminate the non-structural part of the government deficit associated with a weak economy. Another negative is that the weak economy could easily be tipped into a double dip depression if the December budget relies heavily on taxes to cut the deficit,especially taxes on low income groups whose tendency to spend most or all of their incomes supports aggregate demand in the economy in the Keynesian economic model.
 


CarnivalOfAction

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For estimates of how fiscal consolidation through government spending cuts and tax increases have depressed economies in the past,see The Economist Economics focus: Cutting edge | The Economist

Quote:

"...a fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years,and to an increase of 0.3% in the unemployment rate. Spending cuts do less damage than tax increases.This is mainly because they seem to be associated with bigger declines in interest rates."

Presumably,many of these consolidations were done to rein in overheated economies,which is easier than applying austerity in an economic recession/depression as in Ireland's case.

The comment above about declines in interest rates has particular relevance for Ireland:should the huge premium on Irish government bond interest rate be restored to near the former small premium over Germany's,that would undoubtedly assure a strong recovery,if not a revived Celtic Tiger.

How much of a negative impact will the government's austerity programme have? With the structural deficit in the range of 8 to 10% of GDP (ie.the deficit that would remain even if the economy recovered fully),elimination of this deficit over four years would reduce the economy by 4 to 5 percentage points if the 1%/0.5% ratio in the above quote applied,but this drop of 4 to 5% is in isolation from the remaining economic trends. For example,if a drop in interest rates and increases in exports and consumer spending boosted economic growth by 2.5% a year,that would allow for economic growth of about 10% over four years less the austerity impact of 4 to 5%,for a net growth of 5 to 6% or about 1 to 1.5% a year.

This slow growth would make it difficult to eliminate the non-structural part of the government deficit associated with a weak economy. Another negative is that the weak economy could easily be tipped into a double dip depression if the December budget relies heavily on taxes to cut the deficit,especially taxes on low income groups whose tendency to spend most or all of their incomes supports aggregate demand in the economy in the Keynesian economic model.
Yep, but, thanks to the FF bailout to their cronies, we don't even get a W-shaped depression; more like a L-shape with a droopy member.
 

Expatriot

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Double dip?

When did we come up for air?
 

gijoe

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When did we come out of the first depression?:shock:
 

Bill D Gallows

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More to the point, when was the actual point the double dip recession started.

This month or last ?
 

revolution

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my understanding of a recession is 2 quarters of negative growth.
on the flip side of that we only had 1 quarter of growth in q1 2010,so did we really come out of recession?
just cause fianna fail said we are out of recession dosn't make it so..

i really hope it dosn't get worse because we are already on our knees,wouldn't take too much to push us well and truly over the edge.

if they get it right (sigh) in the budget maybe we have a chance next year,but there i go again being optimistic,then i remember who is in government.


maybe after a general election,a fresh start,clean slate and all that,we might finally have a fresh chance for optimism even though we know what lies ahead,one thing anyway we'd have to stop giving out about fianna fail and get behind the new lot.
just think-no more ff,no more green party,jaysus we'd be flying.
hopefully they deliver the budget and f**k off into the wilderness
 

patslatt

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A Labour/ Fine Gael coalition would be ineffective

my understanding of a recession is 2 quarters of negative growth.
on the flip side of that we only had 1 quarter of growth in q1 2010,so did we really come out of recession?
just cause fianna fail said we are out of recession dosn't make it so..

i really hope it dosn't get worse because we are already on our knees,wouldn't take too much to push us well and truly over the edge.

if they get it right (sigh) in the budget maybe we have a chance next year,but there i go again being optimistic,then i remember who is in government.


maybe after a general election,a fresh start,clean slate and all that,we might finally have a fresh chance for optimism even though we know what lies ahead,one thing anyway we'd have to stop giving out about fianna fail and get behind the new lot.
just think-no more ff,no more green party,jaysus we'd be flying.
hopefully they deliver the budget and f**k off into the wilderness
Labour could strongly increase its share of the vote as an angry public is likely to register a protest vote against the government. That would be problematic for the four year austerity programme because Labour would insist on achieving budgetary balance largely through tax increases instead of spending cuts as in the 1980s coalition, in order to appeal to its core public sector vote. That would lead to economic stagnation as in the 1980s.
 

Expatriot

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Labour could strongly increase its share of the vote as an angry public is likely to register a protest vote against the government. That would be problematic for the four year austerity programme because Labour would insist on achieving budgetary balance largely through tax increases instead of spending cuts as in the 1980s coalition, in order to appeal to its core public sector vote. That would lead to economic stagnation as in the 1980s.
I am not so sure that is true, I just think that the cuts might be in different places under Labour. Further increases in marginal tax rates will not bring in more money no matter who does it. I think reliefs and taxes on wealth are a more likely path. Either way we are into deflationary times, we need to pray that inflation and interest rates in the EU are our friend while we do this. Alot now simply depends on luck rather than anything else.

I think slashing of current spending is a given no matter who is in power. Capital spending will hardly exists at all.
 

patslatt

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I am not so sure that is true, I just think that the cuts might be in different places under Labour. Further increases in marginal tax rates will not bring in more money no matter who does it. I think reliefs and taxes on wealth are a more likely path. Either way we are into deflationary times, we need to pray that inflation and interest rates in the EU are our friend while we do this. Alot now simply depends on luck rather than anything else.

I think slashing of current spending is a given no matter who is in power. Capital spending will hardly exists at all.
Current spending will be cut sharply but only after years of delay while Labour in coalition try to squeeze more tax from the dwindling numbers of rich. The last gasp of taxation would be a wealth tax,which invites tax avoidance and evasion in useless investments in concealable wealth such as art and collectibles,gold,precious metals,diamonds etc. Coming on top of capital gains tax and marginal income tax of 50% plus,a wealth tax is punitive and very inefficient to collect. But it would thrill the envious.
 

libertarian-right

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The property addiction will come back to haunt the banks as people across the country will be able to afford to pay their mortgages due to allowances disappearing, increased taxes, cuts in pay, water/property taxes. The banks go under again and people will stratch their heads in 3 years time wondering why more bailout money is needed (I thought Lenihan said they were fixed.)
 

Expatriot

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The property addiction will come back to haunt the banks as people across the country will be able to afford to pay their mortgages due to allowances disappearing, increased taxes, cuts in pay, water/property taxes. The banks go under again and people will stratch their heads in 3 years time wondering why more bailout money is needed (I thought Lenihan said they were fixed.)
true, we have only dealt with dev loans, home and buy to lets are next to go.
if they scrap stamp duty and bring on annual property taxes god knows what that will do to property investment. alot of people are still infected with the desire to own a few houses even if they lose money for some famine mentality reason.
 

Expatriot

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Current spending will be cut sharply but only after years of delay while Labour in coalition try to squeeze more tax from the dwindling numbers of rich. The last gasp of taxation would be a wealth tax,which invites tax avoidance and evasion in useless investments in concealable wealth such as art and collectibles,gold,precious metals,diamonds etc. Coming on top of capital gains tax and marginal income tax of 50% plus,a wealth tax is punitive and very inefficient to collect. But it would thrill the envious.
it is beyond that now, they will be spending borrowed money that will not be lent. we do this the ecb way or not at all. FG/Lab would be wise to slash early and blame FF/Green while they are fresh in the memory. What is required to be done has never been done before in any country. We probably will default but we will have to die trying to remain in the EU etc. It is quite funny that FF is now blaming Labour for spending too much as it runs a 32% deficit. Well it would be funny if it were not so serious.
 

patslatt

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Interest burden on national debt bearable

it is beyond that now, they will be spending borrowed money that will not be lent. we do this the ecb way or not at all. FG/Lab would be wise to slash early and blame FF/Green while they are fresh in the memory. What is required to be done has never been done before in any country. We probably will default but we will have to die trying to remain in the EU etc. It is quite funny that FF is now blaming Labour for spending too much as it runs a 32% deficit. Well it would be funny if it were not so serious.
Japan has debt of 250% of GNP,most of which is owed internally,not to foreign investors,and the bond markets are unconcerned as shown in low interest rates.

If Irish govenment debt rises to 130% of GNP and the average interest on it is 5%,the interest burden is 5% x 130% = 6.5% of the national income-quite bearable surely?
 

hammer

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ABSOLUTELY.

Anyone that believes that taking €4 billion in 2011, €4 billion EXTRA in 2012, €4 billion EXTRA in 2013 and €4 billion EXTRA in 2014 out of the economy will somehow create GROWTH would need to drive straight to St Pats now.
 

patslatt

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But wasteful spending needs to be cut

ABSOLUTELY.

Anyone that believes that taking €4 billion in 2011, €4 billion EXTRA in 2012, €4 billion EXTRA in 2013 and €4 billion EXTRA in 2014 out of the economy will somehow create GROWTH would need to drive straight to St Pats now.
But wasteful spending needs to be cut on excessive salaries and gold plated pensions in the public sector, excessive numbers of bureaucrats in the HSE (better to abolish this dysfunctional body),the Department of Health and quangos. This could persuade bond markets that with improving management,the Irish government deserved to borrow at lower interest rates without having to cut €4 billion a year from spending,giving Ireland a shot at growing its way out of debt through increasing economic growth.
 

Cassandra Syndrome

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Japan has debt of 250% of GNP,most of which is owed internally,not to foreign investors,and the bond markets are unconcerned as shown in low interest rates.

If Irish govenment debt rises to 130% of GNP and the average interest on it is 5%,the interest burden is 5% x 130% = 6.5% of the national income-quite bearable surely?
Which means our GNP has to grow by an excess of 6.5% just to keep pace with interest alone and achieve real growth and recovery. Possible?

And what about the interest on all the private debt?

And the ECB rate can only go one way now and inflation is returning. Those yields and interest are going to go up soon.
 

Disabled student

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They can't keep borrowing and borrowing to repay the debts which was/is unworkable.

Inflation is bound to rise in the coming months which would put lots of pressure on the householders with mortgages.

Thus also tax increases on the way would put a huge damper on their tax returns and also consumption would go down as well.
 


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