Cowen talks of Painful Corrective Action for the Economy

Cowen was giving a speech last night where he conceded that corrective action on the economy is likely to be “painful”. Not a great time for the ESRI to recommend a rise in Social Welfare to E230 per week across the boards, yet interesting to see them call it a priority in a time when rising prices are hammering the most vulnerable.

Indeed it marks up the contrast in what Cowen has said he has to do:

“The practical reality is, however, that unless necessary corrective action is taken promptly and appropriately, more painful adjustments, with less scope for sensible prioritisation, inevitably follow,” said the Taoiseach.

“That means prioritising those areas of spending which contribute most to our capacity to weather the storm and to respond promptly and strongly to the emergence of more benign international conditions.

“Equally, in setting our priorities, we must prioritise those who are most vulnerable and most dependent on public spending programmes. That means that everything else has to be a lower priority.”

I applaud his desire to ensure that corrective action does as little as possible to hurt the worst off in society and I do observe the obvious need to remedy the public budget. Yet I look at past government’s records and cant help but think that we are in for a period of binge-purge. The spend it while you have it part is always popular, the tightening when you dont is rarely so popular.

Yet we are at a point of transition here, what does Cowen mean when he talks of investing in capacity? What model of economic growth is going to provide the foundation for the next 10 years? Many have been stressing knolwedge/science/tech based initiative as well as harnessing the entrepreneurial power of small business - local business - to plug into the current climate. All this costs money, money that needs to be spent to secure the future. Even the ESRI were not stressing about balancing the budget. Heading over the 3% limit for a year or two if in the long term we finally have some degree of future proofing would be well worth it. As would the fact that the foundation of a “knowledge economy” no longer learn in a rat-infested pre-fabs.

Michael Taft has touched on this topic earlier in the recent weeks and his analysis makes for a different read:

However, all is not bleak. On the current side - day-to-day spending - we are still in surplus. That means we still take in more money in tax than we spend through all the Government departments. The immediate reason for the rising debt arises out of the capital expenditure - which is one of the highest in the EU as a percentage of total wealth (it needs to be, we have one of the worst infrastructures in the industrialised world).

…

From this platform we can then discuss the damage of unleashing the property market, the narrowing of the tax base, the lack of an enterprise strategy to grow and develop the indigenous sector; a borrowing policy is a gateway policy to other areas. And it allows us, temporarily, to escape the ‘increase-tax, cut spending’ trap the Right would set for us.

What is essential to my mind is that this not become like 2002 and the 1980s before it. Cut into what is nearest, ride the political pain and hope to ramp up spending in two years time. The current crossroads is borne out of structural dependencies that we need to address and also requires investment through to downturn to get out of.