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Public Spending Cuts Won’t Work
Read more about: Economy, Feature Gallery 
It is argued that we must cut public spending in order to reduce borrowing and the deficit. However, there is rarely any evidence produced to show if this would happen and, if it does, to what extent. Assumptions and conjectures have replaced verification and demonstration. This is unfortunate for much of the evidence shows that public spending cuts – especially current spending cuts – will not signficantly reduce the deficit over the medium-term.
Over at Progressive-Economy.ie, my colleague, Michael Burke, and I have analysed the effect of current spending cuts on the economy, borrowing and the deficit using ESRI data. It shows that cuts are economically damaging and fiscally irrelevant. By 2014, current spending cuts will reduce economic growth by 3 percent but only reduce the borrowing requirement by 0.8 percent (as a % of GDP). If anything, most of the risks are on the downside.
This shouldn’t be too surprising. When an economy is in a downward spiral, spending cuts further reduce economic activity, consumer spending, employment and investment. Factor all these in and the effect of public spending cuts on borrowing and the deficit is fractional. In some worst-case scenarios they could even increase the deficit burden.
Already, the IMF and the EU Commission have warned that the Government’s growth projections may be too optimistic. If this turns out to be the case, tax revenue will be lower and unemployment costs higher, thus worsening deficit projections. And all the while our capacity to generate wealth and employment is reduced.
One of the more frustrating aspects in the economic debate is how unsubstantiated assertions (such as ‘cuts equals savings’) are accepted as facts, needing no further elaboration. We then proceed on the basis of these ‘facts’, unable to measure or verify whether what we are doing (cutting spending) will produce the results intended (cutting the deficit). It is a poor way to frame a debate and a policy.
What we desperately need is a pragmatic debate that is evidence-based. That doesn’t mean there won’t be disagreements – over interpretation and policy resolutions. But at least the debate will be grounded in something other than assertions and sound-bites. That would be a good start.
“When an economy is in a downward spiral, spending cuts further reduce economic activity, consumer spending, employment and investment.”
Now we know what lies in the road ahead.
“What we desperately need is a pragmatic debate that is evidence-based.”
The only alternativee is spriralling inflation, a solution I would prefer because it would reduce the wealth of our new god’s- people with money, but it seems these people have covered all the angles.