Dismal Dismal Science

Max McGuinness on some uninspired economics.

As the economy continues to disappear down the tubes, the government announced this week that they intend to do the one thing guaranteed to make things worse -- cut back spending and increase taxes. This, rather than the fact that it amounts to nothing more than a publicity stunt, is the real problem with Brian Lenihan's "mini-budget", which is consistent with a decade of economic illiteracy from Fianna Fáil.

For a responsible finance minister's job is to stimulate the economy during a downturn and restrain it during an upswing. In Ireland, we do the exactly opposite. When growth rates reached up to 8 or 9 percent in the late Nineties and early Noughties, Charlie McCreevy persisted in pouring more diesel on the fire, stoking up the housing bubble and inflation with massive tax cuts and give-away spending increases. Brian Cowen did the same ahead of last year's election, increasing public spending by 13 percent when the economy was roaring ahead.

Now that the economy is poised to contract in a genuine recession, according to the ESRI if not the government, Cowen and Lenihan have decided to exacerbate this by putting on the brakes. Have we learnt nothing from the Great Depression when adherence to the dogma of deflation sent Europe spiralling into the grip of Fascism and war? 

Our national debt is now so low as a proportion of National Income that we can afford to borrow substantial sums to stimulate economic activity and invest in our overcrowded and under-funded schools and hospitals. The Minister for Finance has already announced that we will breach the Stability and Growth Pact (which has been meaningless since at least 2002) by running a deficit of around 3.5 percent of GDP. Why not go further and run an exceptional deficit of 5 or 6 percent of GDP this year which would cushion the downturn and provide for much needed infrastructural investment? The effect would be to push up our national debt to a mere 28 or 29 percent of GDP -- a level which continental countries can only dream of. When the inevitable upswing arrives, it would be time to restrain spending and run a surplus, counteracting the deficit today.

Cowen and Lenihan, like Bertie and McCreevy before them, fail to realise they are in charge of a country, not a household. They need to stop thinking like penny-pinching housewives. Now is the time to borrow to fund the prosperity of tomorrow.