This post is written by Michael Burke, former senior international economist with Citibank and currently an economic consultant.
The implementation of Croke Park 2 will have a very damaging impact on the economy and jobs, and as a result will struggle to have any beneficial impact on government finances at all.
That is the verdict based on the experience of austerity measures since 2008. Over that time and until the end of 2011 there were €14.6 billion in spending cuts and tax increases. On the same cash basis GDP fell by €23.6 billion.
This means that for every €1 in austerity measures the economy contracted by €1.6 as workers and businesses, pensioners and others responded to government cuts by making cuts in their own spending and investment. If the response to Croke Park 2 follows that pattern, the economy will contract by about €1.6 billion.
This will lower living standards and hurt jobs way beyond the public sector. Every public sector worker is a consumer of private sector goods and services. Private sector businesses will cut back on investment even further if demand for their products is declining.
As a result, government tax revenues will be hit. To the extent that a further fall in the economy hurts employment, government spending on unemployment benefits and other social welfare will rise.
The saving of €1 billion from cutting public sector pay will be an illusion. Because of that cut in pay tax revenues will be depressed, not just directly on the incomes of those workers but also from the indirect effects on the economy. Government outlays will also be forced higher on social welfare spending. The Department of Finance now estimates that this sensitivity of government finances to changes in the economy is 0.5. So, following a €1 billion cut in public sector pay there will be a fall in the economy of €1.6 billion which in turn will depress government finances by €800 million. Even on government estimates, the saving will be just €200 million.
It may not even be as high as that. According to the EU Commission, the government’s deficit has so far only fallen by about 1% of GDP despite all the austerity measures to date. In effect, €14.6 billion in austerity measures has yielded just one-tenth of that in improvement in government finances.
The economic damage of austerity measures has been enormous. The claim that this is a necessary evil in order to reduce the deficit is false. The deficit has barely moved despite the cuts. Croke Park 2 is unlikely to be any different.