niamh hardiman [email protected] ucd school of politics and international relations ucd geary...
TRANSCRIPT
Niamh [email protected]
UCD School of Politics and International Relations
UCD Geary Institute
The politics of austerity budgets
Irish Economic Policy
Institute of Bankers, Dublin
1 February 2013
Outline
• ‘Policy requires politics’
• Dominant view
• Bringing politics back into explaining:– Initial policy choice– Composition of austerity– Distributive effects– Outcomes
Ireland and Spain
Collaboration with Sebastian Dellepiane
(Strathclyde)
Austerity budgets in EMU: the context
0 20 40 60 80 100 120 140 160
-35
-30
-25
-20
-15
-10
-5
0
5
Debt % GDP
Defi
cit
% G
DP
Change in debt and deficit, % GDP, 2007-2010. Eurostat
Conventional wisdom
• Object of interest:– 3% deficit target– GDP reference point
• How to do it:– Spending cuts
• Simultaneous
• Weak banks
• No growth
• The wrong option?
Yet ‘this time IS different’
7
The essential guide to fiscal consolidation…
…and the mystery of the missing ingredient
New questions
1. When and why undertake austerity?
2. What mix of spending cuts and revenue increases – and why?
3. What political and distributional effects of austerity?
4. What accounts for success or failure in outcomes?
So:
• What happened?
• How to explain budget policy choices?– Government partisanship/ party politics– Ideas– Interests/ veto players– Contextual constraints
1. Choice of fiscal response to crisis
The impact of fiscal packages between 2008 and 2010 on fiscal balances as a proportion of 2008 GDP
Typology of fiscal policy choice – why?
Type Focus Composition
Fiscal
response
Orthodox Contractionary Bias toward
spending cuts
12
Typology of fiscal policy choice – why?
Type Focus Composition
Fiscal
response
Orthodox Contractionary Bias toward
spending cuts
Heterodox Expansionary Active use of
revenue
13
Explaining initial policy divergence, 2008/9
14
Spa
in
Ir
el
an
d
Explaining Spain’s policy convergence, 2010
15
Spa
in Ir
el
an
d
Spain vs Ireland
Spain Ireland
Policy response
Initial fiscal conditions
Economic structure and interest coalitions
Partisanship
Dominant ideas
16
Spain vs Ireland
Spain Ireland
Policy response Early stimulus Early spending cuts and tax increases
Initial fiscal conditions
Economic structure and interest coalitions
Partisanship
Dominant ideas
17
Spain vs Ireland
Spain Ireland
Policy response Early stimulus Early spending cuts and tax increases
Initial fiscal conditions
Positive Positive
Economic structure and interest coalitions
Partisanship
Dominant ideas
18
Spain vs Ireland
Spain Ireland
Policy response Early stimulus Early spending cuts and tax increases
Initial fiscal conditions
Positive Positive
Economic structure and interest coalitions
Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas
Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks
Partisanship
Dominant ideas
19
Spain vs Ireland
Spain Ireland
Policy response Early stimulus Early spending cuts and tax increases
Initial fiscal conditions
Positive Positive
Economic structure and interest coalitions
Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas
Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks
Partisanship Social Democracy Right/ populist
Dominant ideas
20
Spain vs Ireland
Spain Ireland
Policy response Early stimulus Early spending cuts and tax increases
Initial fiscal conditions
Positive Positive
Economic structure and interest coalitions
Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas
Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks
Partisanship Social Democracy Right/ populist
Dominant ideas State-led supply side investment
Market-conforming competitiveness
21
Then: the failure of EU responses
22
http://www.spiegel.de/fotostrecke/fotostrecke-71636-2.html
Political choices, May 2010
• European and international context changed– Greece– Banks, sovereign debt
• Ireland: more of the same– And a loan programme
• Spain: Zapatero’s turn toward ‘orthodoxy’– ‘Markets’– PSOE: ‘We have lost the 2011 election on this day’
2. Contrasting consolidation strategies
Composition
Ireland 67% expenditure
33% revenue
Spain 40% spending
60% revenue
24
Ireland’s bias toward spending cuts
• Spending cuts: tax increases = 2:1
• €€ or people?
DPER database
DPER database
Revenue increases too
Spain – heavier reliance on taxes
2008 2009 2010
Taxes -7.2% -16.7% +8.1%
2010-11 2012
Taxes 1.7% GDP 2.2%
Spending -1.8% -1.7%
Why?
3. Distributive effects
• Ireland and Spain both:– Cut public sector pay and benefits– Increase taxes
• But – Contrasting government support bases – Different distributive effects
• Why?– ‘Politics matters’
• Partisanship• Vested interests• Credibility constraints
Ireland
• Off-limits:– Corporation tax– Income tax, SI– Public sector pay, welfare
• Adjustment through:– Reduced staff– Services – Quality
DPER database
Perspectives
Callan et al, ESRI QEC, 2012, p.49
Perspectives
Callan et al, ESRI QEC, 2012, p.49
Spain
PSOE, to Nov 2011
– Tax stimulus– Mixed adjustment, big
tax element– ‘Protect the most
vulnerable’ by protecting public sector
PP, Nov 2011+
– Mostly spending cuts• Health, education
– Business-friendly– Labour market issues– Regions
4. Does it work?
• Weaker macroeconomic conditions – Ex ante success, ex post failure
• Legitimation issues– Credibility – Public opinion
Which policy mix? What does it depend on?
Deficit reduction targets can be missed if:
Scale of fiscal effort, 2009-2012
General government underlying primary balancesOECD Economic Outlook, Volume 2012, Issue 2, 17 December 2012
Greece Iceland Ireland Spain Portugal Euro area United Kingdom
Germany0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Macroeconomic performance: Ireland
European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy
Occasional Papers 127, January 2013, p.54.
Macroeconomic performance: Ireland
European Commission. 2013. Economic
Adjustment Programme for Ireland: Autumn 2012
Review, January 2013. European Economy
Occasional Papers 127, January 2013, p.30.
Macroeconomic performance: Spain
FT 28 June 2012
Macroeconomic outlook
European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy
Occasional Papers 127, January 2013, p.44.
Ireland
Macroeconomic outlook
European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy
Occasional Papers 127, January 2013, p.44.
Ireland
Spain
On Monday night, Olli Rehn, the EU's economic and monetary affairs commissioner, hinted that the austerity
programme may have to be relaxed…The Guardian, 29.1.2013
UnemploymentTotal, seasonally adjusted.
Eurostat.
Legitimacy: electoral consequences?
Eurobarometer
Eurobarometer
Eurobarometer
