Wednesday, October 20, 2010

How would you like it done Sir? Harsh or Severe?

The UK government announced its austerity package today; it’s harsh. But how does it size-up to Irelands plans-in-the-making? Opposition members in the HOC were quick to point to Ireland and our governments belief that we could cut our way out of the economic problem; Brian Lenihan’s we’ve turned a corner speech last year was the focal point of their ridicule.

Such ridicule, if heeded, may be good for Ireland; it is becoming clear now that Ireland's "misguided austerity" could actually be a key thing that helps Ireland grow! albeit indirectly via less severe global austerity. In any event, I think it is interesting to place the newly announced UK austerity plan in an Irish perspective. In simple capita terms the UK is just shy of being 14 times bigger than Ireland. We can compute some basic figures off this fact to make some quick comparisons. I also think doing so will help put the fairly animated debates in the UK over their cuts into some perspective for us here.

I’ll just run some of today’s headline figures –

UK Public sector four-year austerity package in Irish terms: €7bn

UK Public sector job cuts in Irish terms: 35,000 jobs

UK Welfare cuts in Irish terms: €575m

UK Extra social care in schools in Irish terms: €165m

UK Axing quangos in business, innovation and skills sector in Irish terms: ~ 2 quangos; €30m


Kevin Denny said...

Thats useful Peter, so per capita, much worse cuts in Ireland? As far as I can see the public sector is a bigger share of the economy in the UK so in terms of scaling back services its also going to be tougher in Ireland.

Peter Carney said...

Kevin, yes, on headline figures it would seem that what we're planning to do in Ireland is about double what they're doing in the UK.

Aside from the scale matter, another notable difference is in the approach. In Ireland, via the Croke Pake Agreement, there will not be any public sector jobs. If Osborne were our minister he would probably be aiming to take at least 35,000 jobs out of our public sector..

Although caveats apply to such quick and basic analysis it should help put the British debate in some perspective for us over the next week or so.

Peter Carney said...

err. should read, "..., there will not be any public sector job CUTS."

Kevin Denny said...

For some more perspective: the US bail out of financial institutions, the Troubled Asset Relief Program (TARP) is estimated according to Wikepedia to cost $30b. I have a feeling that is an underestimate but probably no more than $70bn. But the US population is 70 times bigger so scale up NAMA and ...

Martin Ryan said...


That's an interesting comparison and quite timely. I have some general comments to offer; and then two more direct points, in response to your post.

In relation to the mention of the Irish case in the HOC, I am always wary of how people in other countries may interpret Ireland's program of fiscal austerity. I think it should be emphasised to foreign observers that Ireland is not pursuing austerity in order to bring about growth. Rather, we have been making fiscal adjustments out of necesiity; with no expectation that the real economy would concommitantly improve, or even stabilise. That has been my understanding at least.

To illustrate in more depth, in 2009 the Government realised it would need to borrow approx. €12.5bn just to cover day-to-day spending. That amount was roughly three times the size of loans that we were paying off at the time. One lesson we learned from the 1980's was that we should not borrow to fund our interest payments (whatever about borrowing to fund current spending: not to be recommended either). Also back in 2009, there were real fears that the enormous volume of impending sovereign debt issuance (on a global basis) could lead to higher long-term bond rates (as mentioned in the Bord Snip Nua report). And of course, we have since seen that. Naturally enough, the Government proceeded to stabilise the public finances through a process of fiscal adjustment, but it was no great surprise (given the state of the real economy) that the seasonally adjusted standarised unemployment rate has increased from 9.5% at the start of 2009 to its current level of 13.7%.

(Cont. in next comment...)

Martin Ryan said...

(Cont. from previous comment...)

Getting back to the main thrust of your post, some direct comments are as follows:

(i) Comparing the scale of austerity in Ireland and the UK could be done using more information than demographics alone. Why not compare the difference in the borrowing requirements for day-to-day spending? In the Irish case, ESRI budget projections for 2010 and 2011 indicate a shortfall (exchequer balance) of €18.1bn and €20.1bn, respectively.

In the UK case, the Treasury
increased its estimate of the amount it would need to borrow to bridge the gap between its
spending and tax revenues during 2009, to an amount approximating £90bn.

More recently (June 2010), the OBR gives projections for 2010 and 2011 which indicate a shortfall of £106.4bn and £114bn, respectively.

From all this we know, that for 2010, the Irish shortfall is anticipated to be €18.1bn, while the UK shortfall is anticipated to be £106.4bn, or ~€120bn. So the UK shortfall is roughly six times greater.

However, perhaps the difference in the actual (or expected, in the Irish case) extent of cuts is more salient than the difference in the borrowing requirements for day-to-day spending. Yesterday, the U.K. announced £81bn (€91bn) in cuts; while there are suggestions that the December Budget in Ireland will outline €7bn in cuts.

From this there is an indication that this year's austerity drive in the UK will be 13 times larger than the fiscal adjustment in Ireland. By coincidence, this is similar to the demographic comparison - which shows that the UK has a population roughly 14 times larger.

(ii) On a more practical point, comparing the scale of austerity in Ireland and the UK could be done with more consideration of distributional impact. What we know in the UK case (according to the IFS) is that "with the exception of the richest 2% of the population, the less well off would be proportionately the hardest hit."

It would be interesting to see a similar analysis in Ireland about the distributional impact of the Budget after it is announced on December 7th.

Martin Ryan said...

Of course, the other point I failed to mention is that it would be better to compare borrowing requirements for day-to-day spending in each country as a % of GDP. And also of course, to compare the extent of cuts in each country as a % of GDP. If I have time, I'll look into it. I can see now why you just did some quick per capita calculations Pete!

Peter Carney said...

Martin, really useful sources there.

Just a few point:

The austerity equivalence you suggest doesn't take into account that what the UK announced was for 4 years while the Irish figure is for one year. Noting this will emphasis just how much larger our 'correction' in public expenditure is.

In regard to other comparative measures; i've calculated the proposed reductions as a ratio of current expenditure in both countries for 2011. Assuming some front-loading with the UK four-year austerity package, the rough ratio (2.2) closely reflects my original claim that Ireland's austerity is double that of the UK.

We're in severe waters.

Of further note, its suggested that N.Ireland alone will a disproportionate ~ 30,000 jobs cut over the next four years, not surprising given the size of N.Ireland's public sector. Down south, as our neighbours would say, we're under the impression that we can keep all our current public servants. This will ultimately mean greater reductions else -- it remains to be seen just where they will be.