The Department of Finance tells us that the deficit is improving. DoF reports that the general government deficit fell from €22.4bn in 2009 to €12.4bn in 2012. But it is widely known that the impact of bailing out bank shareholders and bondholders has had a hugely distorting effect on public finances. Unfortunately, DoF does not show these effects in the same release as the overall government finances, and you need to go to a separate database to get these data.
Adding the two together produces a measure of the underlying deficit, excluding both costs and revenues from the bailout. It is regrettable DoF doesn’t do this itself.
The table below shows the deficit excluding the effects of the bank bailout.
|General Government Deficit||-22.4||-48.3||-21.3||-12.5|
|Bank bailout net expenditure/receipts||-3.8||-31.5||-5.7||+1.6|
|Underlying Deficit (excl. bank bailouts)||-18.6||-16.8||-15.6||-14.1|
Fig.1 – General Government Deficit Excluding Effects of Bailouts for Bank Shareholders and Bondholders, €bn. Source: Department of Finance
There is another factor to be taken into account. Hardly anyone suggests that the reduction in government investment is a welcome development. Even supporters of ‘austerity’ suggest it is nothing more than a temporary evil, or an unavoidable necessity. The government has pledged not to cut it further.
As a result, while it has a significant bearing on the economy, it is not strictly part of the ideological offensive supporting austerity at all. Therefore it is worth looking at the underlying deficit (excluding both bank bailouts and the effects of growth) after taking into account the government’s own reduction in investment (Gross Fixed Capital Formation). Without cutting investment sharply the deficit would not have been on much of an improving trend.
|a. Underlying Deficit (excl. Effect of bank bailouts & growth)||-18.6||-16.8||-15.6||-14.1|
|b. Govt. GFCF||6.1||5.5||4.0||3.3|
|c. Underlying deficit, (excluding investment & bank bailouts) (a-b)||-11.5||-11.3||-11.6||-10.8|
Fig. 2: Underlying Current Deficit (excluding bank bailouts), removing cuts in Government GFCF, €bn. Source: Author’s calculations, Department of Finance
On this measure the trend in the deficit is still downwards, but only marginally so. Once both the effect of the bank bailouts and the cuts in government capital investment are stripped out, the decline in the deficit is a paltry €700mn since 2009.
Unsurprisingly, while the economy has stagnated since the slump so has the underlying deficit. The chart below shows the trend in GNP and the underlying deficit since 2007. In effect, a slump has been followed by stagnation. The deficit is a mirror image of growth; a sharp rise has been followed by a flatlining deficit. The modest improvement in 2012 as whole reflected the moderate uptick in economic activity, which gave way to renewed recession at the end of 2012.
The underlying deficit is not really on an improving trend. It remains dependent on growth, which itself remains elusive.
Supporters of austerity in Ireland maintain that export-led growth will be the salvation of the economy. But recorded exports have already risen strongly without lifting the economy out of Depression and there is a question mark about the continued strength of exports in the period ahead.
There is also a larger question looming. Ireland is a capitalist economy and set to remain so for a considerable period. Yet its capitalists have stopped producing capital. The implications of that startling fact will be addressed in a further post.