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Budget should focus on employment, services and infrastructure
The primary focus of Budget 2021 and 2022 should be on increasing employment and delivering infrastructure and services, NOT on reducing the deficit; it is crucially important that we do not repeat the mistakes made following the last crash.
The new Government should outline a three-year stabilisation programme targeted at supporting incomes, restoring domestic demand, and sustaining strategic firms and institutions. This will require a change to Ireland’s fiscal stance in the years immediately ahead.
In addition, the new Government must also commence the major economic and social reforms that we need to meet the United Nations’ Sustainable Development Goals and address the deep structural challenges of poverty and inequality we confront.
Social Justice Ireland’s proposed fiscal stance:
An unemployment target should determine fiscal policy from 2020-2022. For the years 2020-2022, the fiscal stance adopted by Ireland should be determined by an unemployment target, rather than deficit target, in recognition of the role domestic demand plays in sustaining domestic employment.
Plan now for additional long-term tax measures. The State should begin to plan now for the additional tax measures necessary, over the long-term to finance the Government expenditure required to finance universal services and income supports to our citizens.
Deal sensibly with post-COVID-19 costs
As the increase in unemployment in Ireland is entirely caused by a collapse in demand for labour, the temporary adoption of demand management policy represents the most effective means to restore economic activity.
We acknowledge the adoption of an unemployment rate target for 2020-2022 would represent a shift in the fiscal policy framework, and a temporary departure from the EU fiscal rules. However, the European Commission has activated the ‘general escape clause’ of the Stability and Growth Pact and when combined with the extremely accommodative policies of the European Central Bank this provides Ireland with the substantive policy space to implement a fiscal policy focused on sustaining demand and incomes, rather than targeting an arbitrary debt or deficit number. We must take advantage of this opportunity.
We must use the next three years to not only restore demand, but to address social and infrastructure deficits, to strengthen the economy and to protect the environment. This does not mean that we borrow over the long-term to avoid broadening the tax base and increasing the total tax-take. We need both of these, but not simply to reduce the deficit or the debt. Rather, we should see them as welcome opportunities to refocus on preparing Ireland for a post-carbon world.
Extraordinary Measures Required
The measures necessary to slow the spread of COVID-19 have induced an extraordinary contraction in economic activity globally. The EU-wide collapse in consumer spending and investment by households and companies has contributed to an unprecedented shock to economic activity, with a concomitant disruption to the circular flow of income between households and firms. As household incomes contract, expenditure on goods and services contract, threatening families with poverty and firms with insolvency.
Given the scale of disruption, it must be recognised that extraordinary Government expenditure will be required to sustain demand and to support incomes through the immediate crisis and emergence from the public health restrictions, through the recovery period and through the return to a new, sustainable, long-term trajectory for the economy.
In the years ahead as we move through the public health restrictions and into a recovery period, the fiscal stance adopted by Ireland must have a different focus. The objective must be on supporting demand by supporting the incomes of citizen and through Government capital expenditure.
Support economic recovery, don’t prevent it
In Ireland, over the past decade and more, we have become accustomed to being guided by an overall budget target that has adjusted to changing realities over time. After the crash of 2008 the focus was on reducing the borrowing. Then it moved on to focusing on balancing our income and expenditure. More recently, as we were more or less paying our way, the focus had been shifting towards highlighting the need to reduce the national debt. The post-Covid-19 world changes all that.
A fiscal stance with the simple objective of reducing the debt and deficit would be a serious mistake, and would, over time, undermine the very objective it seeks to achieve by permanently destroying the economic capacity of the country. It is vital that the fiscal stance adopted by Ireland in response to the Covid-19 crisis supports an economic recovery, rather than preventing one and causing permanent damage to our long-term economic capacity and more importantly, to the well-being of our citizens.