Posts Tagged ‘Irish Crisis’

David McWiliams: the case for dramatic income tax cuts, offset by property taxes, mass debt deferral.

2009, March 8
The Sunday Business Post
Who will take the blame for the Great Depression of 2010?
Sunday, March 08, 2009
David McWilliams


Making one drastic policy mistake in fuelling the boom with cheap money and tax cuts was bad enough, but making a second one, cutting expenditure and raising taxes in the bust, would be inexcusable.

I am now about to do an unfashionable thing, I am going to make the case for dramatic income tax cuts, offset by property taxes and an expansion of moribund monetary policy through mass debt deferral.

We shouldn’t worry our heads about the implications of this idea, because, if we believe in the logic of monetary union and the irrevocable nature of the euro exchange rate, we should not be too concerned about how big the budget deficit is, or our ability to finance it – because it will be financed.

In addition, if we believe (as I do) in the Irish people, in the long-term economic implication of our demography, in our ability to attract investment based on our workforce and in our ability to create our own companies, these tax cuts will become self-financing.

Granted, these are big ifs. However, we are now following a nihilistic policy which will turn our recession into a depression and will yield us absolutely no economic benefit, either now or in the future…

… There is no mythical pent-up flood of money waiting to rush into Ireland once we’ve shown that we can hit some budget target or other. Show me a country that has benefited from this argument in the past 12 months. They don’t exist. In fact, the country that has seen its government paper being sucked up in trillions is the US, which is running the most expansionary budget deficit in decades.

The core of the problem is that the fundamentalists are using the economic logic of a free-floating currency to argue the budgetary policy in a country with no currency risk at all. No mistake could be more straightforward and no misunderstanding more wrong.

Sure, if we had our own currency we would have to keep our budget deficit in check, otherwise there would be a run on our currency. If we chose to defend a certain exchange rate, we’d need to raise interest rates dramatically. This monetary contraction would reinforce the economic crisis, tax revenue would fall and rates would have to go higher.

But none of this will happen in the euro. The euro allows us to analyse without concerning ourselves with the trivialities of the foreign exchange markets. The euro allows us to think clearly (which is one of its modest advantages for us).

We now need to be radical. We need to cut income taxes, raise property taxes, cut all tax incentives to property and use the money saved to give grants to companies that are employing people. We need to accelerate the new euro-wide bond initiative and use it to borrow heavily.

We should stop getting het up about the budget numbers, because whatever we do now, I can guarantee our forecasts will be wrong.

We also need to introduce debt deferral for hundreds of thousands of mortgage owners who are in negative equity, and use this debt relief as traditional monetary policy. Debt deferral gives hope and – most importantly -i t injects liquidity directly into people’s pockets. The recapitalisation needs to be revisited and a huge distressed bank bond of maybe €40 billion needs to be raised to cover the losses in the banking system.

Every infrastructural investment that would make us more productive in the future should be fast-tracked, not abandoned. We should also raise the money internally, as well as externally. Ireland has close to €300 billion in deposits. We have loads of money. Let’s just raise a national recovery bond and invite our pension funds to participate. We could make it much more tax efficient to invest in the recovery bond than foreign equity.

There are always ways and means. This is all so simple. If our debt/GDP ratio rises to 100 per cent, so what? Most of it will be our cash anyway, and what is the sanction under a monetary union? In the euro, this is only a figure and, as the economy recovers -which it will – this figure will plummet. Implicit in this approach is a cull of many of the senior civil servants who are now acting as inhibitors, rather than facilitators of, change.

Such radicalism is the only way that jobs will be saved and our country can be stabilised. If we follow the current policy of the fundamentalists, we will end up where fundamentalism of every sort always leads -up a blind ally where the world is seen, not as it is, but as they would like it to be.

The world has changed, maybe irrevocably, and we have to change with it. This crisis presents us with the greatest opportunity in decades to shake up this country. Let’s hope we seize it.