Niamh Hardiman 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 Change in debt and deficit, % GDP, 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 ContractionaryBias toward spending cuts 12

Typology of fiscal policy choice – why? Type Focus Composition Fiscal response Orthodox ContractionaryBias toward spending cuts HeterodoxExpansionaryActive use of revenue 13

Explaining initial policy divergence, 2008/9 14 Spain Ireland

Explaining Spain’s policy convergence, Spain Ireland

Spain vs Ireland SpainIreland Policy response Initial fiscal conditions Economic structure and interest coalitions Partisanship Dominant ideas 16

Spain vs Ireland SpainIreland Policy responseEarly stimulusEarly spending cuts and tax increases Initial fiscal conditions Economic structure and interest coalitions Partisanship Dominant ideas 17

Spain vs Ireland SpainIreland Policy responseEarly stimulusEarly spending cuts and tax increases Initial fiscal conditions Positive Economic structure and interest coalitions Partisanship Dominant ideas 18

Spain vs Ireland SpainIreland Policy responseEarly stimulusEarly spending cuts and tax increases Initial fiscal conditions Positive Economic structure and interest coalitions Relatively closed Lower-skill Manufacture Construction collapsed Troubled cajas Very open, trade and FDI High-tech Traded goods and services Construction collapsed Ruined banks Partisanship Dominant ideas 19

Spain vs Ireland SpainIreland Policy responseEarly stimulusEarly spending cuts and tax increases Initial fiscal conditions Positive Economic structure and interest coalitions Relatively closed Lower-skill Manufacture Construction collapsed Troubled cajas Very open, trade and FDI High-tech Traded goods and services Construction collapsed Ruined banks PartisanshipSocial DemocracyRight/ populist Dominant ideas 20

Spain vs Ireland SpainIreland Policy responseEarly stimulusEarly spending cuts and tax increases Initial fiscal conditions Positive Economic structure and interest coalitions Relatively closed Lower-skill Manufacture Construction collapsed Troubled cajas Very open, trade and FDI High-tech Traded goods and services Construction collapsed Ruined banks PartisanshipSocial DemocracyRight/ populist Dominant ideasState-led supply side investment Market-conforming competitiveness 21

Then: the failure of EU responses 22

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 Ireland67% expenditure 33% revenue Spain40% spending 60% revenue 24

Ireland’s bias toward spending cuts Spending cuts: tax increases = 2:1 €€ or people? DPER database

Revenue increases too

Spain – heavier reliance on taxes Taxes-7.2%-16.7%+8.1% Taxes1.7% GDP2.2% 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 –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, General government underlying primary balances OECD Economic Outlook, Volume 2012, Issue 2, 17 December 2012

Macroeconomic performance: Ireland European Commission Economic Adjustment Programme for Ireland: Autumn 2012 Review, January European Economy Occasional Papers 127, January 2013, p.54.

Macroeconomic performance: Ireland European Commission Economic Adjustment Programme for Ireland: Autumn 2012 Review, January European Economy Occasional Papers 127, January 2013, p.30.

Macroeconomic performance: Spain FT 28 June 2012

Macroeconomic outlook European Commission Economic Adjustment Programme for Ireland: Autumn 2012 Review, January European Economy Occasional Papers 127, January 2013, p.44. Ireland

Macroeconomic outlook European Commission Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 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,

Unemployment Total, seasonally adjusted. Eurostat. Legitimacy: electoral consequences?

Eurobarometer

Conclusion: politics matters! Thank you