Einstein once defined insanity as doing the same thing over and over again and expecting different results. For four years the government has being cutting spending and raising taxes. For four years we have been told it is the only way to reduce the deficit, restore growth and create jobs. Yet four years later we still have a large budget deficit, high unemployment and the economy is still contracting.
The problem is obvious. If you reduce a person’s income (through tax increases, public sector pay cuts or social welfare cuts) they have less money to spend. This means local businesses suffer, so they cut the wages of their workers or even let some go. This means there is even less money spent, so even more businesses suffer and so on. It’s a vicious circle.
You can get a clear look as this in practice by examining the numbers. Since 2008, the government has implemented cuts of 15% of GDP, yet the deficit has been only reduced by 3% of GDP. In 2008, the deficit was 18 billion, since then we have cut 20 billion, and now the deficit is 15 billion. The reason is that after every round of cuts, tax revenues take a dive as people have less money to spend. The situation resembles a snake trying to bite its own tail. While we do need to reduce the deficit, it is clear that austerity is not the way to do it. In fact the 6 billion in cuts in 2011 budget had no effect on the deficit, in fact the deficit actually increased.
A wide range of economists argue that austerity has failed and should be abandoned. These include Nobel Prize winning economists Paul Krugman and Joseph Stiglitz. Even the Minister for Finance admits that for every €1 billion in cuts/tax increases, GDP falls by €500 million. A clear correlation can be drawn between austerity and economic decline across Europe.
A common criticism of proposals to replace austerity with a stimulus is the question, “Where will the money come from?” There are 2 main sources: Irelands’ large savings built up during the Celtic Tiger (in 2009 this was between 40 and 50 billion), bond markets (the reason Ireland cannot currently borrow is due to the bank debt, if this was restructured we could borrow again. Its a subject for another time but basically 30 billion would be better spent creating jobs than put into Anglo).
Not only has austerity caused unemployment, economic decline, poverty and emigration, but it has failed in its main aim of reducing the deficit. It simply is not working. Yet the government seems intent on repeating it again and again in the hope it will finally start working. Those who fail to learn from history are doomed to repeat its’ mistakes.