1. Niamh Hardiman Niamh.Hardiman@ucd.ie 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

2. Outline ‘Policy requires politics’ Dominant view Bringing politics back into explaining: –Initial policy choice –Composition of austerity –Distributive effects –Outcomes

3. Ireland and Spain Collaboration with Sebastian Dellepiane (Strathclyde)

4. Austerity budgets in EMU: the context Change in debt and deficit, % GDP, 2007-2010. Eurostat

5. Conventional wisdom Object of interest: –3% deficit target –GDP reference point How to do it: –Spending cuts

6. Simultaneous Weak banks No growth The wrong option? Yet ‘this time IS different’

7. 7

8. The essential guide to fiscal consolidation… …and the mystery of the missing ingredient

9. 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?

10. So: What happened? How to explain budget policy choices? –Government partisanship/ party politics –Ideas –Interests/ veto players –Contextual constraints

11. 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

12. Typology of fiscal policy choice – why? Type Focus Composition Fiscal response Orthodox ContractionaryBias toward spending cuts 12

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

14. Explaining initial policy divergence, 2008/9 14 Spain Ireland

15. Explaining Spain’s policy convergence, 2010 15 Spain Ireland

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

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

18. 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

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 Partisanship Dominant ideas 19

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 ideas 20

21. 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

22. Then: the failure of EU responses 22 http://www.spiegel.de/fotostrecke/fotostrecke-71636-2.html

23. 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’

24. 2. Contrasting consolidation strategies Composition Ireland67% expenditure 33% revenue Spain40% spending 60% revenue 24

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

26. Revenue increases too

27. Spain – heavier reliance on taxes 200820092010 Taxes-7.2%-16.7%+8.1% 2010-112012 Taxes1.7% GDP2.2% Spending-1.8%-1.7% Why?

28. 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

29. Ireland Off-limits: –Corporation tax –Income tax, SI –Public sector pay, welfare Adjustment through: –Reduced staff –Services –Quality DPER database

30. Perspectives Callan et al, ESRI QEC, 2012, p.49

31. Perspectives Callan et al, ESRI QEC, 2012, p.49

32. Spain PSOE, to Nov 2011 –Tax stimulus –Mixed adjustment, big tax element –‘Protect the most vulnerable’ by protecting public sector PP, Nov 2011+ –Mostly spending cuts Health, education –Business-friendly –Labour market issues –Regions

33. 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:

34. Scale of fiscal effort, 2009-2012 General government underlying primary balances OECD Economic Outlook, Volume 2012, Issue 2, 17 December 2012

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

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

37. Macroeconomic performance: Spain FT 28 June 2012

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

39. Macroeconomic outlook European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. 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, 29.1.2013

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

41. Eurobarometer

44. Conclusion: politics matters! Thank you Niamh.Hardiman@ucd.ie