Proposed Austerity Measures for Ireland
The BBC reports that the Irish Government is set to unveil new austerity measures as required by the EU-IMF rescue plan.
It will be a 4 year austerity plan targeting cuts of $15billion euros or 11% of Ireland’s output;
the aim is to bring down Ireland’s budget to 3% of GDP;
reform of the banking sector just falling short of nationalization;
the IMF recommends that Ireland should gradually cut the benefits to the long term unemployed;
the IMF also recommends that Ireland should reduce its minimum wage to be in line with the general fall in wage levels in the Eurozone;
There are some concerns about the proposed austerity measures. First the Cowan government could lose the support of the Independents plus some of his own party’s backbenchers. Second, the measures may prove self-defeating.
As expected, the stupid economist Krugman claims that the spending cuts will lead to a deeper recession. However, is this necessarily true?
European countries such as Ireland are in deep trouble because of their generous welfare state benefits. As a result of the generous benefits these countries have attracted immigrants from other parts of Europe as well as the Middle East and the sub-continent. These immigrants have a tendency to bludge on welfare instead of becoming wage-earners and tax-payers. They have a tendency to scam the welfare system. Like some of the long term unemployed who prefer being on the dole rather than worker, these people do need to have welfare benefits reduced in order to encourage them to seek out real work. These Governments cannot continue to pay for their welfare state without a corresponding increase in taxes, either through increasing the tax rate or by the entry of more wage-earners into the tax system.
The Keynesian economics that lies behind the Krugman concerns have already failed in the past. Long term welfare payments will not get an economy out of its malaise. On top of that there is always the possibility that in the longer term these welfare payments will contribute to a return to the days of stagflation – high unemployment, high inflation and high interest rates. Just like in the 1970s, such a return to stagflation would be a disaster.