How 'smart' Budget could really boost our local economies

By David McWilliams

Imagine children’s allowance was paid not in cash but loaded on to a smart card that could only be spent in domestic shops and couldn’t be spent on certain items, such as cigarettes. Would that be a good idea?

And just in case you think this is an attack on children’s allowance with the insinuation that some people are spending it unwisely, why not include all sorts of tax credits and rebates that are the preserve of the better off?

Why not pay Section 23 relief not in cash or in a smaller tax bill but to calculate how much tax is saved and pay the rebate via a smart card that also has to be spent in the domestic economy rather than second houses in the Algarve?

In this way, both the rich and the average person’s spending would be harnessed in a way which would boost the local economy.

The smart cards could be an equal opportunity enhancer.

The domestic retail economy is in tatters. Most people are employed in small business in this country, so every extra cent spent in the local economy matters enormously.

In normal times, economists argue that the best policy is to leave everything alone and allow the free market to decide who should spend what, where and in what size. But these are not normal times.

The local economy is moribund. People are not spending but are saving whatever they have and the banks are not lending.

So why not incentivise people to spend their allowances and tax credits in the local economy?

By giving those benefiting from state allowances or tax breaks some sort of smart card rather than cash, spending behaviour could be changed dramatically. This could (a) boost the local economy, particularly retailing, and (b) might move money into more productive manufacturing rather than the normal “tax-shelter driven” areas, ie property, again.

Even within the confines of austerity, it is still possible to push the economy in certain directions and persuade people to spend money at home.

Unfortunately, the entire Budget discussion is framed by what is not possible rather than what might be possible even in the context of austerity.

This suggestion could make a very significant difference because there is so much slack in the economy. Economists refer to this slack as the “output gap”. It really refers to how much resources lie idle.

The best measure of this is unemployment. The more people that are unemployed, the greater the waste and the larger the economic impact of each individual spending decision. Economists refer to the impact of each decision as the multiplier. This means when I spend in a shop, the retailer gets my cash and then spends it somewhere else, and then the recipient of his cash spends it somewhere else and so on.

When the economy is on its knees, each new spending decision has a greater impact because it is not adding to spending that was already there, “topping up” so to speak, but it is truly spending what was not there before.

Despite these concepts, which go to the core of modern macro-economics, when I hear the Budget being discussed, all I hear is – amazingly – a conversation focused on the size of the Budget deficit. But the deficit is an outcome, a consequence. It is what falls out at the end after all the spending, all the taxes and all the revenues are totted up.

In this week of the Budget, let’s think about what

a national budget could actually do if you let your mind wander. Quite apart from using smart cards to divert spending in a certain way towards domestic consumption and the local economy, consider what the State itself could do if it bought local.

The Irish State is the biggest consumer in the economy by a long, long way. Therefore, the State can massage the economy in a variety of directions.

One of the ways the State can affect demand is by choosing to buy locally made produce rather than imports. It could not only buy local but could pay quicker than other creditors and, in so doing, it could act as a type of bank for its clients at a time when the banks are not offering working capital.

IF the State were to buy more produce locally and if it were to undertake to pay its bills in one week, rather than the customary three months’ credit terms in Ireland, we could have a source of liquidity in the economy which is now missing without having to extend one loan but by merely accelerating cash-flow turnover.

In normal times, this activist intervention might seem very heavy handed but we are not in normal times. We are in what is called a liquidity trap. This is an economic phenomenon whereby, even at very low to zero interest rates, people don’t want to spend and banks don’t want to lend. Thus without the Government getting involved, the economy is stuck.

The money from children’s allowances and tax credits is being recycled by the State anyway from one set of taxpayers to another, so why not decide to boost local employment by directing spending towards local retailers? If the State giveth, then surely it can directeth?

The retailers will employ more and pay more tax and the cycle will start again at a slightly higher level. Granted some of that money will obviously be spent on imports because we import significant amounts, but the local value added from our spending will be equally significant.

It is at times like this that we should think about what limited measures we can take rather than being fatalistic and suggest there is entirely nothing we can do other than kowtow to someone else’s agenda.