Grow the economy through deflation

who_ru wrote: »

how can an economy grow through deflationary measures as we had last budget and will be even more pronounced in the next budget.

Deflation and negative growth are two different things. If prices decrease by 1% and at the same time there is an increase in economic activity of 2% we will have a nominal increase in GDP of 1% and a real increase in GDP of 2%.

who_ru wrote: »

are we in a spiral of consumers not spending/can't afford to spend & a govt that must remove cash from the economy?

No, we are in a phase of readjustment of spending. As I said in another thread, I find it very difficult to see what exactly people aren't spending on that they would otherwise be spending on.

If the Irish people become more price conscious, prices will come down and their money will go further. So shopping in Lidl and Aldi is a benefit to us all.

who_ru wrote: »

deficit must be within 3% of GDP by 2014?

George Orwell 1982 wrote: »

Our deficit is 11% of GDP excluding the bank bailout. It would be perfectly manageable to reduce that to 3% of GDP by 2014 if it wasn't for the bank bailout.

Our deficit was over 12% last year, and set to be in the same or greater region this year. The cuts of 3bn for next year will see us running to stand still at best.

In any event, the government's plan to get us back to 3% deficit is to have 6% sustained growth from 2011-2014, thus increasing our tax revenues and also while the deficit will decrease slightly in absolute figures, it will decrease more relative to our GDP. Each 6% increase in GDP will, without any actual changes in govt finances, reduce the deficit:GDP ratio by nearly a full percentage point.

Austerity wrote: »

Yes deflation is a very bad thing. In daily life the definition of deflation is a general fall in prices. Imagine I can use my savings to purchase more things than I could before.

With falling prices I can afford to buy more stuff. The HORROR, THE HORROR!

We need inflation immediatley to destroy my purchasing power because making normal people poorer is good for the economy.

Allowing prices to fall so that people can buy more things is very bad for the economy you know!

Exactly. Or what's worse is the appaling vista that deflation makes people more price conscious leading to further reduced prices and it also makes people eschew overpriced tat in favour of goods and services that are actually useful.

xavidub wrote: »

That point of view would have some merit were it not for the fact that deflation destroys confidence so people still don't spend thereby perpetuating the slump. And deflation also makes people's mortgages and even bigger proportion of their takehome pay.

With interest rates lowered because of deflation, mortgages are cheaper than ever. But in any event I disagree with the idea that deflation destroys confidence. Outside of the property market, I see no evidence that people lack the confidence to buy ordinary, good value goods and services. Our deflation is coming from such a frothy peak, that what it means in reality is that people are not buying overpriced luxuries unless and until the prices of them come down. We have generally become more price conscious and that can only be a good thing.

xavidub wrote: »

Just take a look at Japan which has had 15 years of deflation/stagnation which has hugely damaged the post-war economic progress of the country.

Yet Japan is one of the richest countries in the world and one of the biggest exporters of goods and services. They are now a highly efficient economy. Deflation is only bad if your sole measure of economic success is GDP growth. I don't subscribe to that theory - what is so great about growth that it is more important than things like efficiency, productivity, fair distribution of wealth, low corruption etc?