Policy changes should be widespread

ECONOMICS:The State must demonstrate an ability to pull together in a crisis, writes DERMOT O'LEARY

GIVEN THE wave or, more appropriately, tsunami of bad news the Government has had to deal with over the past few weeks, some within it must be thinking Friday the 13th arrived on Groundhog Day this year. From plummeting poll ratings to international criticism on what were seen as irresponsible and unrealistic guarantees on bank debt, it is clear the Irish economy has not been an easy station to man recently.

But the Government has not been short of policy advice. Numerous prescriptions have been offered in this newspaper in recent weeks. There has been a surprising amount of agreement among economists on the types of initiatives that should be introduced to get the State out of the mess in which it has found itself.

Some would say agreement among economists is a danger in itself. It is certainly unusual, but some of the prescriptions rest on simple principles that do not require an economist to identify.

Look at it this way: Ireland, due to the international and domestic slowdown, as well as some rather careless reliance on property- related taxes over recent years, faces budget shortfalls of more than 10 per cent of gross domestic product for the next few years.

These deficits, to pay such things as nurses’ and teachers’ salaries or social welfare contributions, will need to be funded in the international bond markets. For these markets to lend to Ireland, investors must be convinced the State can get its fiscal house in order, thus instilling confidence that this money will be paid back.

If it isn’t, there is a possibility, as has been mentioned to me recently by a respected, experienced bond investor, of the bond market being closed to Irish bonds – at any price. That would render the State bankrupt. While an unlikely occurrence, in our view, it is telling that it is at least being mooted by those who are the potential purchasers of future Government bond issues, of which there will be many over the next few years.

With this possibility on the table, no sane person would disagree with the need to take decisive action. In spite of this, workers hit by the recent pension levy are planning rallies in opposition to it.

There should be no going back. A simple analysis of the numbers reveals it is just not possible to leave this area of spending untouched if the Government is to push through targeted savings of €16.5 billion over five years; non-pay spending would have to be cut by more than 40 per cent (even when interest and social welfare costs are rising), or tax revenues would have to increase by more than 40 per cent, or some combination of the two, to reach that target. Other options include a property tax, increased efficiencies, lower capital spending and a higher income tax band. In truth, all of these painful options, and more, will be required.

There is a difference, though, between the necessary policy changes and the implementation of those policies. Less focus has been placed on the latter in recent debates, despite the fact that it is as important as the policies themselves.

Optics is at the heart of appropriate implementation. It would be insulting to suggest that groups which opposed recent Government initiatives (including the post-Budget protests last October) are not aware of the need to take some pain in the national interest. However, these groups got the impression they were being targeted. In this event, it is no surprise they came out fighting.

If it is generally accepted that there will be a significant drop in the standard of living in the State as a whole over the next few years, policy changes should be widespread rather than piecemeal; they should be distributed to all sectors of the economy at the same time.

In this knowledge, the findings of the Commission on Taxation and what has become known as “An Bord Snip” have to be fast-tracked. Even if their recommendations are not finalised, some broad parameters on the likely changes should be spelled out. For a committee of 18 learned people in the former group, which was set up a year ago tomorrow, this should not be too much of an ordeal.

Such a move would not only help in getting buy-in from the general public domestically, but it would send out a signal to international markets about the ability of the State to pull together in a crisis. Television pictures of strikes on the streets of Dublin, Cork or Galway would not give that impression.

One must not underestimate the importance of convincing international observers there is real intent to restore stability to the public finances. As is noted in a recent paper* from Bruegel, a European economic think tank, in countries with large deficits, there is a power shift towards the closed rooms of the financial markets. The paper dealt with the experience of Sweden, which went through a banking and fiscal crisis of its own in the early 1990s.

Encouragingly, Sweden got through the crisis intact and was running budget surpluses and enjoying relatively strong economic growth within a couple of years. Ireland can do the same if it follows some of those principles.

One of these principles is transparency. Another is setting goals and sticking to them.

Price movements in international bond markets can provide a real-time report card on the efforts of the Government. The latest report card would read: improving, but must try harder.

Dermot O’Leary is chief economist with Goodbody Stockbrokers

* Ten Lessons about Budget Consolidation, Jens Henriksson, Bruegel