Danny McCoy (IBEC) and Paul Sweeney (ICTU) head-to-head

 

Two leading players in social partnership – the head of employers’ body Ibec and the economic adviser to Ictu, the trade union umbrella body – are agreed on one thing: we are in a mess and the Government is not doing all that it should

Rushed laws could damage the economy  for years

Future policymaking must be robust and rational, rather than politically expedient, writes DANNY McCOY

THE PAST months have been traumatic for Irish society and our political system. Unfortunately, there is a danger that rushed legislation, ostensibly aimed at resolving problems, will only serve to create new difficulties for the future.

Government remains in crisis management mode and international forces continue to influence our direction. However, with a period of dramatic events just behind us and the year drawing to a close, it should be a time to take stock and calmly and meticulously plan how to correct mistakes and shape the future.

Sadly, such an approach is not emerging. Severe political pressure and a looming general election mean that we are seeing knee-jerk policy reactions and swiftly mustered legislation that could damage the economy for many years to come.

Growing and understandable public anger, coupled with extreme economic events, has prompted the political system to table a range of policy and legislative changes that could only be described as a mixed bag. Some measures, such as those aimed at reducing the cost of doing business and the broadening of the tax base, are sensible and long overdue. Others though are ill-advised, populist or poorly thought-out and will stifle economic regeneration.

The Budget provided firm evidence that the Government lacks a coherent vision. It tore up much of the painstakingly built policy base in areas such as the voluntary pensions system; employee financial involvement; and supports for research and development. Far-reaching policy changes were introduced without any prior assessment of the likely behavioural response.

Since the onset of recession, Government has claimed that the smart economy is at the core of its plans for recovery. Yet Budget 2011 didn’t even mention the smart economy.

Public pressure for a response from the political system has been greatest in relation to the banking crisis.

The new Credit Institutions Act provides the Minister for Finance with wide-ranging powers to restructure the banking system. However, doubts about its constitutionality led to it being examined by the Council of State before being signed into law by the President. Separate concerns about the legislation were raised by the European Central Bank.

These doubts were inspired by the rushed quality of the legislation, despite its magnitude and potential impact.

Actions since pursued by the Minister using the powers outlined in the Act are disquieting. What is most worrying is that, despite their dramatic and controversial nature, they are only partial measures.

No actual solution to the banking crisis, which would enable at least parts of the system to return to some sort of normality, has been delivered. Neither is there any sense that an overall plan to help the sector get back on its feet is in the offing.

Banking is not the only area in which Government policy lacks coherence. As the Coalition enters what seem very likely to be its final days, we face the danger of a miscellany of legislation being rushed through without proper consideration. The Climate Change Bill, on which business and other stakeholders were promised a full consultation, is one such example.

The Bill as just announced will have very serious economic consequences for Ireland in years to come if not revised. An impossible set of emissions targets will seriously undermine our ability to compete at the very time when we need to grow ourselves out of trouble. Despite the enormity of its implications, the Bill will be pushed through the Oireachtas in just a couple of weeks. One party will be allowed to fulfil a key electoral promise, despite the economic impact.

Other pieces of legislation are likely to be unveiled shortly: it will be hard for the outgoing administration to resist a pre-election glut.

Since the foundation of the State, a key failing of the political system has been its disdain for evidence-based policymaking. Such an approach doesn’t sit well with the electoral system. But the cavalier approach to decision-making has been a root cause of the current crisis. During the good times, policy in areas such as housing, investment and tax reform was formulated without impact assessment. It was largely populist and short-sighted. We are suffering the consequences of that approach now.

Social partnership also contributed to this dysfunctional decision-making process and the business community has acknowledged its role in allowing this to happen. We must ensure that future policymaking is robust and rational, rather than politically expedient.

As a collective, we in Ireland urgently need to reflect on the type of economy and society we would like to emerge from this crisis. And we need to carefully craft laws and policies to reflect that vision.

Important decisions that we are taking now have the potential to shape our country for a generation: they need to be credible and connected.

  • Danny McCoy is director general of Ibec

Only hope lies in ditching the deflationary experiment

The new government will have to be brave and radical with its economic policies, writes PAUL SWEENEY

IT HAS been a terrible year for the Irish economy. People are deeply confused, insecure, angry and feel that those to blame are getting off scot-free or even getting bonuses. The mighty “Irish Economic Model”, an experiment in deregulated, ultra-free but subsidised markets, collapsed. This year we became the laughing stock of the world. There had been a real Celtic Tiger economic success from 1987 to 2000, which was impressive on every count. But from the late 1990s, it was being squandered.

The real economy is still in good shape. While there is a deeply serious fiscal crisis, it is manageable. It is important to recognise that the IMF-EU-ECB bailout is not because of the fiscal crisis, but because of the private banking crisis. The “bailout” is to ensure that Irish citizens pay the bank bondholders back in full and with interest.

The crazy deflationary policies now being pursued by a Government with no mandate will exacerbate the fiscal crisis. But it is the banking crisis which has the potential to sink the whole economy and undermine social cohesion. Virtually every economic decision made over the past 2½ years has been wrong, especially the decisions on banking. The banks and their so-called “rescue” may yet sink Ireland and its citizens. The decision to risk the pension reserve fund on the banks, instead of using it on a major prolonged Keynesian stimulus is staggering.

The Government’s deflationary plan:

  • has choked domestic demand for three years by cutting current public spending drastically; cutting public sector wages, (when private sector wages remain relatively stable); cutting welfare for the poorest; and the minimum wage, which has nothing to do with fiscal policy.
  • is trying, largely unsuccessfully, to pursue an economy-wide pay cuts policy for all employees in the whole economy, thus choking demand.
  • has cut investment, also deflationary – when most economists recommend it, especially in a recession.
  • has “invested” billions of our pension savings fund in the failed private banks. These same banks are not even lending back into the economy.
  • has no jobs programme.

These policies are a programme to undermine prosperity, confidence and to impoverish the middle and working classes for decades. It is faintly possible that we can export our way out of this crisis, but by undermining so much domestic demand – 70 per cent of the economy – current policies will leave a wasteland in many parts and indigenous sectors of Ireland.

The recent national income figures, showing that Ireland has its first quarter of economic growth in 30 months, gave a faint hope to supporters of the destructive deflation plan. But in the real world, most economists would agree that this is an outdated and narrow measure of national wellbeing. Recovery must be judged, not on economic growth, but on job increases. It will be a long time before there is a large sustainable increase in jobs, with these policies.

To celebrate that one figure is, of course, ridiculous, because national income has actually fallen by more than 21 per cent from a peak in 2007 in GNP of €161 billion to €127 billion this year. This is one of the biggest collapses in the developed world. The economy has shrunk by a massive €34 billion in just three years. This collapse in national income is equivalent to more than the total tax take this year of €31.5 billion. Investment has plummeted from €50 billion to below €18 billion.

The only hope is for an almost total reversal of economic policies as fast as possible. Here is what should be done by the new government:

  • Renegotiate with the bank bondholders, issue Brady bonds or whatever it takes, to get Ireland out of this poisonous “rescue”. This is no longer an option as we simply will not be able to pay them.
  • Invest in education and in a massive skills activation programme.
  • Initiate a counter recession stimulus programme, promote robust automatic stabilisers and invest €2 billion a year for three years from the pension reserve fund into the economy.
  • Abandon the “internal deflation” of attempted wage-cutting, in favour of collective bargaining to allow workers purchase the goods and services of a dynamic private sector.
  • Commit all public policy to being evidence-based. Start by reversing this Government’s decision to pour subsidies into favoured businesses without an analysis of costs, benefits and distorting effects.
  • Together with stakeholders drive public sector reform, because when this key part of the economy is efficient, the whole economy gains and employees are better motivated.

Simultaneously the private sector must be reformed. A radical reform of its corporate governance; of company law, moving from “shareholder value” to all stakeholders; unwinding the “Nama wives’ club”; the bank bonus culture and enforce the law to stamp out cronyism in private business.

Ensure that all policy is counter-cyclical from now on.

The key targets are a) full employment;

b) rising living standards; c) economic stability and sustainability; d) social cohesion;

e) equitable income and wealth distribution; f) poverty reduction.

These ambitions are achievable. However, while Ireland’s real economy remains quite strong the new government will have to be courageous and radical to ensure that the perverse economic experiment is dismantled as soon as possible.

  • Paul Sweeney is economic adviser to the Irish Congress of Trade Unions


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