Harsh but unavoidable

Thu, Nov 25, 2010, 00:00

THE NATIONAL Recovery Plan 2011-2014 is a gamble. It is gambling on the assumption that any measures which restore order to the State’s finances will build confidence and lay the ground for economic recovery. In overall terms, the plan should be welcomed because, in a time of great uncertainty, it sets out to tackle the problems head-on and sends out a clear message that this State will confront the reality of its indebtedness.

However, whether the plan will deliver the average growth rate of 2.75 per cent which has been targeted is far from certain. The plan envisages spending cuts building up to €10 billion while taxes will rise by €5 billion by the end of the four years. Taking this amount of money out of the economy – €6 billion alone comes out in next month’s budget – is certain to depress economic growth. The retail sector is unlikely to experience a happy Christmas in such a challenging situation.

Much will hinge on employment creation; if the jobs do not flow, the plan will not work. Because the money simply isn’t there, the plan is low on employment stimulus. The economy, aided by export growth, has started to turn but the Government expects it to grow by only 1.75 per cent next year so job creation, in the short term, will be modest. One has to hope that the international climate is supportive and that demand for Irish exports continues to increase.

The decrease in the minimum wage – which is harsh – may encourage businesses to seek more employees but it will discourage unemployed persons from returning to the workforce. Changes to social welfare payments, to be announced in the budget, can be expected to move the goalposts and will be awaited anxiously.

It is disappointing – but not that surprising with an election imminent – that the Government has decided against revisiting the Croke Park agreement. Ireland will continue to pay public servants (including politicians) at a rate considerably above similar-sized EU countries and at a rate that the State cannot afford. The plan stresses reductions in public service numbers but, on past performance, that may not be delivered.

Public servants get off lightly on the pension front as well. The cost of their pensions has doubled in just five years to €2.8 billion but the Government proposes a reduction of just €100 million. Meanwhile there will be cuts in the dole and in child support while anyone earning €15,300 per annum will be hit with income tax. All families will take a hard hit on income tax, pensions and social welfare payments.

The plan is not without its faults and will not be popular. It is not radical enough in places and lacks imagination. It is a blunt instrument which has been designed primarily to reduce indebtedness. Too much of the unpalatable medicine is postponed to the post-election years – even though there is a clear public acceptance for the austerity to be faced up to now. These adjustments, starting with €6 billion next month, are unavoidable to obtain the bailout. And, surprisingly, they have restored some calm to the Dáil.