Major State investment plan needed for recovery
OPINION:Austerity is not working and the Government must lead the recovery by ditching defunct economic orthodoxy, writes PAUL SWEENEY
ALL ARE agreed that Ireland is in deep trouble. However, there is now clear evidence that the level of austerity being imposed is causing damage. While it is important to be upbeat, policymakers must base their prescriptions on evidence, not on hope. There appears to be a growing intolerance of those who are critical of current failing policy, even as the evidence becomes overwhelming.
The period for recovery is too short. The level of cuts in public services, combined with largely regressive tax hikes – such as the VAT rise – are too severe. Domestic demand, which is the key to jobs, has been collapsing at an astonishing rate (as top table shows).
Government can boast that exports have done well, but to expect they will be sufficient to lift the whole economy is naive, as Europe enters recession and US growth is set to be lower than was forecast.
The bottom table shows how important domestic demand was in the composition of growth and in the recovery in the 1990s. Since the crash of 2008, the collapse in domestic demand has eviscerated GDP growth.
While there was some growth last year, GDP has fallen by 10.7 per cent from peak. GNP is a better guide to per capita income but even it barely rose and indeed has fallen, overall, by 15.3 per cent from peak.
A far better way of evaluating real economic welfare is to examine domestic demand: The top table shows it fell by a massive 24.9 per cent in four years.
This collapse in demand must be a cause of serious concern to policymakers. Domestic demand is made up of three main components: personal consumption (the largest), government spending on goods and services, and investment.
Some may argue that the collapse in domestic demand is mainly caused by the 65 per cent fall in investment and that the “worst is now over”. But all three components have fallen.
Other indicators of falling demand include falling retail sales, falling tax revenue (when rate increases are excluded), falling employment (down by 306,000), falling employment participation (down from 64 to 60 per cent), rising emigration, rising long-term unemployment (now 56.3 per cent of the unemployed), rising under-employment (currently 25 per cent), rising business closures (up 20 per cent last year), and falling confidence, as orders fall per the purchasing managers’ index.
The economic collapse is the main cause for this fall in domestic demand, followed by the failure of the private banks and the lunatic bank guarantee. But the last five budgets, rather than helping, have made the collapse worse.
Confidence cannot be restored when there is no hope. These five failing budgets are to be followed by a further three. The next budget may be the worst, as virtually all that can be cut, has been cut. Meanwhile the world sinks into recession and the actions of EU leaders and the unelected European Central Bank are exacerbating the crisis.
The greatest problem is the inability of European leaders to bring stability to Europe and to the euro. This is not an economic problem but a political one. Ireland has a very limited role in this area.
The Government has room for manoeuvre within the terms of the agreement with the troika, but has consistently chosen to pursue austerity over growth. Thus, it exceeded the agreed €3.6 billion to be taken out of the already declining economy this year. Clearly, decision-makers have not yet realised that economic orthodoxy is not working.
However, the real opportunity for growth policies can only come from renegotiation of the bailout deal and of the impossible burden of bank debt. The failure of the EU and ECB to bring financial stability to Europe and the euro gives grounds to renegotiate.
A lower interest rate must be secured, a longer repayment period and debt forgiveness. The 1.8 million people at work – of whom a quarter work part-time – cannot repay the debts of the failed banks.
However, all sovereign debt should be repaid in full, over time. That the troika is happy with our “progress” does not mean that the situation for people or the economy is improving.
The democratic legitimacy of the State and EU project is being undermined by this deal and inactions of the EU and ECB.
The key to recovery is a real jobs programme, not fiddling with supply side issues like employers’ social charges, when the real issue is lack of demand.
The Irish Congress of Trade Unions has made a proposal to facilitate investment by private Irish pension funds in key infrastructure projects. Currently, much of the €75 billion they hold is invested overseas, stimulating job creation everywhere but in this State.
Such investment could be hugely beneficial in terms of jobs and the enhanced competitiveness that derives from improving infrastructure. And it can be delivered at no cost to the taxpayer.
Further, the National Pension Reserve Fund still holds some €5.3 billion that could also be put to work creating jobs and boosting business credit (rather than “investing” it in failed banks).
Government can raise revenue from taxes on high incomes, on wealth and on corporations, auto-enrolment in State pensions, hypothecated “solidarity bonds” etc. It must not be paralysed by the fear that some investment may leak outside the country: with planning, the impact can be maximised.
Cutting investment is just postponing it. More seriously, it reduces future growth and eliminates skills and jobs today.
The Government will soon unveil a plan to create 100,000 jobs by 2015. But with 306,000 net jobs lost since 2008 and 315,000 unemployed, that target is far too low.
A bold, major investment programme over five years would demonstrate that the Government has freed itself from enslavement to defunct economic orthodoxy.
Only the Government can lead the recovery, boosting confidence and encouraging the private sector to invest. Unless there is a sudden upturn in the world economy – and few expect it anytime soon – Ireland will end this year in an even deeper crisis. Or we could choose to help ourselves.
Paul Sweeney is chief economist of the Irish Congress of Trade Unions