ANALYSIS:Report proposes drastic measures, but it does nothing to tackle banks or shortage of credit, writes LAURA SLATTERY
IRELAND’S DEFICIT reduction document goes by the official title of the National Recovery Plan, 2011-2014, although it is also known as the bill for a decade of developer debt-gorging and governmental negligence.
Sinn Féin renames the document the “plan for national impoverishment”, while Fine Gael’s enterprise spokesman Richard Bruton sums it up as “a lot of platitudes”.
The Government assumes a different position, speaking of confidence and vitality and business dynamism. The report of the four-year plan promises that if we “accept our share of the burden”, then we can “collectively share in the fruits of that will undoubtedly flow from solving our current problems”.
So let us look at the how the four-year plan spells out how Ireland and its workers will arrive in this newly equitable orchard paradise where employment is no longer at double-digit rates and employers and employees alike can thrive in an economy that’s smarter, greener, cleaner and leaner than currently imaginable.
THE BARE MINIMUM
Perhaps the single most concrete measure in the four-year plan is the announcement that the minimum wage will be cut by €1 an hour to €7.65.
It’s a move that will immediately affect the 3 per cent of the labour force that is paid the basic minimum wage, most of whom are employed by the hospitality and retail sector. But it doesn’t end there. A point that is often missed, says UCC economics lecturer Declan Jordan, is that workers whose salaries are set with reference to the minimum wage will also see their earnings deflate in turn.
Indeed, it is this broader wage deflation that is the reason for the minimum wage cut, not the stated claim that the current wage level acts as a barrier to job creation among younger workers.
“I don’t think lowering the minimum wage will create jobs,” says Jordan. “It’s more to do with bringing about an internal devaluation in the economy. We can’t devalue our currency, so we have to have some level of internal devaluation.”
Once wages go down, then poverty-trap logic suggests welfare payments must go down too. Here comes the pain.
While the minimum wage move was immediately welcomed by the hospitality industry, employers’ group Ibec says it is not the main problem when it comes to labour costs. This honour goes to the various registered employment agreements that exist in the services and construction sectors, which Ibec economist Fergal O’Brien describes as “antiquated”.
LABOUR DEACTIVATION
“We’ve gone through it in detail and to be honest we can’t find a growth strategy,” says Sinéad Pentony, head of policy at the economic think tank Tasc.
“A lot of it is existing policy. They’ve just taken bits out of other documents and put it in.” And there can be no confidence or certainty in the economy without quantified investment, she notes.
The plan devotes several pages to “removing disincentives to work” and increasing the “level of engagement with the unemployed”, with the latter measure involving the holding of group interviews after three months.
But “incentivising” people to work – eg, cutting welfare – is a misnomer in a jobless recovery. Training schemes and education places are important, says Pentony, but with no jobs strategy in place, the context is wrong.
“They’re applying supply-side solutions to demand-side problems,” she says. The trickle of people who do secure places on the Government’s labour activation schemes will be trained for jobs that don’t actually exist. She predicts the long, winding queues for temporary Christmas positions in the retail sector will remain a feature of the economy. And these jobs will now pay less than before as a result of the reduction in the minimum wage.
The report does cite areas such as the so-called green economy, where some employment might be found to replace the job losses in the construction sector. The insulation frenzy that is the National Retrofit Programme has already provided work, the report states, without citing specific numbers, while the upside of the introduction of water metering, apart from the environmental benefit, is that it will provide “commercial opportunities for utility companies”.
But when it comes to hard numbers, the plan could be more accurately described as operating a policy of labour deactivation, given that some 25,000 public sector jobs are up for the chop.
THE EXPORT FACTOR
Ah, the export-led recovery. Minister for Enterprise Batt O’Keeffe is fond of noting the recent performance of exports, which are now estimated to grow by more than 6 per cent in real terms in 2011. This doesn’t mean that the recession is over, sadly, as in 2011, “there may be some slowdown” due to “the moderation of the pace of recovery in our main trading partners”, which is code for the world is in chaos and we’re not sure anyone’s buying.
As Irish consumers will be too poor to go shopping, the Government prides itself on identifying the key export sectors: agri-food, energy, life sciences, etc. But while it promises funding for exporters, it doesn’t formally announce any actual sums or policy measures.
Business group Ibec, which was positive about parts of the report, was disappointed by this vagueness. “They really haven’t put the detail on it,” says O’Brien.
For example, the report indicates that the agri-food sector will be given direct capital supports for marketing and processing to achieve the State’s aim to grow food exports by 40 per cent by 2020 (an ambition fuelled by an expected explosion in global demand). “We would be very interested to know what that means in terms of funding,” O’Brien notes.
ENTERPRISE SUPPORTS
The four-year plan has swept away with the Business Expansion Scheme (BES) on the understanding that it will be replaced by something called the Business Investment Targeting Employment Scheme (BITES). Given that “it bites” is a synonym for “it’s really rubbish and annoying”, this is perhaps an ill-judged acronym.
Although its full name suggests it will be more employment-led than BES, the report does not specify how BITES will work except to promise “a simple and efficient certification process” and an increase in the maximum amount that can be raised.
According to Kevin McLoughlin, head of tax services at Ernst Young, the old BES was “under-utilised” as a means of funding. The “specifics” of BITES will be “eagerly awaited to see if it is something which business can embrace in order to secure ongoing funding”, he observes.
Inevitably, the smart economy makes an appearance in the report. Although there were no new tax credits, the four-year plan stressed ongoing State support for research and development (RD) activity – a clear commitment to “incentivising the creation and maintenance of high-value jobs”, according to McLoughlin.
Jordan is less sure. Funding RD is not going to spur economic growth, he says. “It seems more of a marketing tool for attracting multinational corporations. But it’s a very expensive marketing tool.”
CORPORATION TAX PROMISES
The Government declares it is “unambiguous” about its plan to retain the corporation tax rate at 12.5 per cent: it is now “part of our international brand”, the four-year plan states. “It has become a totem of our industrial policy,” agrees Jordan. “It’s almost like faith at this stage. Any government that tries to change it will get an awful reaction.”
Through mouthpieces such as the American Chamber of Commerce, which has “warmly” welcomed the retention of the tax rate, the multinationals have threatened that they will reconsider their presence here if Ireland becomes a little less tax-friendly to the corporate sector.
Yesterday, at a lunch attended by Minister for Finance Brian Lenihan, the chamber’s president Lionel Alexander claimed retaining the rate would “position Ireland strongly to win its share” of a predicted 30 per cent growth in foreign direct investment in 2012.
“More importantly it will copperfasten existing levels of investment,” he added, which is perhaps the more salient point.
In Jordan’s view, however, the importance of the rate is political rather than economic. Raising the rate to, say, 13.5 per cent wouldn’t spark an exodus of the job-providing multinationals that have set up shop here but it might create “an element of uncertainty”, he says. If the rate could be raised once, it could be raised again. It would also be “a signal that we don’t run our affairs any more”.
THE “FISCAL FRANKENSTEIN”
Given that a general election is imminent, worrying about what is or is not in the four-year plan in terms of an employment strategy seems academic. But even, just supposing, Ireland stood ready to re-elect the same administration, the part of the report devoted to “sustainable growth” is still largely hypothetical.
The report has been criticised for glossing over Ireland’s broken banking system and doing nothing to address the credit crunch still affecting overdraft-hungry businesses. Ireland’s banking system – labelled a “fiscal Frankenstein” by Trinity finance professor Brian Lucey still needs to be untangled before businesses can exit their current “survival” mode and even think about expanding.
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