Time for the common good to be key economic reference point


OPINION:We are fast running out of time to get to grips with the economic crisis – can our current political system manage, writes RAY KINSELLA

WE ENTERED the second half of 2009 as one of the most debilitated and vulnerable economies within the Organisation for Economic Co-operation and Development.

Nothing short of a political transformation is going to get Ireland out of the vicious circle in which we are now and which is drawing us into a vortex of political contagion.

Government expenditure for 2009 is estimated to come in at about €60 billion. Revenue is projected at about €34 billion. We have to borrow some €26 billion to keep the show on the road; and this adds to our stock of debt. It pushes our debt -gross domestic product (GDP) ratio northwards.

Now assume that existing trends will continue by, say, five years which is the normal term of office of a government. Assume Government expenditure rises by 5 per cent (compounded) over the next five years. That is conservative; it leaves out, for example, the escalating costs of social welfare payments and rising debt service commitments as well as “rolling recapitalisation” related costs. By year five, expenditure would amount to €77 billion .

Now let’s examine revenue, which has collapsed over the last two years. Let’s assume that it will grow by 2 per cent on average for the next five years. That’s pretty generous for an economy dependent on international recovery and a domestic economy that is running on empty. This would result in revenue of about €38 billion after five years. Crucially, our stock of debt would still rise by €167 billion over this five-year period.

Let’s be generous and assume that revenues will rise, not by 2 per cent but by 10 per cent per year over this period. This would still mean that our stock of outstanding debt would be about €120 billion higher than it is today. The interest payments on the increase of about 6 per cent would mean that we would have to find another €7 billion per year in servicing costs – just for the increase in debt.

Interest rates are not going to stay at their present historic lows – they will rise. Even with spare capacity in the major economies, there are latent inflationary pressures on the horizon. The European Central Bank, especially, and the US Federal Reserve, will respond by increasing interest rates over the next year. The resultant increase in rates for sovereign borrowers will be significant, particularly for those countries which have a credibility problem – including Ireland.

This simple model can be made as complicated as you like. The point is still clear. A defining political issue of the next five years will be how to address the correction of the public finances. The finances have been holed below the water line by a crisis in banking. The banking business model remains essentially unchanged. We need a new model of government if we are to preserve democracy.

This will require cuts in public expenditure, not the kind of counter-productive and socially insensitive cuts which we have had to date. Somebody is going to have to ask the elephant, very politely, to leave the room. For elephant, read size of public sector.

Equally, reversing the implosion in revenue will not come from the kind of levies, increases in excise on fuel and VAT that have debilitated the domestic economy. We need to grow our way out of this trap. This means listening and responding to real businesses: removing constraints on them and incentivising them to maintain, or even increase, employment. The scale of the task can be seen from the figures above. We need to more than double the size of the economy to make ends meet based on our current spending trajectory. That is a measure of what it will take to return to sustainability and to relieve pressure on political, let alone, economic, stability.

Misconceived fiscal policies, conformed to a failed and humbled economic orthodoxy, are part of the problem. The last three budgets have bled the economy of domestic demand at a time when international trade and foreign direct investment are contracting. Equally, the costs of recapitalising financial institutions, whose business model and corporate modus operandi precipitated the crisis in the first place, is now equivalent to half of the costs of funding the health system.

There is no longer an optimal or even reasonable set of options: there are only least bad options. We are running out of time – and balance-sheet – to make these options.

A failure to support what is intrinsically an innovative economy, and to demonstrate a values-based politics, raises the spectre of sovereign default. It’s not pleasant to name, but it’s priced into the financial markets’ forward-looking evaluation of Ireland. This could incubate a political contagion – the counterpart of the virus-like financial contagion which has infected the global financial system – across the wider EU. If our political parties and institutions do not respond with courage, then responsibility will pass out of our hands – to external agencies and to market forces.

Government is too big. In the 10 years up to 2008, the total population grew by a very robust 10 per cent. Total employment in the public sector (including health but excluding commercial semi-State bodies) rose by almost 30 per cent, from 234,000 to 332,000. This extraordinary growth in the size of the public sector, representing as it does a fixed overhead that has to be funded by business, has left the economy vulnerable to the full force of the economic crisis.

Political parties have allowed themselves to be defined primarily in terms of opposition to the status quo. Opposition is, of course, part of what an alternative administration is about. But it is only a part. It has to go much deeper if “change”, “fresh starts” and “new beginnings” are to have new meaning. It must mean something new.

All of this is exacerbated by the paradox of coalition government. The electorate votes only to find, when the dust has settled, a coalition government cobbled together is in charge. This means that an administration then governs the country without having been endorsed by the electorate. The people – at this critical time – have no way of knowing, having cast their votes, the values of those who will subsequently be appointed to lead the country.

It is, of course, the case that any administration confronted by a crisis must take unpalatable decisions. What is different this time is the sheer scale of these decisions which could have a make-or-break impact on the Irish economy.

The protection of our economic autonomy – and democracy – requires rethinking such fundamental concepts as legitimacy, competence and leadership. Political leadership that requires the humility to appoint some sorely needed expertise from outside to serve in a decision-making capacity.

It is not just a matter of the deficiencies in the system. It is the failure to contemplate new and awful questions:

What is the political counterpart to the global financial crisis?

Do the present political systems have immunity from the meltdown that has happened in finance and economies?

How do our political institutions deal with the social consequences of the crisis and how can we prevent a political contagion that could subvert political stability when the jobless exceed more than half a million people?

We need to move away, while there is still the time, and the capacity embedded in our entrepreneurs, technologists and scientists, to re-imagine the Irish economy. This will require a reference point outside of power and shareholder value. That reference point is the common good.

It is difficult to step back from power. It is equally difficult to step back from seizing the long-awaited moment of power, certain that we have the right solutions. Ireland is now in a national emergency.

Ray Kinsella is director of the centre for insurance studies at the Smurfit Business School, UCD. This article is based on a paper presented to the international inter-parliamentary Organisation for Security and Co-operation in Europe