Weight of terror over Anglo is cracking our optimism
Banking woes distract from wider financial ills. They are crippling the confidence we need for economic recovery, writes STEPHEN COLLINS
AS THE Government continues to wrestle with the awful magnitude of the Anglo Irish bailout, there is a real danger that the despair it has generated will fuel the recession by undermining confidence in the possibility of a recovery. An added problem is that the banking drama is actually obscuring the crisis in the public finances which won’t go away even if the banks are fixed.
Given the current mood in Ireland, it is worth pondering Franklin D Roosevelt’s famous inauguration speech in January 1933 at the height of the Great Depression: “Let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance.”
Unreasoning and unjustified terror is now as big a threat to an Irish recovery as the underlying problems it faces.
Minister for Finance Brian Lenihan has insisted again and again that while the scale of the problem at Anglo Irish Bank is appalling, it is still manageable. The governor of the Central Bank, Patrick Honohan, has voiced the same opinion.
The fact of the matter is that the country’s problems are eminently manageable by a government that has the resolve and the mandate to do what is necessary. We only have to look at our own history to see what was achieved in far more difficult circumstances.
It is instructive to look at the very first book of estimates presented to the Dáil in October 1922, as civil war raged and the government of WT Cosgrave was struggling to establish the apparatus of an independent state.
Out of total government spending of £37 million in the year from March 1922 to March 1923, £10 million was allocated to compensation for damage caused by war and more than £7 million went to the army. These items accounted for 46 per cent of all public spending, the equivalent of about €26 billion today. If the founders of the State could survive that, and civil war into the bargain, the scale of our present difficulties does not look so bad.
One of the current problems is that, two years after the economic whirlwind struck, many people no longer believe that the Government knows what it is doing, particularly on banking, and it doesn’t have the mandate to do what is needed to sort out the public finances.
Whatever happens, though, the banks will be sorted out at some stage, but the continuing uncertainty has eroded public confidence in the Government’s ability to deal with the situation. It has also distracted from the scale of the hole in the public finances which is an even greater threat to the country’s welfare.
While the banking crisis has pushed up the cost of exchequer borrowing, it is the very fact of the borrowing, to cover the enormous gap between tax revenue and Government spending, that is truly scary. We are now borrowing close to €20 billion a year to keep the country going and that simply cannot continue.
The Government has announced its intention of making further adjustments of €3 billion in the December budget and, even though economic commentators have suggested that it will not be enough, it won’t be easy to achieve. Reducing capital spending by €1 billion will be the relatively easy part, but finding at least €2 billion more in spending cuts or tax increases will cause severe pain.
A determined effort to widen the tax base is an urgent requirement but the Government has so far failed to act on this front.
One obvious and very necessary reform to our tax system that would generate significant extra revenue is the introduction of a comprehensive property tax. Despite the fact that it was recommended by the Commission on Taxation over a year ago, work has still not begun on a new property valuation system.
Fianna Fáil is clearly afraid of a negative political reaction to a property tax and so too are the Opposition parties as they have all shied away from advocating it. Still, when it comes to the budget, Lenihan may have no option but to make a start with some interim form of property tax.
A dilemma facing the Minister for Finance is that the cuts in spending required to deal with the budgetary crisis will take money out of the economy and curtail the prospects for growth. It is a very difficult circle to square but he will have to attempt it.
The fact that a general election is growing ever closer is also becoming a problem, as the temptation for both Government and Opposition is to shirk some of the major issues confronting the country. The need for a property tax is a case in point and so too is the necessity for pension reform in the public service and whether or not the Croke Park agreement is delivering anything worthwhile or even affordable in the first place.
There is a strong case to be made for having a general election as soon as possible, so that a government with a mandate and a full term ahead of it can make the big decisions that are required to put the country back on its feet and instil the kind of confidence that is a prerequisite for economic growth.
Back in 1987, when the mood of depression in the country was similar to today’s, a general election served as a catalyst to clear the logjam of political stalemate. During the campaign, Garret FitzGerald argued that the vicious cycle of negative growth, spiralling government debt and unemployment could be turned into a virtuous circle of growth, jobs and declining debt.
While nobody in their wildest dreams expected that Charles Haughey and Fianna Fáil would end up implementing Fine Gael policies, that is exactly what happened in the shape of the Tallaght strategy. The country was put on the road to recovery in much quicker time than anybody believed possible. Only when the next election is out of the way will it become clear whether our next batch of political leaders have the political skill and will required to rescue the country again.