What we need for recovery is a major Keynesian-style stimulus package
Ireland has to shift rapidly from Boston to Berlin: from the Anglo “shareholder value” system, to the European “stakeholder” model. To find solutions, we must learn from history, writes Paul Sweeney
UNEMPLOYMENT MAY be heading for 450,000 and for the first time, there is no place to go. The emigration “safety valve” is closed. This crisis is different to anything we have experienced before.
Therefore, the solution must go far deeper than simply addressing the public finances. This explains the social solidarity approach taken by congress in negotiations with Government, primarily our insistence that the cost of any adjustment is shared across all of society. We require a fundamental realignment of our economy and society.
And if/when we resolve the crisis there can be no return to business as usual for corporate Ireland: for the banks, builders and Government policies that combined to bring our economy to its knees. This global mess was generated by privatised, deregulated and ultra-free markets. All countries, including Ireland, must now abandon this redundant economic model.
However, ongoing commentary from many Irish economists demonstrates that most are still wedded to neo-classical economics, adhering faithfully to the theory of “efficient markets”. But the world moves on. The market is not working. It was not even working when it appeared to be booming.
In fact, areas of the market now need public subsidies to function. And when the market comes out of rehab, it must be fundamentally reformed and learn to operate under greater public oversight, or we will have learned nothing.
Some of us warned against the buccaneering, tax cutting, free-spending, pro-cyclical policies of Charlie McCreevy, when minster for finance, and the huge subsidies to property investors. These actions greatly inflated the bubble and exacerbated the bust.
Several businessmen who built up fine firms have been found playing casino capitalism with vast sums of money, borrowed from “friendly banks”. New laws are urgently necessary on financial disclosure, on unlimited companies, on regulation, and especially on corporate governance. Ireland has to shift rapidly from Boston to Berlin: from the Anglo “shareholder value” system, to the European “stakeholder” model.
To find solutions, we must learn from history. Some argue we should not look back and scapegoat. But it was the bankers, and developers, their professional advisers and economists who “pimped up” the boom. They almost destroyed what is still fundamentally a sound economy and Government policy greatly assisted. No wonder people are angry.
Today’s bust would not be so bad if, during the boom, the Government had taken its foot off the growth accelerator and not reduced taxes so much – we pay virtually the lowest income taxes in the developed world, have the lowest taxes on corporate profits and none on property. In addition, it would have helped if they had conserved revenue and been far more vigilant on financial regulation.
Credit would have been tighter, thus the boom would have been reduced and the bust would have been less dramatic. Had direct taxes not been cut so much, we would now have a big pile of cash to maintain public services. But Government chose the US way of deregulation and privatisation. Further privatisation would be folly. Selling productive family silver in a bad market would be naive in the extreme. These are key, Irish-controlled companies that deliver vital services and profits. We privatised a highly profitable, debt-free, heavily investing Eircom and the result on prices, services and broadband has been disastrous.
On the positive side, the National Treasury Management Agency currently holds borrowings of over €21 billion in cash. Thus, Ireland will not be forced to borrow for a while, at prevailing premium rates. The net National Debt to GDP ratio is now only 20 per cent. Congress has accepted that the country is in a double crisis with both the banks and tax revenue in freefall. Thus cuts in public spending will have to be made but only if the pain is shared.
Conservative economists simplistically advocate cutting public sector pay. Some even want to cut social welfare and the fuel allowance. But there are regressive State subsidies we should target. For example, over €3 billion in tax has been lost in “incentives”, to wealthy investors in area-based property schemes alone, with some €473 million forgone in 2006.
More importantly, Ireland runs a massive but hugely unreported corporate welfare programme with billions given to the enterprise sector annually in tax breaks, incentives and subsidies, all of which is run by a vast network of public servants who deliver free services to the sector: IDA Ireland, Forfás, Enterprise Ireland, SFADCo, Údarás, Teagasc and BIM are but a few examples. Businesses should be more careful in what they wish for in public spending cuts as they might now have to pay their own bills.
Similarly, the IFA demands a 20 per cent cut in wages. Yet public subsidies and price supports to Irish farmers under Cap are equal to their total net incomes, annually. Some 118,000 farmers will have received a staggering €53 billion in Cap subsidies by 2013. They cannot talk of competitiveness. They bite the hand that feeds, pun intended.
Over €1.5 billion a year could be saved in cutting subsidies to business, farmers and investors – overnight.
We have also heard unsubstantiated claims that labour costs are a big problem, this being the basis in arguing for big cuts in all employees’ pay. It is asserted that “we” are paying ourselves too much, as if we are all uniformly well paid. For professors of economics on €150,000 to €170,000, this is correct. For dentists, solicitors, accountants and medical consultants, many business people and some farmers, it is correct. But it is not correct for average workers. Two-thirds of the workforce earn less than €44,000. Conservative economists do not seem capable of distinguishing between differing incomes and wealth. As the accompanying table shows, the cost of employing the average Irish worker is 22nd from a list of the world’s 30 richest countries.
It is clear that total labour costs are way below those of the UK, Germany and other euro zone countries. The loss of cost competitiveness we are experiencing is due to the strong euro, not pay levels.
Competitiveness is a very complex issue and involves far more than costs, either labour costs or even unit labour costs. Yet our productivity is amongst the highest in the world and has risen at over three times the average rate in the euro zone for the last decade.
A further major flaw in the conservative argument on pay cuts is that they will automatically translate into overall lower costs and will not lower consumer demand. That is untrue. Congress is seeking a major Keynesian-style stimulus package. We accept the need for an adjustment in the public finances, with progressive public sector reform and tax increases for the well-off, action on tax exiles, a termination of tax shelters and a broadening of the tax base.
We seek increased investment in education, our key competitive advantage, with a national No Child Left Behind programme for all pre-school children. We propose reshaping our social welfare system around the concept of flexicurity, along with a jobs scheme for vulnerable firms, as unemployment soars. Congress wants real bank reform, not rewards for bad behaviour, and concrete measures to help those threatened with repossession. Other key issues are: better regulation, curbing executive remuneration, progressive health care reform; a green deal for renewable technology and a National Recovery Bond.
To solve this major crisis, all will have to contribute, according to their means. This includes cuts in subsidies to the enterprise sector, to banks, to corporates, to investors, to wealthy farmers. There can be no more “business as usual”.
Paul Sweeney is economic adviser to Ictu, the Irish Congress of Trade Unions.
On Monday, John FitzGerald of the ESRI, who began this series last Saturday, will conclude it with his thoughts on what has emerged during the social partnership negotiations and the way forward the Government is trying to chart