GETTING THE TOOTHPASTE BACK IN THE TUBE IAN 0906 IV

GETTING THE TOOTHPASTE BACK IN THE TUBE
Last month the Government received a mauling in the European Parliament elections and in the national local elections. The main opposition party, Fine Gael, passed out Fianna Fail for the first time, not just in the opinion polls but in terms of actual election results. A variety of left wing candidates were also successful. It was too bad for the victors that the election results meant next to nothing in terms of national political power.
It is hardly surprising that an electorate still seeking scapegoats took it out on the government. From never having it so good, the pendulum has now swung the other way, with a vengeance. However, and particularly regarding the surge in support for left wing candidates, it is difficult to avoid concluding that a sense of denial about economic reality continues to pervade much of Irish public opinion. It is all very well to castigate the government for economic mismanagement in years past. But that will not get the country out of the current economic hole. There is no magic bullet. There is an abiding reality to be faced and that is that very unpalatable measures cannot be avoided. Moreover, those who shout loudest about no cuts in government expenditure, particularly in the welfare area, have short memories. It remains to be seen whether the election results were more than a mid term protest.
Save in one respect Ireland is not unique. Other European countries also have their current economic travails, particularly some of the newer member states and that was reflected in the results for the European Parliament elsewhere. Generally, and predictably, the bigger the national economic difficulties the worse the result for the government concerned. In Britain, Ireland’s most important trading partner, the Labour government was punished savagely. Britain, remember, has banks and bankers every much as venal as those in Ireland and has committed to borrowing even more prodigiously than Ireland. It has also joined the USA in adopting a policy of printing money, the end result of which is uncertain.

I have just returned from Spain, which presents an interesting economic case-study with some striking similarities with Ireland. Both countries have seen a lengthy building-based economic boom end with precipitate speed, accompanied by a sharp rise in unemployment (Spain’s, at 19%, is far higher than Ireland’s). Both have woes with developers, and are suffering the worst economic contraction in 50 years. In Spain’s case also, the huge tourist industry (60 million visitors annually) has been suffering the double whammy of the European-wide recession and the appreciation in the value of the Euro. The (socialist) Spanish government predictably also took a beating in the European elections.
Where Spain and Britain differ from Ireland is that their tax revenues have not collapsed. They have been reduced, true, as the recession has made itself felt, but they have not gone into meltdown. There is money in the pot, or credit to be used, to help stimulate economic activity. In Spain 280,000 extra jobs have been created by an $11 billion government stimulus package for public spending by town and city halls this year. Britain had enough in the tank to attempt to lower taxes as an economic stimulus in its last budget.
Contrast Spain with Ireland. Irish government revenues have collapsed. The government is currently borrowing roughly $100 million per day just to keep going. A series of emergency budgets, incorporating levies (i.e. extra taxes) have been introduced in an attempt to stabilise government finances. These now appear to be having an effect, though the jury is still out. Economic activity seems to be picking up, but at a jarringly lower level. Jobs continue to disappear, with all that that entails in terms of individual hardship and family misery. Crucially, the building sector remains at a standstill Crucially also banking activity, where not stalled, is functioning only at a low level. Credit for small businesses remains at a premium or simply not available. And the government has already signaled harsh budgets to come for at least the next two years, with higher taxes, new taxes and severe cuts in spending in order to carry on the task of getting the public finances under control.
The Celtic Tiger years were good years. There was unparalleled prosperity in the community as a whole. More jobs meant more tax revenues. The government had large tax surpluses, and used them! Existing government debt was greatly reduced. An ambitious programme of infrastructural development, particularly on roads, was started. Spending on health and education and to combat social exclusion increased dramatically. There were significant real increases in payments to the elderly, the unemployed, single parents. Children’s allowances were hiked to unheard of levels; a family with four children receives $1000 per month from the state. Our social welfare payments climbed to become among the best in Europe. The Irish minimum wage is the second highest in Europe. An old or unemployed Irish person receives payments more than double those in Britain.
Prompted by Europe, numerous new government regulatory agencies were established. An ambitious expansion in existing programmes was instituted, increasing the numbers on the public payroll considerably. More nurses, more teachers, more police. These and other popular measures required extra staff, which costs!  Annual expenditure on Development Cooperation increased from around $500 million to $I billion over a five year period and was targeted to go higher, making Ireland the world’s sixth most generous donor to the world’s poor. A Pension Fund was established, to provide for the coming rainy day when current revenues could not cope (up to now the percentage of elderly in Ireland has been uniquely low as a consequence of emigration). And, to encourage saving, the government spent some billions topping up a national regular savings scheme by 25%.
All this spending was done to cheering and applause from a public which revelled in the new found prosperity. Woe betide the few who counselled caution. Equally popular was the fateful, and fatal, accompanying policy of slashing direct taxes, which saw the basic rate cut from 30 to 20% in a decade, and increased exemptions from tax, which saw 38% of those working paying no tax at all. The cuts were made possible by buoyant tax revenues from the almost million new jobs created and the surging receipts from stamp duty and capital gains – the taxes on property sales. Without the tax cuts, the property collapse and the recession might have been manageable. As the property taxes melted away, the reduced tax base was cruelly exposed, which is where we are now.
Remedying matters will be like trying to put toothpaste back in the tube. Restoring taxes to the levels of 2000 will be deeply unpopular. But it will not be sufficient. Expenditure also will have to be cut, and cut dramatically, and that will mean real pain. For starters the government has signalled cancellation of the Christmas bonus welfare payment. It is meanwhile channeling billions from the Pension Fund to prop up a deeply unpopular bank. Either issue could be its Waterloo. Should it fall, the future looks bleak. There will be no more denial should the IMF arrive.

END

6/13/09

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