ON THE CLIFF EDGE? 1309 LV

ON THE CLIFF EDGE ?

My local village pub has just closed its restaurant “until further notice” after two years of losses. It offered good value, unpretentious, food. It closed because of lack of custom, its fate in some ways a metaphor for what’s been happening in the real Irish economy. Elsewhere one of my favourite Dublin bookshops now closes every Monday and has reduced hours during the rest of the week.

Ordinary punters, assailed by a flood tide of direct, indirect and stealth taxes, have hunkered down. In a society where government taxes on a standard bottle of wine are $5, 20 cigarettes cost over $12, and gas and electricity prices are among the highest in Europe, dining out has become a luxury. The anecdotal evidence for this has now been backed up by the just released latest Quarterly National Household Survey – for the third quarter of 2012. Things have certainly not improved since.

The Survey paints a stark picture. 82% of those surveyed have cut back on some spending, 25% have cut in multiple categories. 66% have cut back on outings to pubs and restaurants, 65% on clothing and footwear and 51% on groceries. 60% have cut back on foreign holidays and over a third their spending on automobiles. A quarter of those surveyed have dipped into savings to pay everyday bills.

2014 promises little solace. The property tax will apply for twelve months instead of six, already overpriced public utilities are pitching for price increases from later this year, while health insurance premiums – for those who can afford them – are set for another substantial rise. The full impact of the solid fuel carbon tax, introduced last May, will be felt as soon as the home heating season begins. Public sector workers are now beginning to experience salary cuts imposed from July 1st. Hikes in many other basics and services like public transport will further squeeze what’s left of disposable incomes.

So much for the micro level.

On the macro level things seem to be panning out well with most of the heavy lifting on the economy done. The Troika targets have largely been met and the end of their stewardship seems in sight, leaving Ireland free reassert to its sovereignty by borrowing afresh on world financial markets, probably towards the end of next year.

Reducing borrowing to the recommended 5.1 % of GDP next year looks easily achievable despite the projected need of the government to continue to borrow well in excess of $ 1 billion monthly just to keep going. Some pundits are already arguing that we are so far ahead of schedule that some easing of austerity should be attempted in October’s budget, where the tug-of-war is already under way.
“Normal” politics has begun to re-emerge. The usual opposition voices calling for a reversal of policy are now being joined by significant sections of the Labour Party. With the government’s term well past half way and European and local elections due next year this is hardly surprising.

Labour has taken a hammering and is desperate for anything to restore its fortunes . While the party leader continues to speak bravely about its role in saving the economy, on current polls at least half of its deputies will lose their seats. The forthcoming budget represents perhaps a final chance for the junior government party to salvage something.

Support for Fine Gael, by contrast, is holding up well. This despite the decision to legislate on the thorny issue of abortion. The resulting law, while very limited in scope, criticised from all sides, and subject to a possible constitutional challenge, has been a watershed. Not just socially, but politically. It has established Taoiseach Enda Kenny, as a formidable political leader and Fine Gael, finally, as a tough professional political party. On his hind legs Enda is not a man to be trifled with; nor, increasingly his party.

This year’s budget is yet to be decided. As I write we are stuck at the skirmishing stage, with the actual amount of the savings required –roughly $4 billion – still in dispute. Labour wants less – given the perceived wiggle room now appearing; Fine Gael wants to keep to the pre-set target. The wrangling over cuts versus taxes has yet to hot up.

What IS clear is the message coming from the real economy that consumers have little if anything more to give. Domestic demand is in crisis; people have had to adapt, but at a price – considerable collateral damage to the retail economy. The argument advanced in favour of not slashing welfare payments because they tended to be spent, thus supporting economic activity, has now acquired relevance also for the spending power of the slightly-more-affluent.

Up to now there has been widespread stoical acceptance of what needed to be done to repair the economy, and, in the main, this has been achieved without wholesale dismantling of the welfare state and social safety net. Few would dispute that some of the spending cuts imposed at the margins, especially those affecting disparate small groups at particular disadvantage, have been ham fisted at best, incomprehensible at worst, and require redress as a priority, but by and large the system remains intact. Hence the absence of the type of public and street protest seen in Greece.

However, with different signals now coming from Europe about the efficacy of austerity policy as a panacea for the Eurozone’s economic woes, opinion is shifting here. The argument is that if some of those in Frankfurt are now having a rethink on austerity why the hell is the government here persisting with it. This argument is, of course, too simplistic. Relevant is Keynes’ comment that “When the facts change, I change my mind.” The economic situation, in Europe and worldwide, is evolving, and, with policy input feeding into and affecting economic developments, it behoves those in the ECB to take stock and amend their thinking accordingly.

There are additional flies in the Irish ointment. The target of bridging the budget deficit, so that eventually at least we can pay for our services and welfare without borrowing, continues to restrict the government’s freedom of manoeuvre and means that in practice there will be little relief for the populace next year no matter what.

Additionally our economy is heavily dependent on exports and our recovery hopes ( and plans, and strategies) are pinned on expanding those exports. There has been a double hitch. Firstly the world economy is showing at best only sluggish growth, retarding our export drive. This partly contributed to a fall of $4 billion or 6.4% in manufacturing exports this year to end June.

Pharmaceutical exports, however, which represent over half of total manufacturing exports, fell by around 10%. Much of this was the consequence of the so-called “ patent cliff “ when some extremely lucrative drugs – like Viagra(!) and Lipitor – came off patent. New drugs are being developed, so the fall has not been as precipitous as feared. Nevertheless the combined effect is to depress GDP this year, with negative implications for the budget arithmetic.

When will the hard-pressed taxpayer get some relief?

Echoes of another Keynes bon mot: “ In the long run we’re all dead.”

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