FREE AT LAST! -WELL, ALMOST 1401 LIX

FREE AT LAST! – WELL, ALMOST

With considerable fanfare Ireland has exited the Troika bailout programme after three years. The programme, which provided cheap credit to run the country when no other institution would loan us money, has had a bad press. It became identified with assertions that Ireland had “lost” her economic sovereignty. At best an oversimplification.

Following years of economic and fiscal mismanagement and a banking collapse, a crisis developed in the country’s finances, with a yawning gap between tax revenues and the cost of running the country, including a bloated and expensive public sector and an over generous welfare state. The alternative to savage politically and socially unacceptable cuts to balance the books was the Troika arrangement. Under it – thanks to it – public finances have been stabilised, the tax base has been sensibly extended and our economic and social structures have survived. All this with negligible public discontent and unrest.

Opinion among commentators is divided on whether Ireland’s exit has been a trifle premature and whether we should seek a line of credit “just in case.” The instinct of the government is “No.” The reasoning is that the political plaudits to be claimed for “restoring our sovereignty” – assuming it was ever lost – far outweigh the risk of needing a further bailout. If the need arises, not only can it be blamed on external factors, but does anyone doubt that we would not be accommodated – and with the real economy in far better shape than in 2010? The government is on a winner on this one.

So where does Ireland stand now? The picture is somewhat murky. Very few have been left untouched by the crisis since 2008. Even for those with jobs or still in business disposable income is down substantially. Domestic demand has suffered grievously and serious structural problems remain. The mortgage crisis remains to be tacked in any definitive way and its effects extend far beyond those directly affected. The banks – what remain of them – carry the albatrosses of distressed mortgages and overvalued property portfolios, inhibiting any genuine recovery of the banking system and restricting severely the availability of credit to the domestic economy.

Unemployment remains stubbornly high, with the annual natural increase from school leavers and immigrants a constant to be factored in. Reducing the minimum wage to a more realistic level , which would facilitate hiring additional workers, appears a lost cause with Labour in government. Certainly wage costs have come down considerably, improving the country’s competitiveness, but little action has been taken to reduce upward only rents. The retail sector remains in distress with long established businesses continuing to go to the wall. Shortage of credit from the banks is now chronic. And, when recovery comes, the debt legacy will remain for years to come.

But suddenly there are Green Shoots everywhere – in the media and among politicians at least. And optimism is catching. A good summer; a mild autumn. The public mood is definitely more positive amid hopes that the worst of the recession may have passed. Several economic indicators are showing improvement. Not only is unemployment down, something that could of itself perhaps be explained by emigration, but employment is up, very definitely, with new, permanent, job announcements weekly. There is a mini boom in house property prices around Dublin and hopes that it will spread. Small, and new, businesses are opening.

Whether this is a temporary blip or whether recovery is actually on the way remains to be seen. Partly it may be the seasonal factor with pubs and restaurants in the cities full again. However, for most people things have stabilised and even the prospect of increased property taxes and water charges to come are being contemplated with equanimity . There is a growing feeling that, to quote Churchill, while this may not be the beginning of the end, it is certainly the end of the beginning.

Not surprisingly politicians on the government side are talking things up for all they’re worth. There is cautious optimism that, politically as well as economically, the corner may have been turned. The latest opinion polls show Fine Gael continuing to perform relatively strongly, while for Labour, post –budget, the slide seems to have been halted.

The fig-leaf Labour has clung to, that it helped keep the economy from collapsing while simultaneously maintaining core welfare payments, suddenly seems to be acquiring substance. While Labour has a long way to go to regain the ground lost, its leadership received an added unexpected bonus in early December when one of its most trenchant internal critics left to join Fianna Fail.

Taoiseach Enda Kenny appears to have that quality Napoleon regarded as essential in generals – luck. He was in opposition when the economy collapsed. He – and the government – were presented with the Troika as a convenient fait accompli. Moreover, and often overlooked, much of the heavy lifting to get the finances straight was actually set in train by Fianna Fail, with the present government now beginning to reap the benefits of the knock – on effect of emergency measures taken in 2009 and 2010 – before the Troika arrived.

Then strict adherence to the Troika’s terms, the harshness of which could conveniently be lumped at the previous government’s door, began to pay off. The result was some wiggle room come last October’s budget, which proved less severe than feared, with the relatively harsh cuts of $3 billion passed off as some sort of easing of austerity. Fianna Fail were – and are – hamstrung since the Troika deal was theirs, while the Left, including Sinn Fein, has, despite everything, been unable to make serious inroads. The population as a whole, while increasingly leery of politicians, has shown stoical acceptance of what needed to be done to get the economy straight.

There is still some way to go. 2014 will provide some answers. On paper another harsh budget is required to bring borrowing down to the 3% mark. But politicians are politicians. There remains the danger that, with European elections scheduled for next summer, the politicians will cut and run by offering, or promising, sweeteners for the electorate. As I write the prospect of tax cuts is already being floated by some government ministers , though the Taoiseach has emphasised that there can be no return to the profligacy of the past . This is something to be watched. Short of an amendment to the 2014 Finance Act – unlikely – any changes in taxes will not take place until 2015 but the very fact that the notion is being peddled now is worrying.

For 2014 potential banana skins remain, none more so than in the black hole of Health. The 2014 budget target of cuts of $3 billion was achieved by introducing a balancing figure for cuts in health spending amounting to €666 million ($1 billion). Some commentators have suggested that, factoring in elements left out – including the overrun for 2013 – the “true” figure for cuts in 2014 could be close to €1 billion. If implemented this would mean a double digit cut in the health budget – both unsustainable and unacceptable, and probably also unachievable given the HSE’s track record to date. Any cuts at all in health are politically sensitive. Watch this space.

December 16 2013

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