January 27th Morning: The Recession Diaries

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It really is surreal.  Hundreds of jobs are going in the banking sector, Retail Excellence Ireland warns that 25,000 jobs could be lost in the first quarter.  The economy is turning in on itself.  And the Government is obsessing over public expenditure cuts.  People are demanding to know what can be done to protect their livelihoods and Fianna Fail Ministers debate cutting the Carers’ Allowance.  It’s all worthy of a Dali painting.

It’s against this backdrop that the Irish Times proceeds with it’s ‘What is to be Done’ series is on the economy.  First up is John Fitzgerald of the ESRI.  He rightly claims that

‘What Ireland needs now is a strategy for digging ourselves out of our current hole and restoring normal growth.’

In many senses, however, Fitzgerald doesn’t offer solutions. Rather he outlines options. For instance, he rightly declares that restoring ‘order to the domestic banking system’ is a primary task for the Government. But he is content to outline the options: recapitalisation or further nationalisations. However, his ordering of choices suggest the direction we should head in.

Cut the Public Sector Pay bill: we can choose between cutting public sector pay and/or making public sector workers redundant. Whichever, cut we must.

Cut the Social Welfare Bill: Eerily, Fitzgerald opens up the possibility of cutting social welfare, claiming that recipients are getting a ‘dramatic’ boost in real incomes owing to the decline in the Consumer Price Index. We are, of course, talking about the lowest income groups in the country – the unemployed, pensioners, the disabled, lone parents, etc. We are also forgetting that in the last year these groups suffered disproportionately from rising food costs, thus reducing their real income by a higher amount than other groups. No matter – consider the cut.

Cut Capital Investment: this could be done by either postponing projects which ‘wouldn’t have a major impact on the economy’s productive potential’ or by pocketing the savings arising from the fall in the cost land and building. Another, more profitable course would be use the savings to reinvest into more capital projects – lord knows, with our infrastructure ranking 64th in the world, we need a lot of upgrading. Good for productivity, good for job creation, good for growth. But Fitzgerald is first and foremost viewing these options through the lens of fiscal retrenchment. So cut.

Cut the Minimum Wage: In keeping with his earlier calls for cuts in private sector wages, Fitzgerald suggests more cautiously: ‘Possible obstacles to preserving jobs arising from the minimum wage may be considered.’ In other words, an invitation to cut.

Beyond the cuts, Fitzgerald looks forward to tax increases ‘beginning with the possible recovery of the economy some time in 2010′. He puts forward a number of options:

  • Cut personal tax credits to lower the threshold at which people begin paying taxes
  • Increasing the top rate of tax
  • Abolish the PRSI upper threshold
  • Abolish tax expenditures
  • Introduce carbon tax
  • Introduce a property tax

Now all of these are worthy of serious debate, especially as there is no doubting that following the recession, the tax base will have to be bolstered. Worryingly, though, Fitzgerald doesn’t suggest these tax increases will go into improved public services or sustained job creation measures to re-employ those made jobless during the recession.

‘. . . Government will have to choose between further cuts in employment and public services or raising taxes’.

So we will have to slash the public realm upfront and, when the recovery starts, we will have to increase taxes or cut even further. Tax increases will have to be instituted to merely maintain an already degraded level of public services. Hope postponed.

Let’s be clear: John Fitzgerald has never been part of the neo-liberal brigade. Though writing in a personal capacity, he comes with the gravitas of the ESRI in tow. His article shows how much the traditional centre ground has shifted. All we are offered is a buffet of cuts topped off with a desert of tax increases. None of this is mediated by any public intervention being considered and pursued in Washington D.C, London, Berlin and Canberra. Indeed, Fitzgerald positively rejects these routes.

‘For Ireland it is vital that action is taken to boost the euro economy to complement that being taken in the US. Some debate has taken place on whether a fiscal stimulus would be appropriate in Ireland. However, the crisis in the Irish public finances means that it is not feasible or desirable to do so.’

The strategies pursued by a number of other countries – from Obama’s $800 billion stimulus to Germany’s €50 billion – are dismissed out of hand, without any discussion. Indeed, this is becoming a standard claim among many commentators: (a) we need action to boost the economy; however (b) we can’t take such action ourselves; besides, (c) we wouldn’t want to do it anyway; but (d) we need action to boost the economy.

Ultimately, Fitzgerald doesn’t present any options to boost the economy. We must wait on the kindness of strangers. In the meantime we must make the same mistake as Fianna Fail governments did in the early part of the decade – pursue pro-cyclical strategies: cut, cut and when that is exhausted, tax. Instead of ‘digging ourselves out of the hole’ we are digging ourselves ever deeper.

It almost makes you want to take up painting.

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One Response

  1. Robert Browne

    February 5, 2009 1:10 am

    If you read any economic blog on ireland it is full of facts and figures, the deluded economists trying to out-do themselves with analysis. It is all about theories and convoluted formulae. We are in the position that we are in because of one simple fact. WE HAVE BECOME ONE OF THE MOST CORRUPT COUNTRIES IN EUROPE it has nothing to do with getting a few formulae wrong! It has everything to do with gross corruption by successive governments of every hue and colour.

    So corrupt, in fact, as a people have we become that we no longer realizes just how far we have fallen! We have TV presenters who are earning multiples of what the Taoiseach or Prime minister of the country earns. Judges who have become millionaires while presiding over years of Tribunals of Inquiry into “corruption”. Inquiries that have become shameless gravy trains of “legal abuse”, if there is such a concept, of legal abuse, of the tax payer. In Ireland it certainly exists and these tribunals are still squeezing the last few euro’s out of the tax payer. The public do not even need these judical “Reports ” which are now worse than useless. We have seen enough. Spare us the “Reports”.

    This country will only start to recover when it collapses or implodes, no longer able to service the absurd levels of debt needed to sustain the corrupt political parties and agendas. We have 800 quangos with over 5000 political appointees and more at almost every level in society.

    When Moody’s, S&P and the creditor nations realize how daft they are to prop up our corrupt government the collapse will be precipitated! Then ireland as a people can start again, many of us look forward to that day.