Shane Coleman writes:

‘ . . . the reality is that if there was a general election tomorrow and Fine Gael and Labour became the new government, there is probably no decision of the past nine months that they would reverse.’

I fear he might be correct.  Of course, there would be changes at the edges.  We should expect the educational special needs allocation to be restored, we would probably get some extra spending in job-intensive infrastructural projects, there would be fresh faces with their fresh-looking expressions, even competence.  Broadly speaking, however, there wouldn’t be much of a change - certainly not with Fine ‘George Lee’ Gael in the ascendant.

RTE:  In terms of squaring up to the difficulties in the public finances, is there any avoiding tax increases and major cutbacks in public spending?

Richard Bruton:  No there isn’t.  I think the issue is the balance you strike between those.’

Thus spake Fine Gael’s Finance spokesperson on This Week[1].  Even Labour, against its better instincts (and against what it was prescribing for the economy only a few months ago) has accepted the need for fiscal contraction - at the same time as the economy is contracting even further.  Of course, it will probably be a ‘fairer’ set of deflationary policies but deflationary nonetheless.

So, given what is on offer today, Shane is probably, unfortunately, spot on.  But its one thing to prognosticate a wrong set of policies, it’s quite another to cheerlead on those same policies.  That’s what Shane does:

‘Any responsible new government would have to take the same course of action (as Fianna Fail) . . . Regardless of who is in government, the tax net has to be broadened and public expenditure has to come down so that at some point over the next five to seven years, the exchequer returns to a balanced budget . . . let’s not kid ourselves that there is any alternative to the kind of policies currently being implemented.’

Apparently, Shane is not keeping up with the news.  The ESRI[2] has predicted that under current policy - tax increases and spending cuts - we won’t get a balanced budget; not anytime soon.  The EU Commission[3] reinforced this with a vengeance - stating that under current policies the fiscal deficit will rocket out of control.  John McManus[4] quotes Jaakko Kiander of the Labour Institute for Economic Research speaking about the Finnish strategies when their economy collapsed in the early 1990s (which, Mark helpfully pointed out):

‘ “In response to the crisis, fiscal policy (in Finland) was tightened in 1992-95: public-sector expenditure and employment were cut, social benefits were frozen or reduced, and taxes on employment were increased. But in spite of these measures there were large government deficits in 1992-1994, and the cutbacks and increased taxes further reduced demand and employment,” says Kiander.’

McManus summed it up nicely:

‘ . . what jumps out from Kiander’s paper is that the Finnish government initially adopted the same policy response as we have and it didn’t work.’

Shane is flogging that ol’ dead horse[5] and dressing it up in some kind of Dr. Rambo economics (‘The only cure for the disease currently crippling the Irish economy is some particularly tough medicine.’).  Fair enough - there’s a lot of it going around.  But then he says

‘ . . . no one - political commentators, economists, dissident government TDs, opposition TDs - has come up with a credible course of action that is markedly different from what the government has been doing since October.’

Okay, so Shane doesn’t drop into Notes on the Front.  Again, fair enough - there’s a lot of that going around, too.  But a number of commentators over at Progressive-Economy[6] have been arguing for a different course of action for some time. So have some trade unions.  So have some individual politicians.

Maybe it’s that Shane only reads those who affirm his world-view.  Or maybe he feels that those of us who think differently from him - and Fianna Fail - are so marginal to the debate that we deserve no mention, no acknowledgement. Maybe he was partying all week and had to pull an all-nighter to write this particular column, which didn’t give him enough time to study alternative perspectives.

Whichever, I will come to Shane’s assistance and provide him with an alternative - one that he’s free to rubbish. But at least he can’t say there are ‘no’ alternative courses of action.  Here’s a set- abridged and limited - but Shane can contact me anytime and I can fill him on the details.

What a Progressive Government Would Do in the First 100 Days

(or Start to Do)

1.  Introduce a mini-budget and reverse most of the levy increases on low and average income earners.  You really need a reality check to think - during a massive economic contraction, when enterprises dependent on domestic demand are collapsing because of falling consumer spending, with wages being frozen or even cut while workers are being laid-off or short-timed - that reducing the disposable incomes of those with a high propensity to spend is a good idea.  It isn’t.  It’s daft.  Return the money to those who are likely to spend it.

2. Ramp up capital expenditure - ramp it up high.  Do it through the Exchequer, do it through ICTU’s State Holding company, just do it.  Fine Gael claims that ICTU’s programme (which they refined) would create 100,000 jobs over four years - in energy, telecommunications, insulation, water and waste treatment.  Given that Ireland’s infrastructure is one of the worst in the industrialised world, there is no shortage of projects to modernise our economic base. But get people like Edgar Morgenroth[7] to oversee the capital budgets - we need efficiency and transparency.  More people at work, more tax revenue, less social welfare spending - and a better infrastructure to boot.  How’s that for a winner.

3. Introduce a German-type payroll subsidy programme, which would top-up the wages of those who are short-timed as an alternative to redundancy.  In Germany, over 350,000 jobs have been saved in this way.  This is a lot cheaper than letting people go on the dole.  Payroll subsidies would have the benefit of keeping people in the labour force, maintain their living standards, and help the fight against falling demand.

4. Set up an Enterprise Credit Bank.  However the banking crisis is solved (and the best way would be to bring the banks into public ownership - that’s another article) if banks, whether public or privately owned, are to be run on commercial criteria, they are not likely to loan out much money during a recession.  So set up a Credit bank for small and medium-sized companies.  Accept that it will probably lose money.  But get credit flowing - whether directly or through state-backed loans and credit; just do it.  We can work out the solvency and repayment issues after we are out of the recession.

5. Expand and enhance public services.  Yes, expand services, don’t retrench.  Two areas should be prioritised:

(a)  Early childhood education. Boy, do we fall down on this.  Forfas[8] stated that less than two percent of Irish three year olds were in early education in 2005 (EU-14 average - 82 percent) while our  pre-primary system is almost entirely privately funded, unlike the typical OECD system which is 80 percent public sector funded.  Let’s cop ourselves on; if all that knowledge capital stuff is more than just rhetoric, then we need early education and we need it now - through the public sector, not a patchwork quilt of private subsidies.  The social equity benefits will mean reduced costs down the line, while the economic benefits will result in higher performance.

(b)  Primary Care Teams.  Dust off Fianna Fail’s shelved primary healthcare strategy[9] and establish a network of primary care teams throughout the country to ensure that everyone has access to free GP and related services.  This, like early education, is a necessity, not a luxury.  This will not only create a healthier society (keep those ol’ production inputs - people - functioning at adequate levels); it will reduce costs in other areas - in particular, expensive hospital and tertiary care.  This is the first step in rationalising our health care system and budget.

The great advantage of these two approaches is that (a) they will save money in other areas; (b) increase demand, as it will lower educational and health costs to people, and (c) create jobs in our critical, but wholly under-resourced, social wealth-generating sectors.

6. Increase Social Welfare.  Oh, yes.  President Obama’s stimulus programme gives pride of place to social welfare increases.  Why?  Because this investment has the best multiplier effects.  Those on low-incomes don’t save, they spend - and in Ireland we have a lot of poverty; they purchase goods and services with less import-content than the population at large.  So increase Family Income Supplement and make it available to those on incomes up to €50,000; reintroduce the pay-related element to Jobseekers’ Benefit (if we can’t keep people in work, at least keep them out of poverty); and increase Carers’ payments - a critical cash-strapped group subsidising our healthcare system.

7. Flat-rate Wage Increases.  Hammer IBEC and ISME, force through a new wage agreement based on flat-rate pay rises that would disproportionately benefit low to average income groups - those same groups that spend more than they save.  Can employers afford it?  Many can.  The Industrial Relations News[10] has compiled a lengthy list of major companies - in manufacturing and services - who have already paid the current wage agreement; that same wage agreement that IBEC walked away from because they said no company could afford them.  What about those employers who legitimately can’t afford it?  As always, there is the ‘inability to pay’ clause that ensures that those who can’t to pay, don’t pay.  So what’s the problem?  Wages, along with employment, are the anchor of fiscal stability.

8.  Save Key Enterprises.  When companies - with key skill sets, worldwide brands or vital regional presence - are under pressure due to the recession, don’t let them fall apart or be asset stripped by private equity vultures.  Bail them out - BOI and AIB style:   provide public equity, go into public-private partnership, even take them into public enterprise.  Yes, public enterprise - those same companies that make considerable profits (ESB, Bord na Mona, Coilte, Bord Gais combined made over €600 million in their last year of reporting).  For if these key enterprises go down the tubes, there is a good chance we’ll never get them back and lose those key skill-sets.  Tell me, how does this help our future competitiveness?

These are just some of the many growth strategies that progressive government would initiate in the first 100 days.  There are many others - such as a comprehensive back-to-education programme for the unemployed - which would also be prioritised.  You could go on and on - and each proposal is worthy of an article on its own.

Oh, but I hear the chorus of deflationists - what about fiscal responsibility (wailing, teeth gnashing, rending of garments?  Well, putting people back to work, generating tax revenue, reducing social welfare costs, maintaining domestic demand, modernising our infrastructure and social wealth sectors - that’s how you reduce the deficit.  In other words - grow the economy, not slash it, not deflate it, not kick it when it is down.  But:

Harsh Medicine:  we progressives can dish out that ‘harsh medicine’, too.  How’s this for a prescription:

• Introduce a capital asset tax (i.e. wealth tax) - a 5% levy on all assets over €1 million, including private residences.  That’ll rake it in and ensure that those who got rich through the Celtic Tiger boom contribute their fair share during the bust.

• Withdraw all tax reliefs, credits and allowances (save for productive reliefs) from all individuals earning more than €100,000.  That’s another source of revenue.

• Go through every expenditure line-item and stress test it for social equity and economic efficiency.  If any fail the tests, reform or abolish the expenditure.  First stop:  subsidies to private, fee-paying schools. There are many stops on this long boulevard.

That’s just a start.  The list goes on - targeting those revenue sources with the least deflationary effect (phasing out tax relief for landlords could eventually save over half a billion Euros).  Of course, taxes in the medium term will have to increase.  But unless one wants to risk delaying recovery, general tax increases will have to wait until recovery sets in.

* * *

Shane now has an alternative.  He may not agree with it.  But he can’t say it doesn’t exist.  There are other courses of action besides the one that the Government is pursuing - the one that ESRI and EU Commission projections show to be an utter and absolute failure.

And if Shane protests - claiming we would have to borrow too much - just point out to him that we are already borrowing at an excessive level and, if the EU Commission projection comes true, our borrowing levels are set to explode (and this doesn’t count the NAMA debt).

So if we can borrow to maintain people on the dole, if we can borrow to buy out toxic assets, why can’t we borrow to put people back to work, why can’t we borrow to invest in productive assets?

The latter course can get us out of the recession - and in far better shape than we are in now.  The former will lead us to bankruptcy.

For me, anyway, it’s a no-brainer.

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[1] http://www.rte.ie/news/2009/0503/thisweek_av.html?2536726,null,209

[2] http://www.esri.ie/UserFiles/publications/20090429104918/QEC2009Spr_ES.pdf

[3] http://ec.europa.eu/economy_finance/publications/publication15048_en.pdf

[4] http://www.irishtimes.com/newspaper/finance/2009/0504/1224245890044.html

[5] http://notesonthefront.typepad.com/politicaleconomy/2009/05/ive-been-trying-to-get-away-from-this-topic-the-whole-deflation-thing-and-its-impact-on-the-economy-and-the-budget.html

[6] http://www.progressive-economy.ie

[7] http://www.esri.ie/about_us/staff/view_all_staff/view/index.xml?id=32

[8] http://www.forfas.ie/media/ncc090309_statement_on_education.pdf

[9] http://www.dohc.ie/publications/pdf/primcare.pdf?direct=1

[10] http://www.irn.ie/