October 17, 2013
We've shown yet again how we can waste a good crisisPosted in International Economy · 127 comments ·
With all the noise, spin, political point-scoring and special interest lobbying over the past 24 hours, it is difficult to assess where exactly this Budget is taking the economy and, more significantly, what is the overall game plan.
In terms of the latter, Michael Noonan said: “One of the primary tasks of this Budget is to lay down the conditions for a successful exit from the bailout programme at the end of this year . . . We are well on course to do this.”
But we are well on course to do what exactly? Over the past four years, economic policy has been reduced to targeting the budget deficit as a percentage of national income. This can be achieved by either raising the growth rate or by reducing expenditure and raising taxes.
Given that raising taxes and reducing expenditure reduces the growth rate, the Government needs to have to do something extra to push up the growth rate of the country. This means deep and meaningful changes to the way the country does its business, changing areas that are underperforming and driving up productivity in key sectors.
Much of this means taking on vested interests in the economy, whether that is from restrictive practices on the left and/or the banking elites on the right.
In short, it means weeding out the ‘insiders’ who want the economy – and by extension the society – to remain just as it was before the crash. This implies acceptance of the fact that borrowing from tomorrow to pay for today is not an option, particularly if it is borrowing just to maintain the status quo.
Many countries have used their crises to change fundamentally the way they did business. Finland is a great example of a country that used a banking/housing/fiscal crisis to change its education system, to demand more from its public service and to change its banking culture profoundly.
As a result, in social terms, Finland has shifted from a lowly position in education to being the best in the world today. In corporate terms, this intensive focus on changing the old ways, resulted in the emergence of Nokia as one of the premier telecom manufacturers in the 1990s and early 2000s. (Nokia has now fallen victim to the relentless cycle of competition but that’s the way the big, bad world works.)
In the past few years the Irish economic establishment has had a choice: it could have focused on the growth rate, but it didn’t; instead, it replaced economics with accountancy and focused on cutting and taxing.
As a result, here’s the deal today: Ireland will exit the bailout in a few months most probably with the benefit of another €10bn standby facility which, though not specified, must be a precautionary measure in case the banks haven’t enough money to cover expected losses from mortgage defaults as more and more people are unable to pay their loans.
So we will still end up borrowing more money next year. The target for the budget deficit will be 2.9pc of GDP in 2015 (plus the €10bn standby facility). The Irish economic establishment’s objective is to continue borrowing – rather than balancing the books and paying our way – because we can’t generate the growth to achieve the standard of living that the politicians think we deserve.
This type of prosperity is rented, not earned. Instead of emulating the Finns we only did half the job.
After three years of a bailout, nothing significant has been done to change the way we do business. Without these basic changes, the economy is not on a higher growth trajectory. The growth rate will still fall short of the economic vibrancy needed just to eliminate government borrowing. We simply add to tomorrow’s debt burden to live above our means today.
Ultimately you have to earn your prosperity, yet the stated ‘success’ of Irish policy, as seen by the ‘exiting the bailout’ mantra, will be to borrow from respectable pension funds to pay back hedge funds based in tax shelters who took a gamble on Ireland’s attitude to economics in 2011. That’s what ‘getting back into the market’ means in plain English.
So let’s think about it. We exit the bailout simply to borrow from different people to maintain a lifestyle we patently can’t afford and nothing has been done to drive growth or productivity.
Take our education system, which yesterday got a boost. But who will get the benefit? The public who are served by the system or those who work in the system itself?
In Ireland, 80.56pc of all education costs are wages. This compares with 60.7pc in the UK. How can you change an education system if you can’t touch four out of every five euro spent?
If we were getting profoundly better results than our neighbour on even the most basic metrics, we could possibly justify this disparity. But that is not the case.
Figures produced last week show that in terms of literacy for all adults, Ireland is ranked 19th, while the UK is 14th in the OECD. And, in terms of numeracy of all adults, Ireland is again 19th, while Britain is three points ahead of us in 16th place.
The UK is paying much less on educators’ wages and getting better results. Across all metrics on this study Britain beats Ireland on every score, meaning it beats Ireland big time in the public benefits of the education system – using less money.
Wasting money is everywhere in Ireland and nothing has been done about it. Think about the citizens paying bank bondholders in full but the State – the owners of the banks on our behalf – can’t even enforce a €500,000 salary cap for banking’s top dogs.
Without deep changes to the way the economy is run – across the board – Ireland joins one of those nations that didn’t use the crisis to dramatically change itself.
Exiting the bailout therefore simply means making legitimate the status quo. The insiders are protected and the outsiders – those without a stake in the economy – suffer.
This is why the Budget doesn’t have any coherence. In terms of where it is driving the economy, there is no evidence of any direction.
Bits are pro-business and bits are pro-taxes, bits are pro-welfare and other bits seek to take away. The banks will now be used as an instrument of tax collection, snatching Dirt from depositors and passing on levies in the guise of a ‘banking tax’ on charges. It is one step in one direction, followed by a little nudge in the other.
It is difficult to expect anything different from a Coalition pulling in opposite directions to satisfy ideological and party-specific biases. That’s what they do.
However, failing to make deep changes and rendering legitimate the failed status quo (at a time of global economic transformation) doesn’t roar ‘success and courage’ – rather it shrugs ‘cynicism and a lack of ambition’.