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Keeping people in jobs/ businesses going crucial to solving economic crisis

Issued : Friday 3 July, 2009

This is an important debate. Not as an opportunity for party-political point scoring at the end of the Dáil session. Not, because the IMF or the OECD have any monopoly on economic wisdom.

But because vital decisions are going to be made by Government during the summer recess; decisions which it may be impossible to reverse.

And because the report of the IMF in particular, calls attention to fundamental flaws in the Government approach to the banking crisis in particular, which it is not too late to address.

The report of the IMF is not gospel. There is much of it with which I would differ, and we are entitled to do so. But it is the work of an influential international body, that brings an important external perspective, and that we should take seriously.

The IMF report rightly analyses Ireland as having three inter-linked economic crises:

It summarises the complexity and difficulties involved quite crisply

‘The authorities agree that the risks remain significant. The risks arise from the continuing interaction of slowing growth, financial sector stress and the state of public finances, with each threatening to pull the other down. If the distress in the financial sector is larger than currently estimated, this damaging reinforcement could accelerate’

In other words: we must address the jobs crisis. No-one doubts the importance of fiscal crisis. No one doubts either the importance of the banking crisis – of restoring the flow of credit. But you also have to deal with the crisis in the real economy – people losing their jobs and their businesses.

Again and again, I have come back to this point. If the Government thinks that higher unemployment is the cost of saving the banking system and the public finances – they are wrong. Keeping people in work, keeping businesses going, supporting new ventures with whatever tools are available – these are essential to dealing with the other two crises.

The tools are limited, but they do exist.

Labour has argued, for example, for a State Investment Bank, that would fund infrastructure development and also provide finance to business.

Of course, we must demonstrate that the public finances are on a path to sustainability, but we cannot ignore what is happening in the real economy.

The construction sector, in particular, is in dire straits. Yet at the same time, there are any number of infrastructural projects that could be carried out, which would yield a positive long-term return. There is an opportunity to make those investments now, when there is spare capacity in the building sector, and tender prices are at an historic low.

That is why Labour has been calling for a new National Development Plan to be drawn up, and innovative financing options to be examined. Given that the construction sector is operating below its sustainable level, jobs and incomes can be saved, and valuable infrastructure put in place, with a determined approach by Government.

It is also vital that we provide training and work experience opportunities for the unemployed. Again and again, Labour has made the argument that we must learn the lessons of the 1980s. It is not economically, socially or morally credible, that this state would be passive in the face of the half a million people on the live register. It is simply not acceptable.

I cannot, for the life of me, understand the inertia from the Tanaiste and her Department on this issue. There have been modest proposals brought forward in the budget and since then on training, but they are miniscule when compared with the scale of the problem. Active Labour Market Progammes do cost money, but the cost is modest, when you realise that the person on the scheme would otherwise be in receipt of a social welfare payment. We also know that schemes do not have to be expensive to be successful. Labour has brought forward a range of innovative ideas that attempt to learn from the experience of the 1980s.

•An earn and learn scheme
•A bridge the gap scheme for work experience
•More places in further education
•New criteria for the back to work and back to education schemes
•A tax back scheme for people who want to go back to full time study
•Literacy programmes for those with reading difficulties who are among the most vulnerable when they lose their jobs.

The Government’s response has been piecemeal and limited. It has agreed an ‘earn and learn’ scheme, but with only 277 places! They have done some work on training and education, but the scale of the response does not meet the scale of the problem.

If there are to be 500,000 people on the live register, then we should be thinking in terms of 100,000 new opportunities to gain skills and experience.

This is not a matter of giving people on the dole something to do. This is about making sure that we don’t see the build up of a new group of long-term unemployed. This is about investing in a pool of people who will be more highly educated and more highly trained, and will be ready to participate in the recovery.

Again, this is an investment that has a long-run impact on the productivity of the economy. And again, there is an opportunity to do so now, when the economy is in a downturn.

Those are but two areas of policy. There are others. We should look again at supports for SMEs, to help viable businesses to survive, and new businesses to start up.

Businesses today are being crippled. They are suffering from the drop in trade as a result of the recession. The banks won’t lend them money. And they are also having to deal with a range of state bodies, such as revenue, the local authorities, and regulatory bodies, some of whom are continuing to behave as though Ireland is still at the height of the boom.

Labour has argued for a PRSI exemption scheme for companies that create new jobs for a limited period.
We have agued that local authorities should have discretion to introduce rates exemptions for new businesses.
We have also argued for changes in the law on rent reviews.
Here, I had hoped the Government were doing to adopt Labour’s Bill in this area, but instead they are applying the new rules only to new leases, which is of little use to hard pressed businesses.

If we are to develop a new NDP, then we should look again at the capacity of each sector in our economy to create jobs. Are we making the most of the food industry? What about tourism? At the height of the boom, the Irish tourism sector was in danger of pricing itself out of the market. In the past twelve months, accommodation prices have fallen by 12.4%. That is something we can sell abroad.

Again and again, we come back to the point that the Government is ignoring the jobs crisis, which is undermining its capacity to deal with both the banking crisis and the fiscal crisis.

The Banking Crisis
A Ceann Comhairle, The IMF is an inter-governmental organisation, and it takes care to couch everything it says in the most diplomatic language. The report was written so that the Government would be able to welcome its findings – such is the nature of the process.

Yet, amidst the carefully constructed language, two things stand out. The first is the estimate from the IMF that the banking crisis will cost the Irish exchequer some €35billion Euro, or 20% of GDP.

That is a truly staggering figure to contemplate. Its important to remember – a billion has nine zeros. It means that because Fianna Fáil were, at best, asleep at the wheel of banking regulation, every man woman and child in Ireland is left with a bill of nearly 8000 euro.

Of course, the IMF’s estimate is just an estimate. What is also striking, however, is that the government had no alternative figure to advance. It was left to the IMF to come up with a number.

Which leaves us with the question: what is the Government’s number? For months we have had a drip feed of bad news from the banking sector, but we have not seen an authoritative figure being put on the bad debts in the banks. No-one doubts that this is a difficult thing to do, but in the absence of a credible figure from Government, others have made their own assumptions.

This is a central issue. As the IMF again point out, and as I have pointed out before, there is a significant linkage between the banking crisis, and the cost of borrowing for the Irish exchequer. By taking on responsibility for the bad loans in the banks via the guarantee, the Irish exchequer took on a huge contingent liability, that no-one has been able to quantify. Little wonder then, that movements in our bond spread have been strongly associated with events in the banking system.

Put simply, the inability of the Irish Government to sell a convincing story about Ireland abroad, and to put a credible figure on the cost of the banking crisis, has contributed to our higher cost of borrowing. Somewhat belatedly, the Minister for Finance has been wooing the bond markets on a road show of financial markets. Indeed, I was sent a copy of the presentation that he has been using, by an irate banker who found it much less than impressive.

The core concern of the IMF report is NAMA. Here the usages of diplomatic language have been strained to breaking point. It is amply and manifestly clear that the IMF mission believe the present NAMA proposals represent an unwarranted risk for the exchequer. In IMF-speak ‘Price determination is a major challenge’

They go on to essentially endorse the approach proposed by the 20 economists, and by the Labour Party, which is based on temporary nationalisation.

Of course, they do not rule out the NAMA idea but rather want to see it redesigned to operate alongside temporary nationalisation. The insertion of a long paragraph taken from recent IMF documents on the role of nationalisation is a clear signal of what they actually think.

We must also have regard to the delay in setting up NAMA and in legislating for it. That delay is the cause of further damage to the banking system and to the economy. Because NAMA will take both good and bad loans, the delay in introducing NAMA is causing banks to restrict credit where a business has some holding of development land or property. Meanwhile, those who owe the banks a fortune for development loans have no incentive to pay the banks, in the hope that they will get a better deal from NAMA. Thirdly, the delay provides some individuals the opportunity to try to hide good assets.

The Public Finances

There was clearly a greater level of agreement between the IMF and the Government on the public finances, though that is not something from which we can take comfort.

The IMF report makes a bald statement that fiscal adjustment should focus on expenditure cuts. They argue that there is international evidence to suggest that adjustment based on cuts in spending rather than on taxation have been better sustained, and have often been expansionary rather than contractionary. This line echoes comments being made by the Government in recent times.

We must be particularly careful here, not to just blindly apply the result of a statistical analysis of what may have happened in other countries in other circumstances to the position of the Irish economy in the here and now. Nor should we vest this issue in any great economic mystique.

In the end, this comes down to fairly simple logic. For a fiscal adjustment to succeed, it must deal with the underlying cause of the deficit. If the cause is ever-increasing public spending, then the solution is to arrest public spending. If on the other hand, the cause is an excessively narrow tax base, then you have to broaden the tax base.

The keys to successful adjustment are sustainability, credibility and political acceptability. If the public finances are put onto a sustainable footing, and are seen to be on a sustainable footing, then it will be seen as credible, and financial markets will respond positively. If an adjustment is to be sustained and sustainable, then it must be fair, and be seen to be fair.

If the argument is advanced that this can all be done through lower public expenditure, then that will not be credible, and will not be seen as credible. If the burden of adjustment is placed on the least well off in society, then it will not be politically acceptable, and will be undermined accordingly.

Labour has been arguing for years that Ireland’s tax base is too narrow – that too many people have been able to avoid paying tax on too much of their income. That has to change. We need a broader tax base, both because it is fairer, and because it is more sustainable. The present Commission on Taxation was essentially the brainchild of my colleague Joan Burton. What I hope to see coming from that report is a set of proposals that will contribute to the required fiscal adjustment. What we need is a tax system that will support high quality public services in a sustainable manner, and that is manifestly fair.

Equally, there needs to be adjustment on the public expenditure side. Again, Labour has been arguing for years that the system of budgeting for public expenditure in Ireland is crazy. It is little more sophisticated than adding a set percentage each year to last year’s allocation. Since 2001, Labour has been proposing better scrutiny and better prioritisation of spending. That can no longer be delayed.

The Labour Party is committed to the development of the best possible public services for the Irish people. It is precisely for that reason that we are committed to public sector reform. We want budgeting systems that achieve that goal on an on-going and consistent basis. Value-for-money in public spending is not something that we should only be concerned about when there is a budget crisis. It should be hardwired into the system of resource allocation. To achieve that, we are going to have to develop a place a far greater onus on Departments and Agencies to manage their own affairs, rather than attempting to micro-manage everything from one office in the Department of Finance.

What I want to see from the McCarthy group, is not a set of random cuts. What I want to see is a set of proposals for doing ‘more with less’. For systematically improving productivity in the public service on an-going basis. To make savings now, certainly, but in a managed and sustainable manner. And in a manner which is based on the concept that public services are, very often, different from private companies – that is why they are in the public sector in the first place.

But I don’t know whether the McCarthy report passes that test, because the government hasn’t published it.

What’s the big secret? Last April we asked for the departmental submissions to the McCarthy group, and we weren’t given those. Now, there is no sign of the report. All we are getting are leaks. Lets get the report into the public domain, and see what it says.

But you also have to question why it is that we need a McCarthy group in the first place. No disrespect to the people who are on the group. But why do we need an outside group to tell Government what to do?

The opposition parties are constantly being asked the question ‘What would you do?’. We are expected to have detailed answers, which is fair, and as far as we can, we give them. But we suffer from a disadvantage – we are not in Government. We don’t have at our disposal the managerial information that comes from being in Government. The kind of information that you can only access when you are part of the system of Government.

But Fianna Fail has been in office for 12 years. The Taoiseach has served in several ministries. The Tanaiste likewise. What is it that Mr McCarthy knows about the running of Government that the Taosieach and the Tanaiste don’t know?

These are difficult times, and difficult decisions will be required. But we must also have priorities. This is the moment when values matter. For me, cutting the basic rate of the social welfare is the last place you look for economies. I do not accept, that in a society where the super-wealthy can pay little or no tax, we must look for savings from those on less than €11,000 per year. Moreover, if we are concerned with macroeconomic effects then social welfare is again the last place you should look for cuts. When a person is on the breadline, they spend practically all of their income. Others will reduce savings, but people on social welfare will have no option but to reduce spending. The impact on the broader economy, therefore, is greatest from that type of spending reduction.

Our country, and our economy face grave challenges. We can and should address them together in national solidarity. That means the greatest contribution being made by those who can best afford to bear it. That means all political parties being prepared to contemplate difficult options. What we cannot have, however, is any attempt to use the crisis to advance a right-wing ideological agenda of reducing the social safety net or rolling back the state, when avoiding the responsibility to contribute for those who can most afford it.

An important issue that we must also address is the rate at which consolidation is achieved. Here the minutes of the debate at the IMF board are interesting, if not that revealing. They state that

‘A few Directors, while recognizing that fiscal consolidation is an imperative, cautioned that consolidation should not undermine efforts to arrest the economic downturn’.

This comes back to the point that I made at the outset – about the inter-linkages between the three crisis. I am deeply concerned that we do not attempt to correct the public finances so quickly that we end up doing more damage to the real economy, with negative feedback to both the fiscal crisis and the banking crisis.

As I said at the beginning - there are three crises. They are interlinked. Unless we deal with each of them, in particular unless we do more for jobs and businesses, we risk making the other problems even harder to manage.