Friday 28 July 2017

Croke Park is economic treason

Lenihan must follow Osborne's example and take an axe to the public service, writes Daniel McConnell

Last Tuesday night, as the autumn cold bit hard, members of the Fianna Fail party gathered for their normal weekly meeting deep inside Leinster House.

In the party's meeting room on the fifth floor, they assembled to air their grievances, listen to Brian Cowen and decide on the course of action for the next seven days.

However, what happened at that meeting was anything but normal.

In the wake of Michael Noonan and Joan Burton's briefing at the Department of Finance the previous day, from which the Opposition deputies emerged ashen-faced and shocked at how bad things actually were, Fianna Fail backbenchers were keen not to be kept out of the loop.

In stepped Dr Alan Ahearne, Finance Minister Brian Lenihan's economic adviser, to address the troops.

Ahearne, stepping back into his previous role as a university lecturer, stood at the top of the room, complete with his PowerPoint presentation, and spoke for more than half an hour. During his address, Ahearne said that €14.5bn had already come out of the economy since July 2008, the most aggressive contraction seen in the Western world. He said that while competitiveness had improved and exports were booming, the Irish economy remained very weak.

He alluded to the spike in international borrowing costs due to the uncertainty over the banking crisis and also to the increased pessimism over economic growth. He conceded that the forecasts laid out in the last Budget had been overly optimistic and as a result "additional consolidation" was now needed to meet the target of reducing Ireland's debt to three per cent of GDP by 2014.

He warned that we must frontload the pain this year to maintain and restore market credibility, and that Ireland could not afford to continue borrowing at the rate it has been doing. He concluded that a €3bn adjustment (the previously stated figure) was no longer viable and that a harsher, deeper cut was needed.

Whereas his earlier presentations provoked lively debate and heated exchanges, the mood in the room last Tuesday night following his latest pessimistic briefing on the state of the public finances was "very subdued".

Many of the 50 or so politicians present realised for the first time how serious and how precarious was Ireland's position, and how close we were to an International Monetary Fund (IMF) intervention. They also realised that their careers in politics may only have months left to go because of the pending carnage from the Budget.

"It was shocking, the depth and the scale of the crisis. There is no doubt by 2014 we'll all be on our knees," said one senior figure. Others who spoke were less frantic and more pragmatic. "It was matter of fact, sure the numbers are bad, but we knew that. We just have to get on with it," said Limerick TD Niall Collins.

Ahearne's address spelt out how dangerous is our current fiscal position. Virtually bankrupt, with the eyes of the world upon us, next month's four-year plan will be the most crucial document the Department of Finance has ever produced. Given what it has published in the past two years, in terms of Nama and the banking bailout, that is saying something.

That four-year austerity plan will determine our fate. If it is credible, we will be left alone for a while longer to fix our affairs. If it is not, then it will be a matter of when and not if the IMF takes us over.

The big problem is that it is all a big lie. Nobody really believes that getting our debt to below three per cent by 2014 is achievable. Not Lenihan, not the Department of Finance, not the markets.

As economist Karl Whelan wrote in the Irish Times, behind closed doors, there isn't a single person who believes the 2014 target is achievable.

Lenihan hinted that the deadline may be extended once this year's pain is over with; the Economic and Social Research Institute has called for it to be extended, as have a batch of left-wing groups.

The important difference is the ESRI says an extension must include dismantling the Croke Park deal. Siptu wants an extension so Croke Park can stay intact.

Lenihan's hope is that we cut as deep as we can this December, and after 18 months all will have improved and the deadline for debt reduction will be extended at that stage. The EU responded sharply, saying that no movement on that deadline is possible, but many believe they are just talking tough.

After weeks of speculation over what Brian Lenihan's sixth budget in three years will contain, several people close to the process have confirmed key details of what will be announced on December 7.

Since July 2008, €8.9bn of the €14.5bn taken out of the economy has come from spending cuts. Up to two weeks ago, we were told that we would need a correction of €3bn this year and €7.5bn over the four years to 2014.

Michael Noonan caused a stir on Thursday when he told Pat Kenny's radio listeners that the Department of Finance was working toward a correction of €7bn this year, but this is not the case. The real target is between €4.5bn and €5bn.

The total amount of cuts by the end of 2014 currently stands at about €11bn, based on a high growth scenario. Given the worst-case scenario, in which the markets fail to respond and growth slows even further, that figure shoots up to €15bn. If that is the case, the Government will have taken €29.5bn out of circulation, or about 19 per cent of GDP -- a correction so big it has never been tried before.

So where will the cuts come from? Well, some say Lenihan could do worse than follow the example of British Chancellor George Osborne. On Wednesday, Osborne rose to his feet in the House of Commons and announced £81bn-worth of cuts, in a speech lasting just over an hour. This represented the largest consolidation seen in Britain in over a decade.

He reduced welfare spending by £18bn a year, increased the working age to 66, and he doubled previously stated cuts to child benefits. "Today is the day Britain steps back from the brink, when we confront the bills from a decade of debt," he said,

Ireland badly needs to step back from the brink, too, and key to that is a credible fiscal programme. Notwithstanding the EU's concerns, basic logic dictates that you cannot go on spending twice as much as you earn indefinitely.

It has been confirmed that the three big spending departments of health, social welfare and education are to be hardest hit come December.

Health Minister Mary Harney confirmed last week that €1bn is to be taken out of health. Eamon O Cuiv may not be happy, but he is also set to lose €1bn from his welfare pot. Top of the agenda is a capping of child benefit for larger families. Despite promises to protect pupil-teacher ratios and special needs assistants, the education budget is to take a hit of between €700m and €1bn. Capital spending, which had been earmarked for a reduction of €1bn, is certain to be hit further. Savings from other departments will make up the rest.

On the tax side, the Department of Finance favours an increase of one per cent on the top rate, while it is loath to increase the lower rate because it would discourage people from working.

There will be no property tax in this Budget because of difficulties with valuation. Water charges can't be included this time around either because of the slow pace of installing water meters in houses. However, a flat rate household levy of up to €200 on every home is being considered until the property tax and water charges can be introduced fully.

But, ultimately, if Ireland is to satisfy the markets and avoid the IMF, then the preposterous Croke Park deal must be torn up and burned. Cosy deals such as Croke Park or benchmarking were outrageous in boom times, but at a time of crisis they are economically treasonous.

Given that as a country we are a busted flush, a deal which protects public sector pay and conditions until 2014 is so absurd as to border on insanity. Brian Cowen's continuing refusal to break his warm embrace with the unions goes beyond incompetence. It is negligence of the highest order.

Lenihan must adopt an Osborne-like mind set, use the emergency bailout clause and cast 30,000 or so public workers aside. And he can insist that most of those layoffs come from the mammoth HSE bureaucracy. Ireland's fate will be decided in the next three weeks, when this four-year plan is announced. Lenihan's choice is clear. Reject Croke Park or surrender our economic sovereignty forever.

Sunday Independent

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