Interview: Ray MacSharry former finance minister and EU commissioner
Published 07/10/2010 | 05:00
THEY don't call him 'Mac the Knife' for nothing. The man credited with restoring the public finances to health in the 1980s has no doubt that similar action is required now -- and then some.
As finance minister in Charlie Haughey's minority government, his actions helped coin a new economic nostrum -- expansionary fiscal correction -- where cutting the budget deficit appears, paradoxically, to encourage growth.
We could do with some of that now, although the existence of such a contradictory phenomenon is still a matter of debate among economists. Still, as MacSharry points out, in some ways things were even worse back then.
"Unemployment was 17pc, which is higher than it is now," he recalls. "The debt was 120pc of GDP, whereas it is about 98pc now, if you count the bank costs.
"Admittedly, the deficit is worse than the one I had to tackle, at 12pc of GDP, whereas mine was 8.6pc. The important thing, as far as I'm concerned, is that in a short period of time we were able to halve that debt burden to 62pc of GDP."
It went a lot lower after that, which was just as well, given our present predicament. Within four years of the start of the MacSharry surgery, the deficit was below what later became the eurozone's magic limit of 3pc of GDP.
The former minister is the first to admit that, in other ways, things are worse now than in 1987. He had significant EU transfers and a substantial fall in interest rates to help him turn things around.
"They do not apply now, so I am hoping and praying that world growth will turn out better than the current forecasts.
"I think the problems are more severe now. But I would be confident that we can overcome them and I would be positive about our prospects."
He and Haughey are also seen as the architects of the social partnership system. Despite -- or perhaps because of -- his support for partnership, MacSharry wants the Croke Park agreement revisited.
"The things which will have to be done for the foreseeable future cannot succeed without partnership involving all concerned, including the other political parties," he says.
"We did not have the full information we have now when Croke Park was signed. We need an agreement on a four-year budgetary profile and we cannot afford any delay. As the song says, delay is just another year older and deeper in debt."
It is time to draw the knife. First for the chop would be the dozens of government quangos; including, it seems, the biggest of them all, the HSE.
"I often wonder what government departments are doing at the moment. Look at the Department of Health, which seems to have no say in anything, while the HSE is spending €16bn a year.
"All these quangos should have their functions transferred back to the relevant departments. I believe that could be done quickly, despite what they say."
Jobs will have to go too. Despite taking on the work of the quangos, the public service will have to cut its numbers.
"There will have to be voluntary redundancies," MacSharry says.
"We are told it would cost too much, but they will have to find a way to pay for it.
"We must accept that we cannot afford the size of public service that we have now."
In real terms, MacSharry and Haughey would have earned half what Lenihan and Cowen are paid and the same is true for the senior civil servants who laboured with him during long nights, identifying savings. That, too, will have to be reversed.
"How can we justify paying our top people more than they do in the rest of Europe? I know there have been cuts already, but it will have to be accepted that more are needed."
That would include existing ministerial pensions, like MacSharry's own.
"I have no difficulty with that. Pensions cannot be immune if salaries are being cut, although I wouldn't touch the basic old age pension."
But not much else would escape his blade.
"There are only three big areas of spending -- health, education and social welfare -- and I believe there will have to be a 10pc cut in all these areas over the next two years.
"There will have to be serious implementation of the McCarthy report and, in present circumstances, McCarthy probably doesn't go far enough."
The budget gap is too big for everything to fall on the spending side. Taxes will have to rise, especially on higher earners, and there is a case for a property tax and water charges.
"I would support a higher top rate of tax, which would be more in line with other EU countries. We had water charges and property rates before and I'm sure their replacement will have to be considered -- indeed, it is being considered."
Isn't all this just a recipe for economic depression? MacSharry believes there is something in the expansionary fiscal correction idea and it can be made to work again.
"Why is consumer spending down? It's a lack of confidence. What you've got to do is tell people the truth and what you are going to do about it.
"I think the public is more ready for that than they were in 1987, when we had very big protest marches. People will be angry -- they are angry. They were led to believe that things were not as bad as they have turned out to be.
"Now that they know the truth, action can be taken. If you tell people what has to be done and what the objective is, they can work out that they will be 10pc worse off, or whatever it is, and they can adjust to that."
He reckons the markets will also respond favourably to a clear 'road map' and is therefore keen on the idea of a fairly detailed four-year budgetary plan. "It should be published, but with everyone involved," he says -- just days before Brian Cowen invited the opposition parties for discussions.
MacSharry benefited from the famous 'Tallaght Strategy' when Fine Gael leader Alan Dukes gave broad support to the fiscal correction.
But it was a minority government and Fine Gael had to weigh the pros and cons, for the country and themselves, of bringing down the Government in those circumstances.
MacSharry says: "The Tallaght Strategy was welcome because it gave us the opportunity to do what needed to be done. It is important now that all the political parties are realistic about the situation."
Just like 23 years ago, he fears that an election would create uncertainty about the fiscal situation, even though "everyone knows what needs to be done".
He hints at something even more radical than the Tallaght Strategy -- a 'Grand Coalition' of Fianna Fail and Fine Gael.
"About two-thirds of the electorate always vote for these two centrist parties. You then get coalitions towards the right, as with the PDs, or towards the left with Labour. But the bulk of the people favour the centre.
"The differences between Fianna Fail and Fine Gael were founded on the national question and, thank goodness, that is no longer the great issue. So there is no huge difference between them and some areas where they would support each other," he says.
While he believes the confidence generated by a coherent budgetary strategy will be the best stimulus for the economy, he thinks more can be done to encourage growth in the private sector.
In particular, he says, some way has to be found to ensure that credit is available for small and start-up companies. He fears that the new rules on bank capital from the Financial Regulator and the international authorities may be too severe.
"To restore growth, we have to have some flexibility on these capital ratios -- otherwise, there just won't be sufficient credit for good projects.
"Good start-up companies must have access to bank credit. They need that capital to get going and most will never be a burden to the banks."
There is also scope for growth and job creation from indigenous industries, such as agriculture and tourism. If costs are brought down, some of the many jobs which have been lost in manufacturing and services, like call centres, could be recovered, MacSharry believes.
"Companies like the ESB and other state organisations also have to play their part to play in bringing down the cost of doing business in Ireland."
The former agriculture commissioner still watches the implications of changes to the Common Agricultural Policy (CAP). Despite all the past failures, thousands of jobs in food processing and marketing could be created, he says.
"In my view, the indigenous sector has been neglected over the past decade."
He is also a former chairman of Ryanair and, not surprisingly, backs Michael O'Leary in his endless dispute with the aviation authorities.
"They should call in the chief executives of the airlines and say we will abolish airport charges if you can bring in an agreed numbers of passengers."