Cutting spending is the only way out of this crisis
The new government must avoid raising taxes and must means test welfare, writes Marc Coleman
Published 06/03/2011 | 05:00
Last Thursday night, Fine Gael and Labour negotiators could have done worse than attend the National Forum's first meeting after the election. Its debate on what government could best deal with our economic crisis might have been designed as a seminar for them.
It was addressed by two guest speakers who are heavyweight champions at managing us out of crisis.
The first guest speaker was Alan Dukes. Between 1987 and 1989, he was leader of the opposition and had spent four years as finance minister in a crisis-ridden FG/Labour government that tried to grapple with a crisis it inherited from its predecessor. It failed. Learning the lesson that ideological cohesion is the key to stability, it did something unprecedented in supporting the incoming minority Fianna Fail administration for two years. At 118 per cent of GNP, our government debt was even higher than it is now, so, although there was no banking crisis, the fiscal challenge was as difficult. The man who dealt with that, Ray MacSharry, was our second speaker.
I guess the current leaders of FG and Labour reckon they have nothing to learn from this generation. Like the outgoing FF ministers who led their country and party to disaster, it is a presumption they may come to regret.
They seem to be making the first mistake that Alan Dukes warned against in his speech: establishing a consensus that consensus is always a good thing. But, between 1987 and 1989, Ireland was brought back from the brink precisely because various forms of consensus -- that civil war politics could not be questioned, public spending could not be cut, and income taxes could not be lowered -- were dumped.
The international climate for Ireland is more daunting now than in 1987. On Tuesday, Ernst and Young forecast that our GDP could fall not by 1 per cent as forecast by the Central Bank, but by 3 per cent, even worse than last year.
Exchequer figures on Tuesday were also grim: down €119m on expected levels, VAT revenues proves the budgetary strategy of targeting the weakest has backfired.
Core retail sales were down 1.2 per cent year-on-year in February. That the headline growth was a positive 4.6 per cent was deceptive and caused almost entirely by 23.9 per cent annual growth in car sales. (This was driven by the scrappage scheme measures in last December's Budget.)
The outlook in 1987 was, however, in some respects similar: our own economy was struggling to emerge from recession, the main opposition party had just been given a near majority, and there was a major fiscal crisis to face.
In some respects the world economy was also similar. The current oil price and imbalances in the Chinese economy apart, the rest of the world economy is enjoying now the same kind of growth enjoyed then by the US and UK. China (its imbalances aside) and India are doing phenomenally well. So although it's happening in different places, there is now, as in 1987, enough growth out there to power Irish economic recovery.
With export growth rates well over 10 per cent, last week's call by the Irish Exporters' Association for average growth of 7.5 per cent annum over the next few years looks achievable. But can that filter through to jobs and demand in the domestic economy? Not if the government makes further tax increases.
The strategy of tax increases is a proven failure. Between 1982 and 1986 this strategy resulted in GNP growth averaging a pathetic 0.3 per cent. Between 1987 and 1990 -- when the nettle of spending growth was finally grasped and tax rates began to come down -- it averaged 3 per cent.
Temporarily, due to oil prices and impending ECB rate hikes, international factors are pushing Ireland's growth prospects down. And this is aside from crippling debt repayment conditions imposed by the bailout. So as FG and Labour negotiators consider the balance of tax rises and spending cuts, they should not just remember the failure of tax rises in the Eighties. They should look to recent experience: three of the last four budgets have focused on raising taxes and cutting welfare for those most dependent on them. Only one seriously grappled with waste and overpay in the public sector, and it resulted in a boost for consumer and taxpayer confidence. The relapse into a tax and avoid-cutting-waste strategy last autumn was a key component of the bailout, the failure of the Budget and the destruction of FF.
Alternative strategies must now be followed. Welfare benefits must not be cut for those who need them, but means tested for those who don't. Radical but well planned privatisation should be pursued. Public pay levels above the average industrial wage should be benchmarked down to EU levels plus a reasonable cost of living differential. Instead of -- or at least before -- implementing a property tax, a radical rationalisation of quangos and local authorities needs to occur. Instead of targeting the weak, such measures target waste and excess and are far less damaging to domestic demand.
As always, the ECB may force our hand. It is increasingly signalling a preference for higher interest rates. The rate of mortgage arrears is becoming more serious. Simply put, the taxpayer's capacity for tolerating further reductions in disposable income will soon reach breaking point.
The lessons from the past are clear: cutting spending, rather than increasing taxation, is the only way to generate the growth and tax revenues to solve our crisis. And that strategy must be implemented quickly.
Marc Coleman is a broadcaster with Newstalk 106-108fm and a candidate for Seanad Eireann on the Trinity College panel