News Analysis

Wednesday 17 September 2014

Marc Coleman: Beware of the many troikas that conspire against recovery

Economic pillars such as tax, small business and credit flow need to be carefully balanced

Marc Colema

Published 02/12/2012 | 05:00

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When Michael Noonan sits down in the Dail next Wednesday few will be satisfied and many will be angry. Except, that is, for the troika. Not that the troika doesn't care about Ireland's future, exactly.

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But its key objective is to get Ireland's economy out of intensive care. Whether we can walk home or barely stagger is less important to it. So long as our general government deficit is 7.5 per cent of GDP next year, 5 per cent in 2014 and 3 per cent in 2015, the troika will be satisfied.

But is that good enough? And should the Government really give no thought to the microeconomic and political condition of the country post-bailout? The troika will eventually leave. But the electorate never goes away. And with unemployment at 14.8 per cent and long-term unemployment rising, demand weak and personal indebtedness and negative equity chronic, a budget that exacerbates these problems is unlikely to be forgotten.

But is there an alternative to such a budget? Sinn Fein and the United Left say that there is. But their plan is either to discard the 2015 deficit target or to strangle the productive side of the economy with tax increases. The troika's deficit target must be achieved. But it can be achieved in a way that enhances, rather than hampers, the domestic economy. "Growsterity", the opposite of austerity, is possible. But it is being blocked by politics.

To understand what is happening, consider economic policy as the interaction of three interlocking parts, each with three components. The first such "troika" consists of the three main branches of the economy: exporters, domestic small business sector and government. The excellence of the IDA and Enterprise Ireland aside, our exporters, multinational and indigenous alike, have performed brilliantly.

Last Thursday the Irish Exporters' Association said that 58 per cent of its firms reported increased exports in 2012. Furthermore 77 per cent expect increases in 2013. But they also warned about access to funding holding exporters back, a factor in the next troika we will consider. The second leg of this first troika is most crucial to job creation: the small business sector.

Last week Cork Chamber of Commerce chief Conor Healy warned of the carnage in terms of lost jobs and closed shop fronts due to the crippling burden of commercial rates. In total contrast to the export sector, where corporation tax rates are low and demand is boosted by low and flat income tax rates in eastern European and far eastern markets – the small business sector is dependent on domestic consumers hit hard by rising taxation.

Again the contrast between the export sector, which benefitted from tax-reducing measures in Budget 2012, and the tax increases heaped on the customer base on which small businesses depend, helps us understand the divergence between our domestic and external economies. Which bring us to the third leg of our first troika. The leg that inflicts higher tax on consumers and unsustainable rates on small business: government.

The second "troika" consists of the three branches of economic policy that need to work in tandem for a real lasting recovery to take hold: fiscal policy, banking policy and competitiveness policy. The looming property tax is a good example of where fiscal policy is not working effectively. Instead of shifting the burden of commercial rates from the overburdened second leg of the first "troika" (small business) to the overfunded third leg (government), it is merely redistributing the burden from small businesses to customers.

Modest reform of local government will occur. But in the context of a €6bn annual spend, the anticipated savings, in the region of €400m, are around half of what could be achieved if radical reform were not being blocked. Merging local authorities, achieving cost economies and reforming pay structures for local authority staff, who have permanent, secure and pensionable employment, does far less damage to domestic demand than will the introduction of a second property tax.

Likewise a radical overhaul of the Croke Park Agreement, reducing pay and pensions of permanent employees (while exempting "core" pay below say €40,000), would do far less damage to the economy than raising indirect taxes or hitting those who fund their own pensions. But our political system has – against the wishes of the electorate – decided that the Croke Park deal should be extended a further year.

On the second leg of the second troika, banking, a modest recovery in mortgage lending was evident from Irish Banking Federation data. But credit flow to business continues to decline and our bank debt crisis is unresolved.

As far as the third leg of this troika goes, competitiveness policy, the last budget took useful steps to lowering the tax burden on export-related research and development. But that contrasts with a rake of increases in charges, fees and prices imposed on the customer base on which small businesses in the domestic economy depend. A policy of combining radical privatisation and increased competition in the economy would lower prices and increase growth. But due to the ideological make-up of the Government, only token measures are being taken here.

The final "troika" is a political one consisting of the three main political parties. With Fine Gael and Fianna Fail refusing to do business with each other and with neither likely to command a majority on its own, Labour can play one off against the other to get the best coalition deal possible for it and its trade union allies. This explains why neither Fianna Fail or Fine Gael are willing to represent the majority of Irish people who want the Croke Park deal reformed. Instead, tax increases will next Wednesday be imposed on vulnerable workers with no secure jobs or pension to protect those with secure jobs and pensions.

Our political system is now stuck in a situation where policy outcomes are always left-wing and where the rest of the country is always left behind.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm.

Sunday Independent

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