Taking a few steps back still leaves us well ahead
Coming out of a recession with living standards still higher than those of your peers is no disaster, writes Marc Coleman
Sunday June 28 2009
IF YOU can meet with triumph and disaster and treat those two impostors just the same, then you are a good finance minister. A stiff upper lip, a long-term view and disregard for your image are probably the qualities that Brian Lenihan needs to cultivate most at this stage in his career. With so many people losing their jobs, his showing a continued resolve to boost employment is more important than claiming endorsement for government policy.
Instead of self-justification, Brian Lenihan's response to last Wednesday's IMF report on the economy should have taken a cue from Kipling: Yes, he should have said, our economy will shrink by 14.1 per cent over 2008, 2009 and 2010. But having grown 16.1 per cent in the three years before, our economy, he should have added, is heading back to that point in the summer of 2005 before our banking system went haywire, a point often made in this column. For those with a job and without negative equity, it's not such a bad place to be. For the 223,000 unfortunates who don't -- the latest unemployment number from Thursday's Quarterly National Household Survey -- it's a different story.
But even here, a stoic slant was possible. Having 223,000 people unemployed is 223,000 too many. But this is nonetheless far below the 400,000 level claimed by some of our most respected media outlets and commentators, a point that -- aside from this economist -- even former Fine Gael leader Garret FitzGerald is making repeatedly.
Incidentally, the unemployment numbers confirm that non-nationals are far more likely to be losing their jobs than Irish nationals. They also show that unemployment is rising by less than the actual loss in employment. Some 158,000 people lost their jobs in the 12 months to March. But some 45,000 exited the labour force, mainly due to non-nationals returning home but also to some workers returning to full-time study and some women deciding to work as homemakers (incidentally, George Lee is absolutely correct to say that the continued discrimination of our individualised tax system against this lifestyle choice is a disgrace), leaving a rise in unemployment of 113,000.
What about living standards? Defying the recession, Ireland's stunning population growth has continued and our population is now around 4.5 million and -- as predicted in my book The Best is Yet to Come -- headed for five million by 2020, recession or not.
But in a shrinking economy, more people will mean a reduction in each person's slice of the cake: With GDP going back to 2005, GDP per capita is headed for levels last seen in 2003 or 2004. Again, we need to be stoic about this. When this recession is done and dusted, those GDP per capita levels will still be 20 per cent above the EU average. Now that compares with 46 per cent above the EU average in 2007. But unless you're stupid enough to think the bigger number was ever real or sustainable -- in which case check into reality asylum -- you'd better trust me when I say that coming out of a recession with living standards that are a fifth higher than those of your peers ain't no disaster.
Knowing it had an election to face, the Government allowed the economy to grow far faster than it should in the first half -- around six per cent a year -- and we are now paying the price. Far from being -- as Brian Lenihan claimed -- an endorsement of government policy, the IMF report was as damning as any such report can be on the manner in which during this period its repeated warnings to Ireland were ignored.
In the very opening paragraph of the report, it says "Various commentators and the IMF in its Article IV consultations [previous ones] did warn that the seemingly-unstoppable growth masked serious imbalances, including the fragility of public finances".
Yes, it welcomes the establishment of Nama. But its comment that this needed to be translated from "concept to reality" -- coming four months into Nama's existence -- is a put-down if ever there was one. It has also plainly told the Government that it should stop selling the family silver to recapitalise our banks. The National Pensions Reserve Fund, it quite rightly points out, is not there for that purpose but to act "as a cushion for long-term obligations related to the ageing population, to which it would need to return". In other words, the taxes we paid to put into this fund to look after our pension needs are being siphoned off to bail out the banks.
Finally, the IMF does support the fact that the Government took quick action to correct our public finances. But it does not support the type of action taken. As argued constantly in this column, it points out that "the international evidence is clear: fiscal adjustment should focus on expenditure cuts". And -- as Fine Gael and George Lee continue to refuse to acknowledge -- widespread cuts in public sector pay for those earning above €40,000 a year are "likely to be inevitable" as public sector remuneration "lies above the private sector levels in most areas". As for the 7.5 per cent pensions levy, its welcome is qualified by the observation that consolidation "on the scale needed" demands a further lowering of the public sector wage bill.
For those who advocate leaving the euro to restore our competitiveness, it says that euro membership has allowed us to "avoid the currency pressures that typically accompany financial crises. Moreover, access to ECB financing has been an important source of liquidity for the banking sector". Our competitiveness does need to be restored, of course. Prices and wages here are the second highest in Europe and if we want to regain our lost share of export markets and foreign direct investment, that has to change.
The IMF's employment forecast is for employment levels to settle at around 1,840,000 by the end of next year, exactly where it was -- no prizes for guessing -- in the summer of 2005 and, incidentally, half a million higher than in 1997.
In terms of its unemployment and negative equity consequences, the period between 2008 and 2010 will be a personal disaster for many people, a disaster that the Government has a duty to make good. But in economic terms, what the IMF forecasts for this period really shows is that just as the period between 2005 and 2007 was no triumph, this period is no disaster but a badly needed return to sanity.
Marc Coleman is Economics Editor of Newstalk 106 to 108fm.
