Sunday 23 October 2016

Fix the issues that led to failure in first place

The incoming government will inherit a mountain of debt with limited funds, but there is another way, writes Colm McCarthy

Published 28/02/2016 | 02:30

'The incoming government willinherit a mountain of debt with limited funds'
'The incoming government willinherit a mountain of debt with limited funds'

For a government elected in 2011 to stabilise the economy and avert bankruptcy, the commitment to tax cuts and spending increases served only to validate the Contest of Promises from everybody else.

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Why did the economic recovery fail to deliver for the government parties? There are at least three reasons: it is recent and fragile, it has yet to improve the economic circumstances of many voters, and the electorate is doubtful about the promised distribution of the proceeds.

The world economy is weaker than the political parties have been assuming, the eurozone banking and sovereign debt crises could re-emerge, and Britain may be headed out of the EU.

Rosy promises about tax cuts and spending increases encountered voter scepticism for good reasons, including weary familiarity.

Voters have resisted assertions about the extent of the economic recovery, even though the main indicators have been looking good since late 2013.

Employment is up, consumer spending has risen and tax revenues have improved. The budget deficit has fallen faster than expected.

The assertion that the recovery is confined to the Dublin area does not stand up either: there is evidence of job gains almost everywhere. And yet a survey during the campaign showed that over 50pc of people did not perceive any upturn in their personal economic fortunes.

Can there be a genuine and broad recovery under way for over two years that has gone unnoticed?

Employment peaked at the end of 2007, almost a year before the banking collapse. Jobs disappeared at an alarming rate through 2008 and 2009, finally stabilising at the end of 2010 and with little change through 2012.

The rebound finally commenced early in 2013 and has continued at a decent pace up to the end of last year. These numbers come from the Central Statistics Office's large-scale quarterly survey of households and are confirmed by independent data on jobless claims and other indicators. They reveal that 300,000 jobs were lost over a very short period, and only about half have since been restored.

The jobs have not, of course, been restored precisely to the people who lost them in the first place, and they are not the same jobs in the same sectors and locations. The total at work remains well below the peak reached before the crisis, notwithstanding the strong recent pace of net job creation.

An alternative explanation for voter ingratitude, advanced by candidates around the country, is that the recovery has been confined to the Dublin region. They claim that the provinces have seen no recovery but the numbers do not support this assertion either.

Dublin has seen good jobs growth but employment has expanded in almost all areas outside the capital and retailers report an improvement in turnover nationally. The differential impact of jobs growth is, however, not an illusion. The recovery has been uneven, but more across social and demographic groups than across geographical areas. There are substantial numbers everywhere, including Dublin, still awaiting an improvement in the jobs market.

The employment collapse affected the construction industry most dramatically. Construction employs mainly male workers and despite the recent recovery, the bubble burst in the building industry has left its fingerprints all over the jobs data.

Female employment nationally is almost back to the pre-bubble peak. There were 880,000 women at work in the final quarter of 2015, versus 890,000 in the best quarter before the crash, but for males the most recent figure is 140,000 below the peak.

Almost 46pc of the employed labour force is now female, versus about 43pc at the peak. The recovery has not been creating blue-collar jobs for male workers and the feeling that the recovery has yet to reach many households is not mistaken.

For those in continuous employment there has been a squeeze on take-home pay. There have been salary cuts for some and weak earnings growth in most sectors, accompanied by steep increases in taxes on income.

Even with near-zero inflation in consumer prices, real post-tax pay has fallen and many have struggled to meet mortgage repayments. Most of those in mortgage arrears are not unemployed.

In the Dublin region, where the recovery has been a little brisker than in some provincial areas, housing is once again unaffordable even for young people with decent jobs. The recovery is real but it should be no surprise that not everyone is feeling grateful just yet.

The election campaign consisted largely of competing promises about how the national cake, baked effortlessly with self-raising flour, would be divided between tax cuts and spending increases. The size of the cake five years hence is unknown and unknowable, something which the voters appear to have sensed early on.

There will be no capacity to meet targets either for improvements in job prospects, take-home pay or better public services unless the post- election policy debate steps up a gear.

In the middle of the campaign the CSO revealed that Ireland's per capita spending on health is already higher than in other developed countries, including those acknowledged to have better health services.

No political party could respond to this since all had presumed the solution to involve more spending: more hospital construction, more consultants, more nurses, free primary care.

Staff shortages in any area could only be met, we were informed by their trade unions, through offering higher pay. That is to say the solution is higher health spending, already right up there with the world's highest, according to the CSO.

When he was education minister, Ruairi Quinn let slip his suspicion that the Irish school system might not be all it is cracked up to be. The election debates were all about spending more money: smaller class sizes (means more teachers), larger subsidies to third-level students, another university in the south east.

The housing mess, especially in the Dublin area, is to be addressed by measures including a revival of first-time buyer grants, mortgage interest relief and other reminders of the bubble, plus some completely new wheezes like rent control.

None of these will help cut excessive accommodation costs in the only way possible, through expanding supply in the areas with the highest prices, which means the Dublin region.

There is an alternative to addressing problems in health, education, housing and so many other areas through promising to spend more money, the Midas Delusion to which political candidates are so prone. The alternative is to deal with the vested interests which have contributed to the inefficiencies in the first place.

If the HSE structure is incapable of managing effectively its very large budget, why increase the budget? If education managers offer no path to better performance other than increased taxpayer subvention, what contribution are they making? If local authorities in Dublin are failing to zone and service the rolling prairies of available agricultural land around the city, why should they retain powers they have failed to use?

The incoming government, whatever its composition, inherits a mountain of debt, an uncertain external environment and limited funds to satisfy commitments which should never have been made.

The new Dail will have no shortage of policy concerns should it choose to focus instead on improving the effectiveness of government and public administration.

Sunday Independent

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