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Thursday 23 May 2019

Lenihan: We didn't notice the downturn


The Finance Minister, Brian Lenihan, in a breathtaking admission of complacency, has said that the Government only became aware of the economic "decline" in July, two years after slowdown indicators first became apparent and when the country was actually in the grip of a full-scale crisis.

Mr Lenihan's startling admission adds credence to a charge made against the Government last week that it has allowed the country "sleepwalk" into a devastating economic depression.

It also further supports the belief that the Government seems incapable of handling a crisis which is set to dramatically worsen next year, to the point that the State may be facing bankruptcy if the present rate of decline continues.

The Government's complacency was exposed last week when Mr Lenihan was forced to make a further series of embarrassing corrections. He admitted the economy was set to shrink by up to four per cent next year, in contrast to his Budget prediction, just two months ago, that it would contract by one per cent.

After the Budget, several economists ridiculed Mr Lenihan's projection. But he stuck to his assessment, despite growing evidence he had underestimated the impact of the recession.

Analysis, pages 28, 29, 30, 31

Mr Lenihan's analysis was further undermined on Friday night. In the Budget, he predicted unemployment would hit 7.3 per cent next year. But on TV3's Political Party programme on Friday, Mr Lenihan finally admitted unemployment next year would be up to 10 per cent.

But it now seems possible that it will be closer to 12 per cent. Mr Lenihan had predicted that the gap between spending and tax receipts next year would be just over €12bn or 6.5 per cent of GDP.

But last week, he said the deficit had widened and he now anticipated borrowing €13bn or 7.25 per cent of GDP.

Yesterday, former Fine Gael leader Garret FitzGerald said: "It would be wise to assume that the figure will not be lower than €15bn."

Meanwhile, a Sunday Independent/Quantum Research telephone poll yesterday found a massive 78 per cent believe the Government's economic forecasting is "poor".

The Government relies on the Department of Finance, along with the Economic and Social Research Institute and the Central Bank, for much of the analysis upon which it bases its forecasts.

Its projections, however, have been seriously inaccurate, raising questions about the level of basic competency within the Government.

In the Dail last week, Labour finance spokeswoman, Joan Burton said Ireland was "sleepwalking into a devastating economic depression".

Last May, in a reflection of government thinking, a Cabinet member told the Sunday Independent there was no need for a pre-summer Budget because "the public might think there is a crisis".

At the time, the Government sought to present an image of competency, maintaining ad nauseam that the "fundamentals" of the economy were "sound".

Now there is near panic among several ministers that the State may be heading towards bankruptcy, unless the current rate of decline is arrested.

Publicly, however, the Finance Minister is still seeking to create the impression that the Government is on top of the situation.

He told TV3: ".. every time we have seen a decline this year, the Government has responded" -- in itself an admission that the Government has reacted to, rather than taken precipitive action, to deal with the crisis.

In the same breath, Mr Lenihan effectively admitted that the Government only became aware of the "decline" two months after he had been appointed Finance Minister. He said: "When we first saw the sign of decline in July ..."

Inexplicably, it remains government policy to await official economic statistics before action is taken.

Mr Lenihan said: "We will take firm action in January, when we have the full end-of-year picture."

The first signs of the economic slowdown occurred in June 2006, when the European Central Bank began to increase interest rates at a time when property sales here were starting to slow.

The former Progressive Democrats leader Michael McDowell then suggested that stamp duty on property sales should be reformed. But Brian Cowen, then the Finance Minister, refused. The property market went into serious decline as potential buyers adopted a wait-and-see attitude and as the ECB continued to increase interest rates.

The full scale of the crisis emerged in the autumn of 2007, when the sub-prime mortgage issue became evident in the US and the credit crunch began to bite.

Yet, Mr Lenihan is now saying that the Government only became aware of the economic "decline" last July.

Taoiseach Brian Cowen is expected to invite unions and employers to a meeting next week to discuss the economy in advance of the latest "rescue" package, to be announced in January.

However, government sources have indicated that the meeting, which may take place on Tuesday, is not expected to deal with public sector pay. More than 300,000 staff in the public service are scheduled to receive increases of 3.5 per cent next September under the terms of the new national pay deal.

While Fine Gael has said that it would scrap the pay deal in current circumstances, the Government's troika of Mr Cowen, Mr Lenihan and Tanaiste Mary Coughlan have sent confused messages on the issue.

Ms Coughlan told the Dail last week that the pay deal was not up for negotiation.

However, on RTE's Morning Ireland last week, Mr Lenihan said: "We can't wait forever on this. Nothing can be ruled out."

Then, on Wednesday, Mr Cowen issued a statement saying the issue of a review of the pay deal had not arisen in talks held recently with unions and employers

Later in the week, Mr Cowen said the Government would not try to change the terms of the pay deal for public servants without discussions under the social partnership process.

Asked if the Government intended to seek a further public-sector pay freeze, the Taoiseach said there was a range of issues facing the economy, not just that one.

An 11-month public sector pay pause will expire next autumn under the terms of the new deal.

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