| 6°C Dublin

Suggestions from lobby groups on resolving jobs crisis are just waffle

The Government is set to reveal its job-creation initiative on Tuesday and expectations should be restrained. The country is going through a shuddering macroeconomic contraction which is not yet over. The financial background is daunting, particularly the continuing enormous budget deficit and the unresolved banking collapse. Domestic and external confidence in Ireland's economy will not be restored until these macroeconomic issues are resolved.

Since the onset of the current crisis in late 2008, the unemployment rate has reached almost 15 per cent and about 200,000 jobs have been lost in the non-agricultural sector. More than half of these job losses have been in construction and there is very little that can or should be done about this. There is now an excess supply of property under almost all headings and no credit available to add to the headache.

There have been severe job losses also in wholesale and retail distribution and in the financial and real estate categories. The financial and real estate sector outgrew the economy in line with the housing and construction bubble and contraction should be seen as necessary and desirable. The same is true for the distribution business: consumer spending enjoyed a bubble too and an economic recovery cannot be built around the stimulation of consumption and the retailing of imports.

The job losses that need to be reversed are in manufacturing, tourism and the other export-oriented businesses. Proposals to have another construction-plus-consumer boom need to be resisted, even when peddled by people who should know better. Confucius would have understood: "By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest."

It is too late in Ireland for either reflection or imitation, so it will have to be experience, the bitterest. Until the budget deficit, the insolvent banks and the drastic competitiveness loss have been dealt with, there is little that can usefully be done to stimulate employment. It is, however, possible to make a bad situation worse and poorly-designed job-creation measures can do serious damage. The Government is anxious to address the jobs crisis and to be seen to do so. But this makes it vulnerable to lobby groups of all descriptions offering jobs-for-subsidies and to promoters of shovel-ready gimmicks which will worsen the budget deficit and damage the prospects for economic recovery.

Right on cue, three prominent representative bodies have produced proposals to the Government for the jobs initiative: the Construction Industry Federation (CIF); the Irish Congress of Trade Unions (Ictu); and the employers' body, Ibec. All three soldiered in the trenches in the noble cause of social partnership over the last glorious decade and are taking time to adjust to the economic consequences of their handiwork.

The CIF, without a trace of self-awareness, suggests a boost to construction, financed by borrowing. They would like to see no less than 40,000 jobs "created", through measures including "green loans" for retro-fitting existing buildings to cut their energy usage. The loans would come from (you guessed it) the Government, but they would be green, which presumably would exempt them from elementary objections such as the Government's inability to borrow one red cent from any source other than the EU and the IMF. The Government's revenue from the carbon tax would also be diverted away from the Exchequer. The CIF recommends the "ring-fencing of revenues under the Government's carbon tax and identification of additional funding sources to support the extension of existing grant-aided schemes for home owners".

How, pray, is the Government to identify "additional funding sources" in current circumstances? Has the CIF noticed that neither the State nor the banks can borrow at all; that the State is relying on the official lenders for €67.5bn over the next few years to cover day-to-day deficits; and that the banking system is into the ECB for a little matter of €150bn in liquidity support? The green loans are to come from "green funds along the lines operated in the Netherlands". Is the CIF aware that the financial constraints facing the Irish Government are a little different from the situation in the Netherlands?

The CIF's final fiscal proposal is to reduce or even scrap VAT on certain construction materials. They assert that all of these stimuli to construction would cost nothing, since "even a 100 per cent subsidy would be cash-flow positive for the Exchequer through the direct and indirect taxes, spending and social welfare savings achieved".

Let's be clear about this: the CIF, an important national representative organisation, believes that increases in Government spending, coincidentally on the output of their membership, will cost the Exchequer nothing, through some asserted mumbo-jumbo about multipliers. That this stuff is treated in the broadsheet media as a routine contribution to the policy debate should help explain how the country ended up where it finds itself. Unfortunately, the CIF is not alone.

Ictu urges the Government to "increase spending on infrastructure to mitigate the effects of the collapse of the construction industry". Ictu concurs with the CIF's belief in self-financing expenditure on construction, and goes a little further, arguing that "the increased tax revenue alone (not counting savings in unemployment costs) would pay for the initial investment". The economics people down at Ictu, to be clear, believe that the budget gap can be closed through increases in Government spending. They also appear to believe that the economic contraction has no consequences for the extent of Ireland's infrastructure deficit. If you felt, a few years back, that Ireland needed infrastructure investment, you must believe that it now needs less, since economic activity and the demands on infrastructure are well down on what was expected. But Ictu has a different take: the Irish construction industry is a government-financed job-creation scheme, to be expanded regardless of any assessment of need.

The belief that Ireland can get itself out of a bust created by borrowing too much to build too much is not confined to the CIF and Ictu. Ibec, the body representing the Irish business sector, has bagged a spot in the chorus: "Despite the economic crisis, the demand for infrastructure remains high and the existing gaps are such that the pace of economic recovery will be greatly restricted if investment is not maintained." No examples are offered. Ibec is of course the fiscally responsible face of social partnership and has a get-out-of-jail financing stunt. The Government should "substantially increase the level of private sector funding in infrastructure provision".

All government borrowing is financed by some other sector, by definition. The Ibec folk are fans of PPPs (Public-Private Partnerships), an accounting device to defer government financing costs. As practised in Ireland, government borrowing through PPPs is an off-balance-sheet manoeuvre devoid of economic content. It amounts to Government paying a premium interest rate for the privilege of pretending that borrowing is less than is actually the case. The UK government has cottoned on to this particular charade and plans to reduce reliance on pseudo-private infrastructure finance. The Irish Government will perforce be doing the same, since it has lost credit- worthiness and PPP funds will not be available.

Another Ibec wheeze is a loan guarantee scheme for business firms. The (effectively junk-rated) Government, already in an IMF programme, is advised to guarantee the borrowings of business firms, and the example of a scheme in Chile is cited. Chile is AA-rated as a sovereign borrower, the highest in Latin America, and the Chilean government can borrow (in its own currency) at rates less than half those currently attaching to Irish government debt. A loan guarantee from the Chilean government has value, in other words. One of the principal reasons why Ireland is facing such a daunting macroeconomic outlook is the imprudent extension of loan guarantees to the banking system, a detail which has escaped Ibec's attention.

The triumvirate of CIF, Ictu and Ibec led the social partnership feeding-frenzy which substituted for an economic policy through the Bertie Ahern era. Their submissions to the new Government should serve to remind everyone that policymaking through the appeasement of vested interest groups was at the heart of the policy debacle. These organisations have learned nothing and offer not a hint of apology. If there is to be any prospect of policy reform, unapologetic submissions from the triumvirate should be returned unread.

There is only one credible job-creation strategy and it has just three components. Fix the deficit, fix the banks and fix the cost base. All else is waffle, special pleading or, in the case of the triumvirate, both at once.

Colm McCarthy lectures in economics at University College Dublin. He has headed an expert group examining State assets and chaired the Special Group on Public Service Numbers and Expenditure Programmes, aka An Bord Snip Nua. He is also the author of the report into the semi-state sector from the Review Group on State Assets and Liabilities.

Sunday Independent