Tuesday 26 March 2019

Brendan Keenan: Union toast comes buttered on both sides

While a massive public investment programme might be desirable and even effective, it's far from a cure-all

Brendan Keenan

Brendan Keenan

LIKE great black oxen, the years trampled the poet Yeats. Two years into the bailout and four years into the crisis, we know that feeling.



When a country finds it can no longer pay its bills, the sense of crisis often creates a consensus that tough action must be taken, sacrifices made, and so on.

But restoring solvency can take a long time. To paraphrase another saying, the country can stay insolvent longer than you can stay sane. People become more reluctant to continue with the process and often spark a fresh crisis by refusing to take any more.

And there are still at least three years to go, probably more. It raises the question whether a rapid, completely brutal approach is better. A doubling of income tax, say, and a 20 per cent cut in government pay and benefits. The kind of thing they did in the Baltics, and endured in Iceland with the collapse of their currency.

The argument here has been more about making the adjustment even longer, on the grounds that each year will be less painful and therefore less economic damage will be done.

The trade union movement has been the main sponsor of this approach. On its own, it is not very convincing.

Psychology suggests that people react to the fact of a fall in their living standards, rather than its size.

A longer austerity programme might produce just as much weariness and anger as a shorter.

The unions have answered this objection by coupling a slower adjustment to a €20bn investment programme (€5bn of which would be spent in Northern Ireland).

The jobs created directly and indirectly, they say, along with the confidence created by the fact that something was happening, would offset the depressing effects of the apparently endless adjustment process.

The argument is set out in detail in a report from the newly-created Nevin Economic Research Institute (NERI), named after the distinguished academic and trade unionist Dr Donal Nevin. NERI does not represent trade union policy, as such, but its establishment is a sign of union frustration that their policies do not get taken more seriously.

In theory, they should have one staunch supporter -- the Taoiseach. This was Fine Gael policy before the election, and NERI happily quotes the manifesto: "We believe the economic crisis provides us with a unique opportunity to invest in Ireland."

Apparently it didn't.

Instead, the Government walloped capital spending in order to avoid having to make bigger cuts in current public spending. It wants to avoid that partly because it fears the reaction of public sector unions. That makes the unions no friends of capital investment.

The unions square that contradiction by advocating the longer adjustment period and, as set out in the NERI document, by seeking other sources of funding for the investment. These are designed not to increase the general government debt, which is the bailout target. But they would add to semi-state debt, and increase the country's net debt by spending some of the money left in the national pension fund. There might also be some private money. One intriguing suggestion is that pension funds could avoid the 0.6 per cent levy if they invested in the infrastructure programme.

There is undoubtedly an issue here. The immediate creation of construction jobs would be good for morale. How many jobs is a moot point. Fine Gael had an extraordinary 100,000 figure. NERI has a more circumspect 50,000, with lots of learned analysis quoted to show that this can be achieved.

Despite this expert stuff on multipliers and suchlike, one worries about Ireland's poor record in efficient investment. One will give them the benefit of the doubt, and assume the jobs are delivered, although the school building programme does not inspire confidence.

It is more important that there is agreement on the parameters into which any investment programme must fit. The NERI report has lots of complicated stuff, a la Prof Paul Krugman, about public borrowing balancing private saving. It attacks the idea, contained in the eurozone fiscal treaty, of trying to target the unquantifiable "structural" balance.

I shall watch with interest whether that translates into trade union policy on the referendum vote. The fact is, though, that, while we cannot measure it exactly, there is a large structural (and therefore permanent) hole in the public finances, caused by rapid rises in public spending and large cuts in taxation.

That cannot be skirted around. There is something to be said for a bigger investment programme running alongside the deflationary measures needed to close that structural deficit. There is even a case for doing it in the public capital programme at the expense of current spending, rather than from outside funding.

But the cheery impression created that this would somehow chase away the great black oxen, or soften their hooves, is, I fear, misplaced.

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