Friday 26 April 2019

The rocky road to recovery

THE economy will undergo a severe contraction, followed by very slow recovery, according to both the IMF and OECD. And that is the good news. The future could turn out a great deal worse if the Government shrinks from delivering the tough medicine prescribed by the IMF, in particular.

Even then, we will need a great deal of luck if we are to regain a level of prosperity remotely comparable to that which we enjoyed so recently and which was squandered so spectacularly.

In a succinct summary of the confluence of failings that exposed this country, more than any other, to the ravages of the world economic collapse, the IMF report points to a property bubble fuelled by easy credit, massive bank exposure to property lending, the undermining of international competitiveness by soaring wages, imprudent tax reductions and unsustainable public expenditure. It all seems so clear and obvious in hindsight, we might wonder how our protectors, the Department of Finance in particular, failed to see it coming and urge appropriate action.

The IMF, in its report, curtly reminds us that it warned the Government as early as 2002, and on several subsequent occasions, about serious economic imbalances and the fragility of our public finances.

Nevertheless, having said we told you so, the IMF gives a nod of approval to the Government's current approach to the banks crisis. It endorses the blanket guarantee to depositors and creditors and the setting up of the National Asset Management Agency.

NAMA is potentially the right mechanism to separate good from bad bank assets, it says, but its success depends upon a realistic value of bad loans.

Indeed there are a great many buts and qualifications in this IMF examination of the economy.

In repairing the public finances, reduction in expenditure is preferable to raising taxes, says the IMF, but unless it is carefully managed, the most vulnerable will suffer. This presupposes a delicacy of approach which has not marked some of the Government's choices in recent months.

Wages must be reduced, but this could impair domestic demand and accelerate deflation.

A reduction in both public and private sector wages will improve competitiveness, preparing the way for recovery, but the economy is already so weakened it remains vulnerable to further adverse global economic events.

So many buts, so many potential pitfalls.

The IMF report calls for robust policy instruments that allow "the flexibility to deal with surprises . . ." Therein lies yet another rub. Unforeseen surprises, even minor miscalculations, could derail the most stringent recovery plan.

And the IMF does not even begin to speculate about possible domestic political hiccups.

The report welcomes what it describes as the Government's "sense of urgency" but warns that current efforts must be sustained, with special attention to the public wage bill and the scope of social welfare programmes.

It points out that despite the application of the pension levy, and the current wage freeze, a further lowering of the public wage bill is needed. Public sector pay now exceeds private sector pay in most areas, and both are among the highest in the world.

Together, the reports from the IMF and the OECD on Ireland are a map of a desolate economic landscape, with the 'You Are Here' arrow pointing to a particularly dark little corner.

They tell us that the country is in the grip of its worst crisis since World War II, that recovery will only be achieved through sacrifice, persistence and endurance and that, even then, we will need a considerable amount of luck.

Yet there is little sense of crisis emanating from a parliament where six-figure sums and unvouched expenses are the norm and where people can be paid huge pensions long before they have retired.

Equivocation on politicians' pay, ministers' pensions and judges' contributions does not convey a notion of crisis to people who are already facing job losses, wage cuts and repossession of family homes.

Neither the Government nor Opposition politicians are adequately preparing people for the radical cutbacks in public expenditure, including wages, which are on the way.

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