Notes on the Front

Economic growth to slump to the lowest levels since the recessionary 1980s. Unemployment to rise. Inflation heading back up. Tax revenue slumping. Exchequer deficit out of control. Export growth sluggish. No direction, no respite, no hope and . . . no ideas. Yep, it looks like Fianna Fail is odds on to win the next general election. You gotta hand it to them. They’re a class act.

In its recent Quarterly Economic Review the ESRI substantially lowered its projection for economic growth for 2008: 1.6% (GNP). This is nearly half the Government’s budget estimate and would represent the slowest growth rate since 1988.

Last spring the ESRI was projecting a 3.9% growth. But in each subsequent quarter they revised downwards: to a summer 3.7% to an autumn 2.7% to a winter 2.3%. But those aren’t the only figures that have been readjusted:

• Unemployment: Within a year, the ESRI revised their projection upwards from 4.7% to 6%.
• Inflation: Another upward revision – from 2.6% to 3.4%
• GNP per capita: Their projections are down, from 2.2% to a miniscule 0.3%. Wealth per person will hardly shift.
• Investment: within a year the ESRI, from projecting an increase of 3.9%, is now projecting a decline of 7.4%.

But the piece de resistance is the Exchequer balance. 12 months ago, the ESRI reported an insignificant €91 million deficit. The deficit is now projected to balloon to €5.3 billion. That’s a turnaround of about €10 billion in three years, or over 18% of the Government’s total budget.

With all the indicators going negative you’d expect the Government to be run out of it. Demonstrations outside the Dail, newspaper headlines screaming for resignations, rebellion among the backbenchers – y’know, the usual stuff that happens in democratic societies when a Government so completely mucks up the economy.

So what’s happening? At the very least the Finance Minister being fed to the wolves?  Not a bit of it. The Government is holding firm, Fianna Fail still maintains a high rating in the polls – and that’s with their leader violating just about every ethical law in the cannon – while the Finance Minister is being touted, in some circles with great hope, as the next Taoiseach.

There is no single explanation for this, but a contributory factor is the conduct of the Opposition. The Sunday Business Post’s Pat Leahy has been surveying this ground for the last couple of weeks.

‘Attempting to raise questions on the undershoot in tax revenues reported by the Revenue Commissioners last week, (Enda) Kenny criticised the Government for the situation but also warned he would oppose any efforts to row back on public expenditure. Where there is a shortfall in taxes the government can borrow more, raise taxes or cut back on spending. All Kenny has been doing, however, is demanding action.’

Mr. Leahy returned to this theme last Sunday:

‘So while Richard Bruton, the Fine Gael spokesperson, calls for a list of spending cutbacks to be produced by the Department of Finance immediately, his colleagues demand spending in health and education. Any survey of a week’s press releases by the Labour Party also show that the Government is to be condemned for a) spending too much and b) not spending enough.’

Now, is this fair? It could be argued that opposition parties have not been in control of the public finances for the last 11 years. To demand that they ‘correct’ a problem that they did not create, and might not have been created had they been in power, is unfair. Well, it may be but both opposition parties want to get into government. If they do, they will have to convince people that they can ‘fix’ the problem that is current now. And this is where Mr. Leahy is correct: a new economic environment (namely, falling tax revenue, falling growth, etc.) requires new thinking.

In the short-term, to ensure the fiscal situation doesn’t get out of control, there are three options: reduce/scale back expenditure, raise taxes (or cut tax expenditures which amounts to the same thing) or borrow more. All have their shortcomings – both politically and economically.

Cutting back on expenditure is never easy and certainly not at a time when so many of our public services are crying out for investment and staff. Even if one jumped the ‘political’ hurdle, there are economic implications. Paul Tansey, by no means a card-carrying member of the ultra-right brigade, has called for cuts in current and capital expenditure growth. But Alan Barrett of the ESRI warned that injudicious cuts could drive our growth rate down to zero. The cure could be worse than the disease.

Increasing taxes is hardly going to propel any party into power – especially with inflation rising and wages expected to fall from levels which are already below the EU average. In any event, it is doubtful that it would make much of a dent: a 1% rise in the standard rate would be equivalent to about 11% of the Exchequer deficit. When you then subtract the resulting problems of lower spending – especially consumer spending – (e.g. lower VAT/excise revenue, job losses or hours reductions, etc.), you might not find you’re not much ahead in the game.

Borrowing is the great panacea. Everyone likes borrowing because you can keep taxes low and you don’t have to take as sharp a scalpel to spending as you might otherwise. We certainly can afford borrowing – we have one of the lowest debt/GDP ratios in Europe and we don’t fork out as much on interest as other governments have to. It’s a great tonic – but that’s all it is. If the underlying economic problems remain, you’ll only be storing up trouble; we have the experience of the 1970s to prove that point.

Of course, in the short-term we are likely to get a little bit from columns A, B and C in creative ways so that it doesn’t appear there have been tax cuts (just don’t fully index tax bands and credits), or public expenditure cuts (hit the poor, they don’t count politically), or call borrowing ‘capital’ borrowing for future growth. The problem with that last point is that our capital and social infrastructure is so far, far behind our competitors that we would need to borrow bucket-loads – well beyond the Maastricht guidelines – to even start catching up.

So now you’re the punter, listening to Brian Cowen and his ‘borrowing for growth’ mantra. Now you’re listening to opposition spokespersons. Who’s got a handle on all this? If you’re like most, you probably don’t have a clue (and even the experts are all over the place). Okay, you tell pollsters you’re voting against Fianna Fail and their poll ratings drop. You even vote against them in the local and European elections and now they really look in trouble. But deep in your heart, you can’t distinguish between what Fianna Fail and any other party is proposing because there is little to distinguish. So in the main event, when national governments are at stake, you go with what you know.

The axiom that ‘Oppositions don’t win elections, Governments lose them’ is trotted out as a replacement for any real insight. Even if that cliché were generally true, it doesn’t appear to have the same force of law in Ireland. Fianna Fail Governments have lost only 5 out of 17 elections. When Fine Gael and Labour were in Government they lost every one. Fianna Fail has not lost an election since 1982. You really have to be a long-odds punter (and have money to spare) to put money against them.

Ever the optimist, I believe the Left can come out of this best. But they had better start telling a new story about the economy, about the hard truths of taxation and expenditure, about real wealth generation and real partnership. It won’t be an easy story for a lot of people to listen to – not at first – but if the Left doesn’t start telling it now, years before the next election, they’ll be sucked into whatever vapid hole passes for economic debate in the few weeks of campaigning before the votes are cast.

An Irish Times editorial, after cataloguing all the economic indicators that are going south, said it best:

‘It is time for a reality statement.’

If the Left doesn’t step forward, then I know which horse I’m backing. For the simple truth of Irish politics is that you don’t lose money betting on Fianna Fail – in good times or bad.