Notes on the Front

When looking at the economy we tend to look at the hard numbers – rising unemployment, percentage GDP decline, retail sales index, export volume.  Understandable.  But economies are made up of people – their hopes, failings, mistakes; and most importantly, their concern over the future.  Uncertainty does incredible damage; we try to measure it in consumer and business sentiment surveys.  But it can be elusive:  the bank doesn't make a loan because it is uncertain over repayments, a builder doesn't build over uncertainty over sales, an employer doesn't hire because of uncertainty over orders, a citizen doesn't purchase – he or she saves, uncertain over the future.  Strategies must deal with uncertainty as surely as any other economic phenomenon.

Minister Lenihan searches through the musty archives to pull out the 'We're spending beyond our means' file.  Just who is 'we' and, in particular, what is 'ours'?  Irish household consumption is below average when compared with other EU countries.  In the Eurozone, household consumption makes up 56% of GDP, in the EU-15 it is 55%, in the UK it is 60% while in the US it is a whopping 71% (with all the consequences that has for its trade balance); in Ireland it is 44%.  So much for spendthrift. 

The fact is that even during the 'boom' years, Irish household spending was relatively low by international comparison.  We could do with more spending.  We could do with that spending since more and more of it is spent – in keeping with the norms of modern economies - on personal services which has a high domestic job-content.  But it is uncertainty, and not necessarily income, that keeps us in our homes, afraid to come out into the economic streets.

It commonly accepted (and backed up by empirical evidence) that people's decision to spend is based more on anticipated future income rather than current income.And this is borne out by Davy's projections that savings will rise from 3% of disposable income to 8% within two years.  It's not that people don't have the money (though there are a hell of a lot who don't have enough).  It's just that they have elected to save.

This occurs because we might be afraid of losing our job, having our hours reduced or our pay frozen indefinitely.  And Minister Hanafin's incredibly indifferent comment only exacerbates the situation – that hey, sure, people might lose hundreds of thousands in pension savings, but not to worry, they can always fall back on poverty-line state pensions.  People are desperately worried about their pension values, their income for old age; others are worried about future medical costs when they're parents gets older or they get older.  All this uncertainty leads to pennies in the piggy bank.

We need policies to reduce uncertainty.  Here are two suggestions.

1. If anyone becomes unemployed, they should receive social insurance worth u€p to 80% of their take-home pay for one year (up to a threshold of, say, €60,000).  The harsh fact is we can't stop people, in the short-term, from losing their jobs.  But we can accelerate public sector job creation initiatives, we can put in place a proper (re)training and back-to-education network, and we can ensure that people won't be penalised – for the first year anyway – for something they have no responsibility for: losing their jobs.  This would help remove uncertainty over income replacement and facilitate consumption.

2. No matter what happens in the private pension industry – everyone turning 65 will be guaranteed 50% of their final salary as post-retirement income.  TASC has laid the groundwork for such a guaranteed, defined-benefit system operated through social insurance.  They proposed that this be phased in over a ten-year period but it is clear we might have to quicken the pace if pension funds get into trouble.  What is needed a transitional programme to see us through this phasing in – but, most of all, people should be assured that no matter what happens, their old age income will be looked after.

These are the two immediate areas of uncertainty (there are many others that can be resolved through state provision – worries over finding a childcare place, medical/nursing costs of ageing relatives, housing placements, etc.).  There will be more.  But by addressing uncertainty we can help free up what little cash there is in the economy to circulate. 

So in constructing strategies for economic recovery – borrowing, spending, investing and lending – let's be sure we confront that most difficult issue to measure: uncertainty.