Notes on the Front

Like many people, when I heard that George Lee had been recruited by Fine Gael to stand in the Dublin South by-election I thought that was it – game, set, match. After all, he’s George Lee, tutor of the nation. So, when I saw that George Lee had penned an article in the Evening Herald entitled ‘How I would fix the economy’. I bought a copy, rushed home, popped up a bowl of popcorn, kicked the cat off the sofa, and hunkered down to what I expected to be an original and thoughtful contribution to the debate. As I started reading, I wasn’t disappointed:

‘I believe we will never fix the deficit in public finances unless we reverse the hemorrhage of jobs in our economy and get people back to work. Every job lost adds another €20,000 to Government borrowing.’

Bouya, George! This can only get better. So on to his ten points.

1.     I would finance a massive job-intensive investment programme in green energy, broadband and clean water, financed in part by selling off state companies like Bord Gais and parts of ESB that the State no longer needs to own.

Interestingly, in proposing this Fine Gael policy on investment, he omits that (a) it was originally an ICTU policy and (b) it constitutes setting up new public enterprises and expanding existing ones. Mentioning this might have confused people – selling off the very enterprises that are created in the first place to generate growth and recovery, selling them off to the private sector that is not capable of creating companies to generate growth and recovery. Sound coherent?

Of course, George the economist will be aware of Ireland’s poor privatisation experience. One word: Ericom. Two more words: ICC and ACC. If we still owned the latter two, we could be extending credit now, this morning, to hard-pressed businesses. But we can’t. Because we privatised them. Now George wants to sell-off a natural monopoly (gas) and the highly successful ESB International, thus undermining a successful Irish multi-national. Why? For purely ideological reasons. It has no economic rationale.

2.     I would fight for a fairer sharing of the burden of rising taxes. Middle income families on an average wage should not be paying 51pc in tax on every extra euro earned . . . This is hardly the strategy needed to encourage people to put in the effort and initiative needed to create new jobs and economic opportunities.

I think I know where this is going, sort of. I, too, believe the levy increases are harmful. But George is apparently of the school that believes ‘high taxes’ reduce incentives to set up businesses and create new jobs. If that were the case, then all other European countries would have been broke a long time ago. The reason why the levy increases are wrong is that it will reduce spending and squeeze enterprises reliant on domestic demand. George is essentially taking a low-tax argument and giving it a make-over for the current crisis.

3.     I would reverse the increase in the VAT to 21.5pc . . . which has combined with the weakness of sterling to see a deluge of hard-pressed Irish shoppers crossing the border, at the expense of thousands of Irish jobs and hundreds of millions in lost tax revenues.

It’s the currency exchange which is driving cross-border shopping.  VAT is just a passenger (there’s no VAT on food here in any event). Yes, in the long-term, we should reduce regressive indirect taxes. But does George really think that reducing a €100 basket of non-food items to €99.50 is going to make a whiff of difference? C’mon, now.

4.    I would cut the reduced 13.5pc rate of VAT to just 10pc between now and the end of 2010. This would stimulate labour-intensive services like construction, help the tourism industry through the downturn, and give a huge incentive for first time buyers to bring forward purchases of new houses, helping to resolve crises in banking and the public finances.

Again, George confuses cause and effect. Reducing VAT will probably not lower prices (they’re in deflation anyway) but it will ease business cash flow – which is fair enough since many businesses can’t get credit. It’s a crude instrument, though, since this ‘credit easing’ helps out businesses that don’t need it just as much as those that do. It doesn’t target enterprises in need which are, in any event, suffering more from reduced demand.

But the real kicker is that reducing VAT on some construction inputs will get the punters to buy houses again. Fact: people who fear for their economic future (or are unemployed or short-timed) don’t buy houses. Fact: the fearless few are waiting, quite rationally, for house prices to fall further. Fact: many who want to buy now can’t get mortgages because of the credit squeeze. Reducing VAT will have no effect on any of this. We are in the middle of a vast stock-clearing exercise – and much of the stock will never be bought as know one will want to live in half-built estates miles from anywhere.  As an economist, George knows this. As a candidate, he’s promoting gesture politics.

5.    I would freeze local authority rates for at least five years.

Fair enough – but where is the alternative source of revenue? Below the national media radar, local authorities are cutting back at a ferocious pace – capital programmes, services, etc. Cutting off more revenue oxygen will only asphyxiate local government everywhere with further deflationary effects.

6.     I would legislate to make upward only rent reviews for small businesses illegal.

Of course. But this won’t address the real problems behind high commercial rents, which are high because many landlords are so heavily leveraged. They can’t afford to reduce rents but if they don’t their tenants will walk or close down. It’s a vicious trap. Amending rent reviews won’t resolve this.

7.     I would exempt employers who take on additional staff from additional employer PRSI obligations until the end of 2010.

Let me get this straight. A profitable company with expanding output (and therefore requiring extra labour) will now get a state subsidy for doing something they were going to do anyway. Talk about deadweight. The issue is about subsidising hard-pressed enterprises that are on the verge of letting people go. Talk about getting it arse-backwards.

8.     I would make sure that taxpayer support for banks is used only to support new lending to small businesses and families, not to nurse along dodgy property related debts to Fianna Fail's developer friends. The banks, the professional investors who funded them and developers should between themselves take care of the mess they have created. They made the big profits in the good years. They should now eat the losses.

First, George wants taxpayer support for banks conditional on opening up credit. But he wants banks, investors and developers to sort out their own problems. If banks eat the losses, they will end up throwing up all over us. There won’t be new credit, just hoarded credit to make up the losses. In any event, can someone explain to me how banks, operating on commercial criteria (even the best criteria), are going to increase lending in a recession? It’s populist but its nonsense.

9.     I would fight to make performance, accountability and thrift core values of our public service once again, starting with the political system itself, and cut top-end public sector salaries, including those of TDs, by at least 5pc.

Yeah, sure, why not. Cut them by 10 percent. Won’t do anything for public finances. Won’t create one single job. Might have a demonstration effect. Yawn. Move on.

10.     I would overhaul the massive public sector quangos like the HSE, CIE and FAS and expose them to more competition in order to deliver vital health, transport and training services more effectively and at less cost to the taxpayer.

Oh, just great. We’re going to either privatise whole areas of public services – or allow private interests to cherry-pick the most profitable parts of the public market. Isn’t that what’s happening in the health sector anyway? And if anyone thinks this has anything to do with competition – just look at the electricity market, where the one company that can compete internationally, invest in new generation plant, and lead a national strategy for new green technologies is actively prevented from doing so. Rather than engage in hard thinking and core solutions, we get knee-jerk responses.

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I tossed the paper to the floor, finished my popcorn and kicked the cat some more. This is the prescription by a leading voice on the Irish economy? It is a collection of populist clap-trap that relies on the failed strategy of privatisation, incoherent VAT cuts, wasteful subsidies, and public market liberalisation.

I had thought that when George Lee entered the race that was it. But progressives like Senator Alex White shouldn’t fear this nonsense – if they have the courage to call it for what it is, go on the offensive and expose Fine Gael as just another deflationist privatising party of the Right with little to say about economic recovery or social equity.

Progressives can turn this by-election battle into what it always was – before the celebrity diversion: a contest between the Left and the Right, a contest between two qualitatively different economic alternatives.

For there is no question that Fine Gael’s new recruit, George Lee, will have no problems getting along with that other new recruit, Michel McDowell.

Like peas in a pod.