October 14th After the Budget: The Recession Diaries

You gottahand it to Fianna Fail.  A tax package that costs those on low incomes more than those on higher incomes, cutbacks on the newly-made unemployed (that'll teach them to price themselves out of the market), bigger class sizes, more costs the sicker you get; over the next few days as people peer into the details of the budget there'll be more outrages to reveal.  But, no, that isn't the genius of Fianna Fail I'm referring to.  Rather, it's the seemingly impossible task of both driving up borrowing costs while at the same time reducing demand in the economy.  Seemingly impossible for mere mortal governments, that is.   But not for our Fianna Fail:  no contradiction is too extreme, no insult too insulting (how would you feel if you were an ICTU negotiator, struggling to get an extra 0.5% for the low-paid, only to see it disappear in a 1% levy puff?), no awkward agency so well established that it can't be eradicated (now we won't have to hear the Combat Poverty Agency moaning about so many poor people).  God bless Fianna Fail, the people's party.

The real trick is to prolong the recession while at the same time ensuring that the state will be burdened with even higher borrowing levels when we come out of it.  In this respect, Fine Gael, ever the accountants' party, is the more honest:  more spending cuts, more job lay-offs, more economic decline but, at least, less borrowing.   With Fianna Fail, we'll rack up over €20 billion in borrowing over two years and still end up with economic decline, exacerbated by taking billions out of the economy through tax increases and spending cuts, leaving society with less money circulating.  Brilliant. 

Is there another way out of this?  Yes.  Would it be difficult?  Yes.  It would require a forensic intervention to maintain demand and jobs in critical sectors, while extracting money out of unproductive sectors:  protecting low and middle incomes while impacting on higher incomes, property and unproductive private spending/investment.  It would require a radical transformation of the Pension Reserve Fund to allow it to invest in commercial, long-term infrastructural development.  It would require promoting those 'public' aspects of services (e.g. national schools), to the detriment of the 'private' aspects of services (e.g. private fee-paying schools' subsidies). 

All this would require a crafty set of strategies that hinge on the one absolute imperative to begin to create the groundwork for the development of a strong indigenous enterprise base that can take advantage of any upswing in the economies of our trading partners.  I use the words 'begin' and 'groundwork' intentionally; this is not something that would reap benefits in the short-term.  But hope and confidence are tangibles that can bring people through a difficult period.  What is Fianna Fail's take on 'hope' and 'confidence'?  A pathetic proposal to provide start-up companies with a three-year remission on corporation and capital gains tax (don't Ministers know that start-up companies rarely make enough in the early stages to be even paying such tax?). 

Not only does Fianna Fail deepen the recession in a most regressive way, mortgaging our future to higher debt; they provide no foundation for pulling us out of the recession.  The latest Davy Report does their usual glass-half-empty thing:  GNP falling by over 3 percent, investment and consumer spending spiraling downwards at an ever faster rate, unemployment rising to close to 9 percent; the real killer is exports.  Davy projects a rise in exports of 1.5 percent in 2009.  Going further, one can only bet this will come primarily from the multi-national sector which means that a huge proportion of that incoming wealth will be repatriated. In other words, our economy will receive little benefit (apart from maintaining jobs in those sectors). 

So the real question is: how are we going to pull ourselves out?   Fianna Fail has no answers, no hope, no strategy, no bloody idea.  All they can give us are fantasy projections going forward: the economy returning to growth in 2010, with growth of nearly 4 percent by 2011; and with that our fiscal problems are solved.  Yeah, right.  As one Department of Finance official told me shortly after the Minister finished his budget statement - 'We can always hope for more emigration.'  Back to the old standby when Irish governments get into fiscal trouble.

So over the next few days, when commentators, Opposition spokespersons and social organisations start delving into the details to reveal more horrors, just keep an eye on the medium-term:  Fianna Fail has not only deflated our economy, it has deflated our hopes for a way out.  And in the meantime has fiddled numbers beyond recognition to any resembling planet Ireland.

At the dead end of the no-hope room, what a party we will have with Fianna Fail.

Comments

[Yvonne]

What I don't understand is why corporation tax is 'untouchable'? Surely a small percentage increase here wouldn't precipitate a mass exodus of TNCs .

[James]

"A pathetic proposal to provide start-up companies with a three-year remission on corporation and capital gains tax..."

With this as with the increased R&D tax relief, I fear the government exposes its belief that the state simply getting out of the way constitutes a strategy to foster innovation, entrepeneurship etc. Once again the mindset is that markets are naturally occuring phenomonen that will flourish if only they are protected from the (albeit necessary) evil of taxes.

For me the biggest downside was the failure to protect capital spending - I feel this could have been justified whether it was supported by borrowing, further tax rises or current budget cuts. Bear in mind that, while there are always question marks as to how well the government will spend money, in the current environment it's likely that a significant proportion of any money taken out of the private sector (businesses plus households) would not be spent at all (provided it came from those who can afford not to spend all their income).

How much higher would you have thought of going in terms of the defecit, Michael? (I know "it depends..." is the only sensible answer, but still...)

[Michael Taft]

Yvonne, I'd like to respond to your comment in more detail - probably in a post. Because the issue you raise goes beyond just getting more tax money in - it cuts to the heart of our deformed enterprise base.

James, I'll say the same thing to you - I'll get back on this subject (it's rather hectic in my day job). However, just let me note that your comment regarding our enterprise policy being reduced to 'getting the state out of the way' is one I wholly agree with (unless, of course, you're a bank and you want a guarantee and, then, for the state to get our of their way). On your question re: the relationship between spending, taxation and borrowing - I'll come back to that.