Histories At Dawn: June 30th The Recesion Diaries

History is such a malleable thing. It can be twisted this way and that to support or oppose any contemporary position. Take An Bord Snip Nua – this is a grand thing altogether. How do we know this? Because, sure, its predecessor was such an outstanding success. Yes, it brought pain but it set the groundwork for the Celtic Tiger economy. So goes the history; if we gird our loins, cut and hack away, we too can replicate this outstanding success. Suffer a couple of years of fiscal pain, and economic paradise awaits.

But history is not so straight-forward and certainly not so reductionist. Was it really the case that the ‘cutbacks’ endured under Mac the Knife (Finance Minister Ray McSharry) were (a) successful and (b) set the preconditions for the growth explosion in the mid-1990s? Let’s take a look at some provocative facts for clearly there is a lot of myth making about that period – a period that ran from 1987 to 1989, encompassing three budgets.

First, how much was cut? In nominal terms, public expenditure wasn’t cut – it increased. During the three budgets, total expenditure increased. Current expenditure increased. Even excluding interest payments, current expenditure increased by over 5 percent. The main target of the knife was that ol’ standby – capital expenditure. Cutting investment is the easiest option. It doesn’t take away from what people already have – it only defers something we don’t have. This started a period of long-term chronic under-investment in our economic base.

But that’s only Irish public expenditure. Don’t forget – this was ‘begging bowl’ days, when Ireland was one of the poorer performing economies in the EU. So what about public expenditure in Ireland? Between 1987 and 1989 we received over £1 billion under the EU Social and Regional Development Funds - a substantial 38 percent increase in the previous three years under the hapless Fine Gael/Labour government. Now, £1 billion might not sound much but were we to receive the same proportional amount it would come to nearly €6 billion over the next three years. That would subsidise a lot of cuts, but it’s doubtful if the EU today would play ball.

Second, there is much talk about how the minority Fianna Fail government brought down the public spending/GNP ratio. In 1986 public expenditure amounted to 54.7 percent of GNP (if you think that’s because we had some kind of super-Nordic government, remember – it was largely due to interest payments and social welfare). By 1989, spending was brought down to 45.1 percent. But this was only the continuation of a trend that was already in place since 1983 when expenditure was over 62 percent of GNP.

But there was one thing that saved Fianna Fail’s bacon. The numbers on the Live Register started to fall. Was that because all this fiscal contraction started producing jobs? Hardly. Between 1986 and 1992, the economy was generating an average of only 14,000 new net jobs, and while unemployment didn’t rise it didn’t fall either. Between 1988 (the first year of the ILO calculation) and 1993, unemployment fell by less than 1% leaving nearly 16 percent still unemployed. So what happened here?

Yes, you guessed it: emigration. Between 1987 and 1989 over 100,000 emigrated. While not all of these would have been of working age, it’s a fair bet most were – the overwhelming majority. The numbers emigrating amounted to 8 percent of the entire labour force in 1989. To put this in perspective, we’d need over 180,000 to leave over the next three years to reach this level.

Emigrants are great. You don’t have to pay them any dole. They reduce demand on social services. They don’t end up clogging our jails. It’s a great solution, and it certainly gave the Government at the time a real dig out. Expansionary fiscal contraction? Try expansionary demographic contraction.

There is no question about the impact of some of the cuts during that period. But, as always, there were choices. Fianna Fail did choose – they chose to abolish the Land Tax – just as they abolished the Wealth Tax a decade earlier. When it came to patients being moved out of closed hospital wards or the IFA, Fianna Fail certainly knew whose side it was on.

Whatever about our ‘historians’ today, what did contemporaries think of this policy? They couldn’t ditch it fast enough. First to go was Mac the Knife himself – kicked upstairs to the EU Commission. During the 1989 election campaign – resulting from a lost vote on a non-economic private member’s bill – Charles Haughey apologised on an RTE phone-in show for not realising the damage being done to cutbacks in the health services (what’s new?). The election result put the seal on Fianna Fail’s historical anti-coalitionism, and for the first time they entered cabinet with another party – the right-wing PDs. What happened then? More of th same?  Don't you believe it.

The Fianna Fail/PD government went on a spending spree. In the very first budget spending cuts were reversed – and how; public spending rose by 7 percent. In the three budgets under this government, spending increased by over a quarter while capital spending increased by a third.

And then there was that EU dosh. It really started flooding in – over £2.2 billion in the three year period. This was more than double the amount received in the previous three year period. Public expenditure in Ireland leaped and bounded ever upwards. 

And this was done against a pretty bleak fiscal situation. While spending was being increased, the debt/GDP ratio was over 85%, though falling; interest payments on the debt soaked up a quarter of tax revenue and over 7% of GDP (compare that to payments in 2008 which made up only 1 percent of GDP). Still, they kept spending.

And then the 1993 devaluation – which made our exports cheaper.

And then the fruits of years of work by the IDA – the multinationals swept in, bringing mega-growth.

And the direct state investment into the high-tech domestic sector.

We never hear that narrative – one that poses spending, investment and public policy as the driving force in the emerging economic boom. Rather, all we get is a selective and reductionist recitation of history, skewered to fit a set of pre-conceived policies.

And just remember, when you read reports of today’s Bord Snip proposing cuts in social welfare, that throughout the late 1980s and early 1990s, social welfare increased every year.  And public sector workers received pay increases.

History has much to teach us.

Comments

[t g macamhloaibh]

Nice post with some good figures and anlysis but. . .

More than ever history is the bastard child of knowledge. Nowhere has this bastard child been more abused than in Ireland. Selective amnesia by the MSM is policy. We have governments who never lie but who can't utter any truth - about anything. Public policy carried out through media leaks and soundbite. Absolutely awful statistical information and penalties for access to public info.

There should be someone coming along shortly to refute any post, or its points, based upon historical interpretation.

If memory serves me correctly during the late 80's and early 90's, Ireland had the IMF in town on a consultative basis, and we also received a very large lump sum payment from the EU. There was a type of Keynsian infrasture stimulus derived from the lump sum.

What is more interesting dese days is recent history. I've been following the economic crises since it began in 2007. From my perspective, the US, UK and Ireland have been in recessionary mode since late 2007 or early 2008 at the very latest. Yet most economies didn't declare themselves in recession* until the middle of 2008 or later. Almost upon announcement of recession, there was talk of recovery. Even now the UK is talking about growth in the third quarter of 2009!

If unfolding history is so easy to manipulate through the MSM, what chance of meaningful discussion about ancient history in 1980? Yet, we must try anyway - if only to leave a record that some saw history unfolding differently.

*I don't buy the 2 consecutive quarters of negative growth as a measure of recession, and this view is increasingly held by many practical economists. The gross distortion of data sets through biased statistical analysis by governmental departments coupled with the Wizard of Oz-Dorothy complex (just believe and it will be true) makes an utter mockery of such outdated analytical methods. I'm always reminded of Michigan's Governor who declared last year that her state, home of the auto industry, had been in recession for over a decade and nobody gives a damn.

[Myles]

"No man ever steps in the same river twice, for it’s not the same river and he’s not the same man…" Zen Buddhist saying.

[Carrigaline]

Michael,

I don't think that anyone disagrees that simply hacking public sector expenditure is the solution. However, what I don't see is how we will pay for simply maintaining existing expenditure.

Today, it was announced that we face a €14.7 billion deficit for the year. While we can support this for a year or two, it is not a long-term, or even a medium-term solution.

The boom time revenue of 2005-2007 is not coming back (massive retail/construction based revenue mostly). With that in mind, we either need taxation increase, or cuts in government spending.

If not cuts in the public sector; where's the revenue going to come, Michael?

[t g macamhloaibh]

Carrigaline,

Haven't you been paying attention for the last 10 yrs?

You build more houses :-)

[Michael Taft]

Carrigaline, thanks for the commnet. The problem that I see is that - within the paramters laid down by the orthodoxy - there is little chance of reducing the deficit or stemming the growth in the growing debt burden. These parameters claim the answer lies somewhere between cutting public expenditure and increasing general taxes. There may be debates over the mix, where the cuts should take place, etc. But as the ESRI has shown - and the subect of my previous post (Dates with the Devil) - such measures will do little to reduce the borrowing requirement because the measures themselves drive down growth and consumption while increasing unemployment. We are running to stand in place.

We have to change the parameters. What is, currently, the driving force behind the increasing deficit and, so, the borrowing requirement? Unemployment and falling domestic demand. This means less tax revenue, more government expenditure (e.g. social welfare costs) and reduced activity. We have to address that. This means getting people back to work via a stimulus investment programme.

Where do we get the money for that? Our one - admittedly diminishing strength (owing to the Government's deflationary budget policies - taxing and cutting) - strength is our low debt status. Essentially, we could borrow, according to the EU Commission, over €16 billion this year and next above and beyond the current Government's target, and still be below the Eurozone average. That €16 billion could begin to finance the necessary investment into physical and social infrasture - an upgrading that is absolutely essential to restore our competitivness. And it will create thousands of jobs. This borrowing would be complemented by increased taxes not just on high incomes but on wealth (through a captial asset tax), reform of public expenditure (reducing, reforming and abolishing tax expenditures) and the issuing of domestic Economic Recovery Bonds, accessible to households and not just financial institutions.

Will this work? It's a gamble. But this is similar to what almost all other industrial countries are doing. One thing's for sure: we are in a slow-motion car crash and the doors are locked. We need something to pry us out before we get too badly injured.