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Never waste a good recession

on .

By the narrowest of measurements, we are finally out of recession. At 0.4 per cent growth there will be few willing to bet that this is a clear signal of a prolonged spell of economic growth in Ireland. We have been in economic and employment decline for six years – that's four times the 'normal' length of a recession. Unemployment figures have shown some reduction, though whether the reason is more to do with continuing emigration or a significant rise in part-time and full-time jobs is not yet clear. The country's debt to GDP ratio is still at an unsustainable 125 per cent so we have a long way to go. Our budget deficit has been substantially reduced and we are edging closer to the end of the bailout under the Troika.
There has been much talk of improving competitiveness and increasing efficiency, but the reality is that there has been a lot more talk than action. The social welfare system, along with health and education are the three big expense lines. social welfare has been clipped around the edges but fundamental reform seems beyond reach. While the debate still ensues as to whether it is worthwhile to work or go on welfare, then a serious problem remains, even if jobs are scarce. Education also gobbles up money and, with a baby boom delivering more junior infants into the primary school system, the prospects of major savings being made in the system are remote.
An area of education that seems to receive little attention in terms of cost/budget analysis or cutbacks is the third-level sector. While the sector is seen as being in the front rank in providing education towards immediate employment, there is little doubt that there is wastage in the sector.

A Bottomless Pit
Healthcare remains the bottomless pit – a voracious and insatiable beast consuming all of the money thrown at it and always asking for more. The health budget overrun in the current year could amount to €200m. This has been described by Minister for Health, James Reilly, as a 'small' excess. Clearly, the minister's association with economic realities is peripheral at best. His response to the problems in the health industry is to create yet another governing body – or bodies – to run the system. No one has, as yet, found a means of restricting the monetary demands of the healthcare sector, if, indeed, there is any solution. The HSE was established to improve efficiency. The fact that the HSE was never streamlined from the previous regional health authorities is forgotten or ignored by the current crop of politicians who seek to put their own unique imprint on a defective system.

Poor Cull Rate
Elsewhere, the present Government made much during the last election of removing, abolishing or rationalising the vast herd of quasi non-governmental organisations (Quangos). The results of this 'cull' have been abysmal. A few soft targets were abolished and a few more amalgamated; a very poor cull rate after all of the hot air and rhetoric about reform. Either the practicality is that reform is impossible or the Government lacks the bottle to stand up to the civil servants who ultimately dismiss most political aspirations.

Budget Blues
The Budget in October is a real indicator of whether this Government is capable of leading the country back to sustainable growth and low unemployment levels. There has been a lot of debate about slowing the pace at which the book balancing exercise is to be carried out.
Extending the date at which we resume living within our means really only postpones the inevitable. What is not explained is that it also adds considerably to the national debt that will have to be repaid over the next three decades. Is there not a case to be made for applying the full rigours of the planned cuts in anticipation of reasonably strong economic growth next year.
With the Budget completed by mid-October, the inevitable damper on consumer spending will have lifted by Christmas and, with the knowledge that austerity budgets are behind us, the country would be well set up for 2014. The alternative, favoured by many in the Labour Party side of Government as well as public figures, such as economist Jim Power, really only postpones the inevitable. The books have to be balanced sooner or later – and the sooner the better if we are to take maximum advantage of the expected surge in growth both at home and abroad. If that happens it will pretty much eliminate any need for further cuts in expenditure or additional taxation measures. On the downside, if the growth spurt does not materialise, or not to the extent hoped for, then the October Budget will only have done what is necessary to keep us on course to exit the bailout, engage in commercial borrowing on the international markets and edge us closer to balancing national income and expenditure.
History is on the side of closing the income/expenditure gap as quickly as possible. The 1980s coalition Government under Garret Fitzgerald, procrastinated for its entire term over how quickly or slowly the budget deficit should be corrected. The result was an extension of the recession in Ireland by at least three years. While the rest of the world experienced a period of significant growth, Ireland remained in the economic doldrums, with high taxes, high emigration and little or no growth.
The rationale remains the same. In order to restore economic and financial well-being, it is necessary to return to the income and expenditure levels of a decade ago. Back in 2003, most people thought the country was doing reasonably well. While social welfare payments were lower than now they did keep most of the recipients out of poverty. Aspirations must be managed. There will be no return to the boom times of the last decade. Quite simply, that boom, for the most part, was driven by a runaway building frenzy. That will not – and cannot – happen again. This means that employment growth will be moderate, even if the economy grows by five per cent per annum over the next five years. Jobless growth is a phenomenon we have seen before. In order to ensure that does not happen we need to balance the books as quickly as possible and then use the benefits of growth to drive employment initiatives. Otherwise, we will need the fruits of economic growth to cover the higher interest rates on our debts as well as to keep up the social welfare and unemployment benefits that are an inevitable result of inertia; the same political inertia that condemned a generation of Irish people to grinding recession 30 years ago.