If the economic crisis is to be adequately dealt with three major challenges must be addressed: resolving the toxic-assets problem of the banking sector, controlling the fiscal deficit and restoring competitiveness.
With the setting up of NAMA (National Assets Management Agency) the first issue is now close to resolution, which it needs to be as it is a necessary condition for economic recovery.
As for the fiscal deficit problem, it was recognised many months ago, but it was not until July, with the publication of the McCarthy Report, that the implications of this for every sector of state expenditure were spelt out. The challenge now is to implement most of these proposed changes without political turmoil and possible social unrest.
There were two issues outside the remit of the McCarthy report, which it addressed regardless. The first is public sector pay and the second is public sector pensions. Controlling both is crucial to resolving the fiscal deficit problem. This is also crucial to restoring Ireland’s competitiveness.
Competitiveness
Few have realised the scale of Ireland’s loss of competitiveness up to 2008. Pre-tax wages though have fallen by 10 to 15% in some parts of the private sector in the last year and tens of thousands of jobs have been lost through compulsory redundancy. Falls in pre-tax public sector pay and numbers may also be required, as the implicit or tax ‘price’ of many public goods and services in Ireland appears to be much too high. The ESRI (Economic and Social Research Institute) found that the average earnings gap between the public and private sectors was 26% in 2006. On the basis of anecdotal evidence in relation to academics, doctors, judges, politicians, etc., pay levels in the public sector also seem to be much higher than in many other EU countries, To what extent this is true is now under investigation by the government.
However, unlike in the private sector where the consequences can be stark and immediate, in the form of closures and unemployment, the consequences of too high a price being paid for state services take longer to materialise and any moves to ameliorate the situation can be resisted by very strong public sector unions. Such resistance is already underway, even before any cuts have been announced.
The tax or implicit price of public services is an issue that will not go away and has to be addressed sooner rather than later if Ireland’s competitiveness is to be restored. This, as the McCarthy Report states, has to be done through reform of work practices and organisational structures in the public sector, reduced numbers employed and also through pay rates. If pay rates take the brunt of the adjustment it will mean that services can be maintained at present levels, in the health and education sectors in particular, two key areas in ensuring competitiveness in the medium to long term. For example, a pay cut in teacher salaries could prevent the loss of thousands of teaching jobs. This is the trade-off the government must put to the electorate.
The McCarthy Report also highlighted the exceptionally generous position that applies with regard to public sector pensions. There is both a fiscal and equity issue here. Why should public sector pensions, funded mostly by the taxpayer, rise relative to the take-home pay of those at work and more importantly why should those lucky enough to have had secure employment in the public sector be so much better-off than those exposed to the uncertainties of the market place? Part of the solution here would probably automatically follow from action on the pay front but more probably needs to be done if the ‘tax price’ of public sector pensions is not to stifle the competitiveness of the economy for decades to come.
Where Now?
There is no reason why Ireland cannot prosper in years to come. The country has a healthy, stable democracy and a well-established rule of law. People are not afraid of hard work. More young people (aged 25-34) have acquired a higher education than in any other EU country except Cyprus. There is an openness to competition and entrepreneurship that simply did not exist in the 1980s. Ireland has the security of membership of the Euro-zone and a strong commitment to the EU and thereby free trade, international competition, a cleaner environment and all that the EU stands for on the world stage. Labour markets are open, and workers will continue to flow into and out of the country with ease. Export competitiveness is already beginning to improve.
Predictions of economic decline can be altered within months. An example of this is the earlier forecast by some in 2009 of a long Japanese-style relative decline in Germany to be followed six months later with the reality of Germany pulling out of recession faster than the US or UK.
The last two years have seen a slowing down and then a significant reversal of the boom times from 1995 to 2007; about that there is no doubt. But there has not been a disaster. Standard of living may fall back to 2003 levels but these are still some of the highest in the world and represent a huge increase in living standards over say 1995 when Ireland was already a very wealthy country in a global context. Even if the worst predictions for 2010 come true, there will still be 80% more in employment in 2010 than there was in 1995, a huge increase seen in a historical context.
It is true that the distribution of losses in the last two years has been skewed. Many thousands of people have lost their jobs, and with little notice. Others have lost their entire life savings or pension funds, as a result of the collapse in asset prices. Many of these were not wealthy individuals but people in the private sector who invested, either personally or through a life-assurance scheme, their relatively small savings for retirement. The vast majority of people though are still in employment and have experienced a fall in the cost of living as prices in the last year have declined. Social welfare payments for the unemployed are at high levels compared to other countries and for those who were in relatively low-income employment a major cushion against the income loss arising from unemployment. There are many, including some small farmers and other medium-income people, who sold at the peak of asset prices and are now wealthy beyond their wildest dreams.
The challenges outlined above are all within our own remit and can be resolved, given the political will and an informed and realistic public debate. In relation to the former, the vociferous objections of special interest groups must be resisted, by all political parties. In relation to the latter, alternatives must be presented, especially by those whose job it is to sift and present information/arguments in an objective way, so that informed decisions can be made. The alternative is never, as the public debate often assumes, some utopian ideal, but one with its own uncertainties and difficulties. Decisiveness, determination and certainty, not prolonged prevarication, are what are required now.
