Gutless Government risks turning economic disaster into a catastrophe

The bad economic news is unrelenting and unforgiving, but the Government is fearful of taking action, even though our recession is the deepest in the developed world, our recovery is many years off and will be weak when it happens, and non-existent until the public finances are sorted

THERE is no time for delay but that is what the Government has decided to do. The economy is in even worse condition than anyone had thought – with soaring unemployment the most visible consequence of a 12% fall in economic activity in the year to the end of March, a decline never before experienced in this State’s history.

There has never been anything remotely like that and the public finances are in rag order accordingly. Yet the Government is going to waste the opportunity to mitigate the disaster somewhat by the implementation of immediate cuts in public spending that will help close the gap between tax revenues and spending.

It is too gutless to do not just what is right but what is essential. The cuts aregoing to be horrible. They are going to be grossly unfair. They are going to damage lifestyles dramatically. They are going to cost jobs and cut incomes. The vulnerable and disadvantaged will not be immune, even if they should be protected.

But the reality is that there is a €20bn annual gap between what the Government spends and what it gets in, and unless it acts quickly lenders will stop us from borrowing any more money. The State will be treated by lenders like a giant property developer gone bust if it is not seen to mend its profligate ways.

The Government can point to the cutbacks it has implemented to date – including the cutting of the Christmas bonus for social welfare recipients and the introduction of an effective pay cut for public servants – as evidence of its willingness to get tough, but it has only been a fraction of what is really necessary.

It can point to its disastrous performance in the local and European elections as the price it has paid – and will pay when the general election comes – but compared to what everybody else is suffering, and will suffer, especially the blameless, sympathy for the Government’s plight is in miniscule supply.

The reality is that it started the entire process of cutting public expenditure far too late – being far too conservative in its actions a year ago when it was clear to anyone involved in business that a sudden and sharp contraction in trade was taking place that would dramatically slash Government tax revenues – and that it has done as little as possible ever since.

The idea that the crisis started with the collapse of Lehman Brothers’ bank in the US last September is one of the Government’s big lies. It has taken the easy options too many times: for example, it has spoken of protecting capital investment projects not just because of the jobs they provide in construction but because of the subsequent economic benefits. In reality, the Government has abandoned any project it had not signed contracts on. The money simply isn’t there to pay for them.

Of course, the Government knows of all sorts of day-to-day spending it could reduce or eliminate, but it won’t. Much is being made of the report from the specially established Expenditure Review Committee – or An Bord Snip Nua – which is about to be finalised and then presented to the cabinet via the Department of Finance.

The Government is acting like its contents are a mystery, soon to be revealed to it. The truth is the bulk of the recommendations have been known to it for months and many of them could have been implemented by now if the political will to do things that are difficult was there.

The word is that many of its proposals are going to be binned because they are regarded as too difficult politically to implement, even if by any rational analysis the services or employment under assessment are unaffordable or unjustifiable.

Instead, the Government is dropping hints it is preparing to be tough and expects everyone to be impressed by that.

It will not release or debate the contents of the Bord Snip report before the Dáil rises for its lengthy summer holiday – yet another insult to the public – next Thursday. Instead, it says it will use its contents to inform its budgetary decisions for next December. It may never publish the report, although I suspect it will do so shortly before the budget, just to show the electorate how tough the recommendations were so it can seek to claim praise for not being utterly ruthless when it rejects some of them.

It should publish now and act, but it has an excuse ready for not doing so and, to be fair, it is an arguable one. It does not want to incite the electorate before the second Lisbon treaty referendum, which is to be held in early October. The fear is that the electorate would punish the Government savagely for doing what, unfortunately, has to be done, by rejecting the referendum again.

That is possible, of course. The Government appears to be taking a tactical decision that a second rejection of the Lisbon treaty referendum would have catastrophic consequences for the State, so it will not take any risks that might cause its side to lose again.

Which might be fair enough were it not for the fact that the State cannot afford to delay in making essential cuts to its spending, unpopular and unfair as they may be. The consequences of a second Lisbon rejection would be many – it would end Brian Cowen’s career instantly, for example, and would make our relationship with the EU even more difficult – but it is arguable that the financial crisis is more pressing and more dangerous. The fear must be that ministers – and their lobby fodder in the Dáil – do not fully understand the seriousness of the economic disaster, or else they are putting their selfish desire to hold onto their jobs ahead of the national interest. The bad economic news is unrelenting, but the Government is fearful of taking action, even though our recession is the deepest in the developed world, our recovery is many years off and will be weak when it happens, and non-existent until the public finances are sorted. It seems to hope that a global recovery will somehow help us, and it clings to some lukewarm praise in reports by the IMF and OECD that we are going about change in the right way.

IT IS true the Government has raised taxes and cut spending, but the reality is that anybody in power – irrespective of political bent – would have been forced to do the same, no matter how much they might like to deny it and are able to do so because they are in opposition. However, the weighting of the two strands of dealing with the crisis has been unconvincing.

The emphasis on increased taxes may have been more responsible for damaged confidence and reduced economic activity than lower spending by the Government.

When it comes to tax, Finance Minister Brian Lenihan has assured us he does not want income taxes to be so high as to act as a disincentive to work. He’s right, but unfortunately we’ve heard that from him before and he had to introduce the savage additional budget in April that aimed squarely at taking more of people’s incomes from them in tax.

He will have to do more in December as well as savagely attacking spending. He will have to try to introduce new types of taxes, such as property taxes and carbon taxes, and will be tempted to hide behind the forthcoming report from the Commission on Taxation, saying he has no option but to act on its recommendations. But while tax increases may seem like a fairer way of doing things, all of the evidence from Ireland’s past and from international experience is that it is the wrong way of doing things. But it is easier politically than cutting spending.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.