Economic growth still the only solution to our current crisis
IRELAND has been in a deflationary spiral since the end of 2008.
The Government, through its failure to provide a planned fiscal stimulus to the economy alongside its swingeing cuts to public expenditure, has caused this spiral to continue.
If this policy continues, the spiral will also continue.
The obvious casualty is the workforce. The Government has allowed businesses that were viable and had full order books go to the wall.
It has also failed to provide investment capital to set up new businesses.
In the 18 months from December 2008 to May 2010, bank lending available to businesses and consumers fell by €44 billion.
In the first five months of this year alone, lending fell by €12.8 billion.
Companies who had viable businesses have closed down as banks foreclosed. Entrepreneurs with viable business plans couldn’t get businesses off the ground. Thousands of Irish consumers have been forced into the grip of money lenders.
The Government has taken about €7.5 billion out of the economy in these last two years and is hell bent on taking a further €15 billion in the next four years, including €6 billion next year.
The effect of a massive and continuing economic shock to the economy has been to drive up unemployment over the past two years.
Each time unemployment rose, tax receipts fell. Each time tax receipts fell, the Government’s deficit increased. Each time the deficit increased, more cutbacks were required, which, alongside a non-existent stimulus package, drove down unemployment again into the continuing spiral downwards.
The proof: at the end of 2007 unemployment stood at 198,000. It increased to 437,000 by the end of 2009. This caused tax receipts to fall from €48 billion to €33 billion over the period, a fall of €15 billion.
The deficit at the end of the period (taking out the exceptional payment of €4 billion to Anglo Irish Bank and €3 billion to the National Pension Reserve Fund), was €18 billion. This accumulated €18 billion deficit over two years would have been only €3 billion if unemployment wasn’t allowed to balloon to cause the loss of €15 billion in tax receipts.
The solution to our current crisis is still in creating economic growth, reducing unemployment, boosting tax receipts and thus improving our deficit position in harmony with a strong economic development push. An extension of the period of fiscal consolidation to 2016 is also a sine qua non.
This requires money. Some have suggested we borrow money from the European Central Bank to invest in jobs. This may be difficult.
The ECB has been supporting the Irish bond market, the Irish banking system and converting NAMA bonds into cash in recent times. The total borrowings of Irish banks from the ECB are €121 billion. The Government is also seriously in hoc to the ECB.
However, it might be argued that government borrowing of another €6-8 billion to fund stimulus packages over the next two years shouldn’t be a problem, given that it is still a relatively small amount and the money would be put to very good use.
Critics will say that we can’t afford more borrowing. To deal with this concern, the Government can use €6-8 billion from the National Pension Reserve Fund. Currently, there is €16 billion available. This would be classified as an investment on the NPRF balance sheet and the government would not have to ‘borrow’ the money or pay interest.
The next step is to get the credit flowing. The Government’s Credit Review Office headed up by John Trethowan was never going to work and hasn’t. The banks are watching their balance sheets and will not move.
As a result, the Government needs to set up a State Development Bank. It also needs to double the funding to Enterprise Ireland, which now lends only about €700 million a year.
Large scale capital loans should be advanced to companies that have high employment potential. The bank can also buy a stake in these companies, which can be bought back by them over time. Small scale micro capital investment needs to be quadrupled through the City and County Enterprise Boards.
The State should ensure that it has equity in high knowledge industry start ups in order to ensure that these companies are not sold off to large global companies once they become successful. The recent report by Forfás entitled ‘Making it Happen: Growing Enterprise for Ireland’ has identified key areas where 100,000 jobs can be created by 2015.
Many of these jobs are in areas where we already have a track record: information and communications technology, agri -food, health sciences and financial services. Others are areas of ‘untapped potential’: clean/green technologies, marine and maritime, creative industries, health and education services, often geared towards export. There is also still growth potential in traditional industries such as tourism and hospitality, transport/logistics and construction.
In the global era of ‘vulture capitalism’, many global financial experts, such as Prof Aldo Musacchio of Harvard Business School, have produced detailed papers showing that there are good reasons for governments to set up and own many of these industries.
This allows profits to stay within the country, reduces the dependence and risk associated with foreign direct investment and the government receives significant dividends. The new information showing that the government was wrong to close the Mallow Sugar Factory suggests that the Government has turned against these companies based more on ideology rather than evidence.
Professors of Economics also need to stop signalling the death knell of Ireland PLC and labelling it as ‘insolvent’.
Using expert knowledge to sign our death warrant is hopelessly unproductive. Even Olli Rehn praised the strong human capital potential of Irish people this week. Those who create ideas in Ireland should take their lead from this and move forward.
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