This time we cannot ignore costs warnings

Advice of expert groups must be heeded as the stakes are very high, says Jim Power

This time we cannot ignore costs warnings

It is now a decade since Ireland descended into what was arguably its worst recession of modern times.

Much has been written about the causes of the crash and blame has been apportioned, at some stage or another, to virtually anybody who draws breath.

The number of people who claim to have predicted the whole crash is akin to the number of people who claim to have been at the famous Munster victory over the All Blacks all those years ago. There is little to be gained at this stage in trolling through the entrails of the crisis, but it is important that lessons be learned.

The basic problem was that the Irish economy turned into a ‘bird flying on one wing’, with a dangerous dependence on the construction sector and associated activities. At the same time, the cost base of the economy was allowed spiral out of control and the banking sector engaged in totally reckless risk taking.

Then, when the global crisis hit on the back of the sub-prime implosion, the Irish economy was blown out of the water. Given the magnitude of the global crisis that occurred from 2007 onwards, a small open economy such as Ireland’s was always going to be extremely vulnerable, but that vulnerability was magnified dramatically by the type of economic model that had been allowed develop up to 2007. In other words, Ireland had zero resilience in the face of what was a pretty unprecedented global economic and financial crisis.

Arguably, the main lesson to be learned was that we must ensure that the next time we are hit with the inevitable global shock, our economy needs to be as resilient as possible to absorb at least some of the shock. A former taoiseach once said that nobody warned him in the run-up to the crisis. This was blatantly incorrect.

The National Competitiveness Council, which was an arm of the state agency Forfás and now reports to the Taoiseach and the Government through the minister for business, enterprise and innovation, warned repeatedly in its annual competitiveness reports that the competitiveness of the economy was steadily deteriorating in a dangerous fashion. The warnings were basically ignored.

The annual offering from the National Competitiveness Council is a superb compendium of how Ireland is evolving on a broad range of metrics that contribute to the competitiveness of the economy.

This week it published the 2017 version, and once again it makes for instructive reading and offers some sensible advice. The key message is the need to engage in prudent management of the public finances, and specifically the necessity to avoid unsustainable current expenditure increases and a shrinking tax ratio. It stresses the importance of having a tax system that is internationally competitive, that has certainty, and which supports and rewards employment, investment, innovation and entrepreneurship. While this makes sense, our political system does militate against such behaviour.

Housing is identified as a key element of competitiveness, as it should be. The Council acknowledges the difficulties in addressing the housing shortage against the background of the EU fiscal rules, but it recommends that there be sustained investment in quality public transport projects, broadband and housing. This also makes perfect sense, but doesn’t really address how this can be done in the context of fiscal limitations. The EU fiscal rules need to be flexible enough to allow breaches of spending limits for capital investment purposes, but not for current expenditure purposes.

Talent development and addressing climate change are also highlighted as important issues. No arguments there.

In relation to costs, it reiterates an earlier message that despite the low inflation environment, “Ireland is a relatively expensive location in which to do business”.

The Council suggests that Government, enterprise and trade unions have a role to play in ensuring that Irish wage growth does not outpace productivity growth, or wage growth in competitor countries. A new version of Social Partnership?

In normal times all of this advice would make perfect sense, but in the face of the Brexit challenge and the external attention being paid to Ireland’s corporate tax environment, the stakes are particularly high and the advice from the National Competitiveness Council must become a driver of Irish economic policy.

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