Forget being softly-softly with the unions — rather, lay down the law

IN AN ideal world every new year should start on an optimistic note. The change in the calendar offers a psychological opportunity for change, for betterment, for renewal. Whatever went before is past and all can be started afresh.

Well not this year, I’m afraid. If you want false optimism, sugar-coating, delusion even, about the state of the Irish economy and its impact on the lives most of us lead then you won’t be getting it here. Bad as 2008 was for most people, 2009 is going to be even worse.

Standards of living are going to decline for nearly everybody, as incomes fall and taxes rise. Falling prices will not provide enough compensation. Hundreds of thousands of more people will lose their jobs. Many businesses — especially those dependent on exports to Britain and screwed by the surge in the value of the euro against sterling — will go bust. Public services are going to be harder to access and will cost more; some that we have become used to receiving may not be provided at all.

Most people had to face up to reality during the tail-end of 2008 and the collapse in retail sales was the startling evidence of that. Many people are afraid about the future and are saving whatever money they can instead of spending it. This contrasts starkly with the willingness to incur debt over the past decade, borrowing money to purchase things in the hope of being able to repay it later.

I’ve pointed it out many times before: the value of loans that individuals had taken from banks, be it for investments in property to rent, home loan mortgages or just consumer spending had reached ridiculous proportions, often divorced from the reality of how people would make the repayments.

It had to stop. Now that incomes are falling, the reckless lending of the banks — and the mad borrowing of customers — is leading to painful consequences.

One big problem is that we’re going from one extreme to another. Having suffered from the condition called “irrational exuberance” we are now panicking. People who could afford to continue spending are doing less than they could if they were so inclined. That said, you can’t really blame them. After years of paying too much for things or wasting money on unnecessary items they didn’t really need many are showing overdue care. If something is likely to be on offer at a lower price in the future why buy it now if it is not absolutely essential? Or why buy it at all?

Some people, however, may not have woken up to the new realities of life. For example, it is now clear that however problematic they may be to those involved in the system, the education cuts announced in the budget were not particularly deep, compared with the disastrous nature of the Government’s inability to pay for its commitments. It remains the case that providing free medical cards to everybody over 70, irrespective of their incomes, is a poor use of public funds, notwithstanding the outrage that followed the Government’s botched efforts to reform an inequitable and unaffordable system.

Unfortunately, the Government failed to communicate the extent of its financial problems — nay our problems — sufficiently before making the cuts and therefore failed to justify its actions. Worse, it now seems scared of doing what is required, even though the cuts are going to have to be a lot worse.

For those who didn’t fully understand what was going on last year, well the penny will have to drop early in 2009. Collectively, we have been living beyond our means, even if it is almost impossible to say that because of the memory of former taoiseach Charles Haughey using that particular phrase in 1980 when he was living it up on the hog, corruptly and hypocritically.

But we’ve had too many years when we’ve been fooling ourselves about the economy, believing that it could continue unabated in its growth or that if it did slow down, we’d get a “soft landing”.

We bought into the myth that somehow we were “different”, that our population demographics and new wealth would continue to inflate the property bubble (not that “we” admitted that’s what it was) and that we would continue to get richer. Those who said it couldn’t last were demonised; even those who raised legitimate questions risked the wrath of the populace.

The elephant in the room these days is the cost of running the public service. This is the issue that economists, broadcasters and journalists are wary about raising because of the viciousness of the response from those who would be affected by the cuts. Correctly, the Government has said it will borrow heavily to invest in infrastructure. It cannot borrow to pay public sector pay, however, without incurring huge bills for future generations.

Worse, it is finding that the cost of borrowing is becoming prohibitive. There is a credit crunch for governments too; even much bigger and better-established economies such as Germany have had problems in securing loans recently.

The reality is that public sector pay will have to fall and that jobs will have to go. The public sector cannot be immune from what is happening in the private sector.

There is the risk of social divide during this year and next, between the public sector workers — who will demand protection from market forces — and private sector workers who’ll get little or none and become frustrated if the pain is not shared. The public sector has made much of benchmarking — apparently to provide equality — but the result of it has been that public sector workers, on average, are much better off when it comes to pay, job security and pensions. If they really believe in the social equity of benchmarking the logic of pay reductions is unavoidable.

As a result of all this the country wants and needs leadership, but our Taoiseach, Brian Cowen, offers partnership instead.

Just before Christmas, Cowen made it clear that the urgent and much needed initiatives to rescue the economy from meltdown would be designed and implemented by Government negotiation with the “social partners”.

THE reality is that the social partners to whom he refers would be better described in the singular. The trade unions — representing a fraction of society and not elected to public office — are being offered effective vetoes over what the Government needs to do. But acceding to the demands of the trade unions has contributed to the unsustainable financing of the public sector. While the unions were entirely right to demand that the proceeds of the boom be shared, giving way on the pay demands and extra employment in the public sector wasted much of the proceeds of the boom. Competitiveness in the private sector was also wasted by insisting on pay increases that pushed our labour costs way above levels in competing countries.

Had successive Fianna Fáil-led governments applied the tax revenues of the boom to the elimination, rather than mere reduction of the national debt, and to developing a fund for the payment of new infrastructure out of savings rather than debt, then this year’s crisis could have been mitigated somewhat. It followed expansionary policies despite knowing that interest rates were way too low and were inflating an asset price bubble. Instead, populist compromise with the social partners has made this country too expensive a place to do business — made worse by the currency crisis — just as our asset bubble has burst. Now the Government is looking to the unions for compromise instead of laying down the law in the national interest.