Tightrope politics

THE Government’s Medium-Term Economic Strategy 2014-2020 is due to be presented to Cabinet this morning and it is expected to be published later today.

Backed by the psychological boost of the bailout exit, the plan aims to focus on job creation, work “activisation” measures, further reform of the welfare system to help the unemployed back into the workforce, with the overall goal of reaching full employment by 2020.

It’s yet another plan on top of the Programme for Government and the much-heralded Action Plan For Jobs.

While some of the targets — especially the creation of 100,000 jobs by 2015 — are capable of being achieved, if full employment is the target for 2020, the Government is falling short on two key areas of economic progress — growth levels and the banking system.

Taoiseach Enda Kenny said the plan will centre on tight budgetary control and the creation of jobs.

The 40-page document is unlikely to make easy reading as it is not, at this stage, expected to go into detail on how each government department is required to contribute.

The centrepiece to any economic initiative, especially keeping tight budgetary control, is the forecast of the rate at which the economy will grow.

However, the Government’s predictions have been hopelessly off the mark since coming into office. It’s first major prediction was the stabilisation programme update in Apr 2011, which forecast growth levels of 2.5% in 2012 and 3% in the years 2013/14/15.

The real levels were just 0.2%. Its latest prediction for 2014 is a growth rate of 2% and if it’s incorrect, it will have major implications for the Government, as a rate of 1.5% would leave it searching for an extra €690m on top of the €2bn adjustment required for Budget 2015 — an even larger adjustment than this year’s budget, for a weary population that has been promised Budget 2015 will be the last austerity budget.

It must also be remembered that Irish families, on average, are facing extra payments of €1,000 next year in property tax and water charges and with Government continuing to cut back spending on public services, domestic demand could be weak, leaving growth targets difficult to achieve.

However, if the rate hits Ibec’s suggestion of 2.8% it would leave Finance Minister Michael Noonan with hundreds of millions extra in his newly-retrieved purse which could kick start the much-publicised tax breaks for the “coping” classes.

While this week’s plan will probably predict broadly agreed growth levels of over 3% for the second half of the decade, it will need to insert some wriggle room on the short-term figures, especially for 2014 and 2015, where predictions are varying from 1% to almost 3%.

One of the major problems the plan will have to take into account is weak rates right across the EU. If the markets don’t like the economic data they see in Spain or Italy, Ireland could be back in the firing line.

Any medium-term plan to grow the economy will bring Ireland’s banking system into the spotlight. And despite promises from the Taoiseach, Tánaiste and the governor of the Central Bank Ireland that the banks will become a contributor to the economy rather than “a huge drain” — the system remains dysfunctional for both the small and medium-sized businesses that depend on it and those with mortgage difficulties.

The Government says it created 58,000 jobs over the past 12 months but many entrepreneurs will say the jobs were created in spite of the Government.

The SMEs are the key to job creation but they still complain about the credit flow from the main banks.

Government-led schemes such as the microfinance scheme was set up by Jobs Minister Richard Bruton to provide up to €90m to more than 5,000 businesses that otherwise would not get credit. However, such schemes are proving unpopular because of the overemphasis on terms and conditions.

Acting Small Firms Association director Avine McNally believes other state schemes such as the loan guarantee scheme have a low take-up because of an over-burden on administration and paper work.

Ms McNally says one in four businesses are not able to access credit from the banks and this figure has not changed over the past 12 to 18 months. She fears the 25% with no access to the banks are operating out of their own funds, leading them to withhold investment which is vital for future growth and jobs.

The Government, at least in the short term, will have the opportunity to deliver on countless promises to help viable businesses to grow and prosper.

One option is the newly set-up Ireland Strategic Investment Fund (ISIF), which has over €6bn transferred from the National Pension Reserve Fund and will have another €600m added if the expected sale of Bord Gáis Energy goes ahead early next year.

Funding will be made available for commercial investment and entrepreneurs will be expecting a lot less paperwork and conditions attached to applications to this fund, which if successful, will help provide a profit for both business and the State.

Likewise, sorting out the giant elephant in the economy, the impending mortgage crisis, would greatly help in adhering to budgetary targets and investing in employment.

David Hall of the Irish Mortgage Holders Organisation believes mortgage and personal debt is paralysing the country and “obstructing growth” and has warned that the country is facing a potential €10bn mortgage time bomb if there isn’t a targeted approach.

THE figures speak for themselves. There are 59,844 mortgage accounts in arrears above one year, with 31,000 of them in arrears for over two years whose arrears add up to €1.8bn.

The Government has set up the Personal Insolvency Practitioners (PIPs) service, but with fees ranging from €1,500 to €6,000, it’s proving too costly for those in debt.

“Only in Ireland would we have a private insolvency system where those most in debt cannot afford to access a system supposed to help them,” said Mr Hall.

He believes banks should be compelled by legislation to provide long-term mortgage solutions, including split options with no interest on the parked amount.

But for younger people, the creation of jobs is the number one priority for the plan. The Government promised to introduce incentives to get young people off the Live Register, but cutting dole payments to €100 for newly unemployed under 26s is more likely to feed emigration.

Taking up jobs will depend on how the Department of Social Protection continues to tackle the benefits system which is seen to punish those who take up low-paid work.

Unemployment peaked at 15.1% in 2012 and is now hovering at 12.5%. Enda Kenny’s target of reducing the rate to 10% by 2016 appears attainable if everything goes according to the Government’s plan. There are 395,000 on the dole right now, yet that figure masks the true reality that it could be tens of thousands higher if the generations-old emigration option wasn’t available.

Yesterday, Mr Richard Bruton said the 2012 jobs action plan target of creating 100,000 jobs by 2015 could be “comfortably exceeded”.

Likewise, the target of having over 2m in employment by 2020 is without doubt achievable. If the county were to have full employment it would mean in the region of 2.2m people having jobs and it looks like an achievable target for 2020.

The reality for the Government is while it has achieved the Best Small Country in the World to do Business, it’s a small, open economy that faces many risks, both economic and political.

If the eurozone faces major challenges over the next 12 months which result in a growth rate close to the 0.2% of the past two years, the accusation of over-promising and under-delivering in a pre-election year will not have been part of this Coalition’s medium strategy, especially if any cracks appear before next May’s local and European elections.


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