Transcript The Celtic Tiger Ireland`s Economic Miracle Explained

RESOLVING THE ECONOMIC
CRISIS
Paul Sweeney
Economic Advisor, Irish Congress of
Trade Unions
AGSI
Athlone
18 Oct 2010
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Outline
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Ireland has a good, (not sound)
modern real economy
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But the Govt blew the boom,
bigtime!
•
Now - compounding the mistakes
of the boom - deflation
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The Tiger Phase – A Golden
Era
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The Celtic Tiger phase of growth was
always temporary – catch up.
•
There was a real boom for 15 years to 2001.
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Growth lifted Ireland on to a modern plane.
•
But seeds of destruction were sown from
late 1990s
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– deregulation, privatisation, pro-cyclical
tax-cutting, tax breaks.
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IRISH JOBS MACHINE '87-11
Almost Doubled & Then Collapsed.
2,200,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
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87
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91
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93
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95
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97
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99
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01
20
03
20
05
20
07
TOTAL AT WORK
2,000,000
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Wrong Policies Pursued
Interest rates, set by ECB were too low
 Banks behaved badly – lending furiously
 Financial Regulator was fast asleep
 Govt. pursued strongly pro-cyclical policies

– Cut taxes in Celtic Tiger Boom and
– gave large tax subsidies to property investors
– allowed Financial Regulator & banks’ to
misbehave
Govt. boosted the Property Boom-Bust
 Government blew the gains of the Boom
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Labour market
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Biggest fall in employment (and GNP) in OECD
Labour force participation rate falling rapidly (next)
Had it remained at 2007 level, rate of unemployment
today would be c.21%
Youth unemployment has soared
Long term unemployment doubled
Emigration soaring
Private sector Hourly earnings rising very slightly
But with cuts in public sector and weak labour
market, earnings down by 2% this year & no increase
next year.
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Ireland – World’s Worst
Performer
We cant blame Lehman Bros or US
 Ireland’s collapse in GNP is worst in world
 It is worse than Iceland on some numbers
 Ireland’s GNP has fallen by one-fifth since
2007 when at €161bn.
 GNP this year @ €129bn will equal that of
2003
 Seven lost years of national income
 Uncertainty - more to lose with bank
subsidies? – give-in to bondholders? €?bns

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Ireland – World’s Worst
Performer contIrish Govt policies caused the Domestic
BOOM (2001/07) & bust (2008 to 2015?).
 Bust could have been avoided
 €58bn surpluses gone, now big deficits
(-20% this year!!)
 AND unparalleled subsidies for banks, while
cutting welfare, health, education, pay, etc
 When will we reach 2007 national income
figure of €161bn again ?
 2018! If we achieve 3% growth pa, but GNP
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is still falling!
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Ireland's Huge Current Budget Surpluses Collapse (Then Adjustments)
€Bn
10
5
20
12
20
10
20
08
20
06
20
04
20
02
20
00
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98
-5
19
96
19
94
0
-10
Source: CSO and Stability Report in Budget 2009.
-15
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The World is a Different Place
Governance system failed
 Markets were so free that new rules were
written by the key players for themselves
 “Shareholder value” law for companies
 Regulators failed, government failed,
 Lack of coordination, eg no Financial
Regulator in Eurozone
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The World is a Different Place 2
There are hard lessons to be learned : Government is back in market, as a main
actor.
 Bailouts far from complete.
 Some banks, financials etc. should have been
let fail.
 Many businesses are failing, including some
good firms.
 Financial Regulators have finally woken up.
 Governments are cooperating internationally
on tighter regulation and market rule-making
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Ireland Today
National Income has fallen by 20% from peak
 Prices down but core wages hold in private s.
 Unemployment up - 13.5% and growing
 Fiscal crisis, after binge of tax-cutting
 Severe Cuts & tax rises not working
 Package of wage and welfare cuts –
Deflationary.
 Lenihan - senior bondholders will not share
any of the burden with Irish taxpayers!
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The Wrong Solutions
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Keep to 4 year period of Recovery
Front-Load the “Adjustment” (Cuts!)
Make it mainly cuts, not much taxes
Also cut investment further
Increase taxes on all earners, not high incs.
Do not burn Anglo+INBS bondholders
No real reform of corporate governance
But Deflation has not worked and will not work
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The Correct Solutions 1
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The 4 year Plan cannot be achieved (3%)
Do not Front-Load the “Adjustment”
Make it judicious cuts + taxes
Do not cut investment further, but boost it
Tax “broad shoulders” eg extend 2% income
levy to corporate profits - €630m plus CGT,
CAT etc
Burn Anglo+INBS bondholders by 90% +
save €20bn to 24bn
Reform of corporate governance ie co law
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The Correct Solutions 2
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Negotiate with bondholders of Anglo/INBS
Thus share burden + save billions
Difference between Sovereign & private debt
Lenders may baulk for a while
But we have €20bn cash and €24.1bn in NPRF i.e.
to end 2011 – can avoid markets
Boost Solidarity Bond, auto-enrolment in pensions,
PRSAs in state pension fund etc. for cash
Lenders will soon lend again after billions in debt
reduction & when economy finally begins to grow
again
We have endured 9 continuous quarters of negative
GNP - Deflation as a policy has patently failed!16
The Correct Solutions 3
Front-Loading is Saturation Bombing – no green
shoots for years after!
Economy is a dynamic organism -cant be cut to
death to “make it” grow
Cuts vs Taxes debate should be over.
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The Cuts Advocates have lost - it has failed to date.
But its adherents still are in office, in Finance, in Unis
Not so aboard, where “Stimulus” holds sway
Correct Answer is in between, but away from
Austerity
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Conclusion
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Deal with 3 crises as one - Jobs, fiscal and
banking
Radically amend “Austerity Programme”
Less cuts & more focused tax-raising
Investment programme in infrastructure and
in education & skills (€2bn from NPRF X3yrs)
New Public / Private paradigm
New Corporate Governance system
Social Solidarity + Rapid Recovery
Build on strengths' of the real economy –
while dealing with fiscal and banking crisis 18
Conclusion
 Deflationary
cuts will delay recovery
– “the cure may even kill the patient” Lex
THERE IS AN ALTERNATIVE
ends
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