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RESOLVING THE ECONOMIC RESOLVING THE ECONOMIC CRISISCRISIS

Paul Sweeney Economic Advisor, Irish

Congress of Trade Unions

AGSIAthlone

18 Oct 2010

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OutlineOutline

• Ireland has a good, (not sound)

modern real economy

• But the Govt blew the boom,

bigtime!

• Now - compounding the mistakes

of the boom - deflation

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The Tiger Phase – A Golden The Tiger Phase – A Golden EraEra

• The Celtic Tiger phase of growth was

always temporary – catch up.

• There was a real boom for 15 years to 2001.

• Growth lifted Ireland on to a modern plane.

• But seeds of destruction were sown from

late 1990s

• – deregulation, privatisation, pro-cyclical

tax-cutting, tax breaks.

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IRISH JOBS MACHINE '87-11Almost Doubled & Then Collapsed.

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

TO

TA

L A

T W

OR

K

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Wrong Policies PursuedWrong 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 marketLabour market 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 Ireland – World’s Worst PerformerPerformer

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 Ireland – World’s Worst Performer Performer cont-cont-

Irish 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

is still falling!

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Source: CSO and Stability Report in Budget 2009.

Ireland's Huge Current Budget Surpluses -Collapse (Then Adjustments)

-15

-10

-5

0

5

10

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

€Bn

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The World is a Different PlaceThe 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 2The 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 TodayIreland 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 The Wrong Solutions 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 1The Correct Solutions 1

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 2The Correct Solutions 2 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!

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The Correct Solutions 3The 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.

– 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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ConclusionConclusion 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

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ConclusionConclusion Deflationary cuts will delay recovery

– “the cure may even kill the patient” - Lex

THERE IS AN ALTERNATIVE

ends