Cowen set to roll back the years

The country is bracing itself for the worst budget in history, with Brian Cowen telling us we’re living 2009 lives on 2002 incomes. How was it back then?

WHEN BRIAN COWEN astonished political correspondents by sitting down to chat with them last Sunday, it was out of concern that people have yet to understand the degree of trouble facing the country and the sacrifices that will be necessary. We were enjoying a 2009 standard-of-living, said the Taoiseach, but funded by 2002/2003 incomes. He also predicted that living standards would fall by 10 per cent over the next two years. According to Prof John FitzGerald – who reckons it’s more like 12 per cent – this would take us back to 2003 in terms of output per head and living with the consequences of that.

So how were we doing in 2002 and 2003? Fabulously well, apparently. In early May 2002, the general election campaign was in full swing and the then minister for finance, Charlie McCreevy, was assuring combative teachers on the doorsteps that the cash was in the bag for benchmarking part one, while urging young mothers to “keep up production” since they would be getting “a pile of money” when the pre-election double dose of child benefit kicked in. He told Michael Noonan that “no significant overruns [were] projected and no cutbacks whatsoever”.

However, warnings from the Economic and Social Research Institute (ESRI), among others, that benchmarking and SSIAs would create a black hole of billions were falling on deaf ears. We were top of the EU inflation league at 5 per cent and the second most expensive country in Europe after Finland. Tourism was in the doldrums amid wild profiteering in the services sector; mid-market restaurants were charging €3 for a glass of still water and €9 for a bowl of steamed rice.

The post-election summer of 2002 was an ill-tempered one as what Bertie Ahern called “a moderation in the increases” and others called “stealth charges” kicked in: new roads to be tolled, a 70 per cent increase in college fees, a €40 charge for attending casualty departments, a doubling of the levy on credit cards.

People grumbled and demanded more money. By 2003, according to the CSO, average weekly earnings in the public sector stood at €743.53, up from €697.68 in 2001; by 2008, they would rise to €945.18. Average earnings in 2003 for operatives in the construction sector were €700.16 (up from €466.76 in 2001). Banking, insurance and building society employees saw their weekly earnings of more than €700 in 2003 rise to €904 by the autumn of 2008. The minimum wage, in existence then for three years, was €6.35 and was mostly the fate of the immigrants who had become vital to manning the Irish services sector.

Meanwhile, the natives splashed the cash. “When was the last time you checked your change in a Dublin pub?,” wondered a drinks industry man in 2002, when asked if the extra duty on cider had made a difference in sales. Hint: we had become the biggest cider drinkers in Europe.

By 2003, Irish trips abroad had climbed from 4,210,899 in 2001 to nearly 5 million; the era of the holiday home had arrived. Anyone selling a house for mad money was imbuing his neighbours with that nice warm feeling of being a (paper) millionaire.

SO WHAT’S NOT to like about returning to 2002/2003 incomes and lifestyle? Won’t salary reductions and levies of all kinds be offset by rock-bottom interest rates, cheap petrol and desperate retailers? The answer is that it will for some. For the one sure thing about this recession is that there will be no parity of misery, whatever the rhetoric. “It will not be spread evenly,” says the UCD economist Moore McDowell. “A person losing his or her job is part of the 10 per cent fall. If you were on the average wage of 38,000 and lost your job, your standard of living will be more than halved.”

Prof John FitzGerald of the ESRI agrees. “Some will be a lot worse off and some may be better off than ever before. For some, it’s certainly not Armageddon,” he says, noting that according to recent figures in the Economist magazine, Ireland is still one of the richest countries in the world. “But those who will really get screwed will be the unemployed.”

The clear message is that a secure job is the holy grail. This week, as unemployment reached 11 per cent or 372,800 claimants on the live register, some economists were predicting that the numbers would climb to 500,000 by the end of the year.

“If everyone went down by 10 per cent”, says John Fitzgerald, former Dublin City Council manager and current chairman of the Limerick Regeneration Project, “you would just be more prudent, do less stupid things with your money and it wouldn’t be that big a problem. But the problem is that half the population haven’t the capacity to do that because of big mortgages or because they’re on social welfare. The concept [the requirement of a 10 per cent fall] is inescapable; it’s the application that’s the problem. Anyone who comes up with an idea, there’s a posse of very vocal people ready to oppose it.”

“It’s also the suddenness of that 10 per cent fall that is going to hit us,” says Moore McDowell. “If your standard of living was drifting down over 10 years – which would be more normal – that might not affect you too badly; it’s when you have that sudden plunge in living standards and that sudden rise in unemployment that will be the problem. And make no mistake, it is a huge drop . . . Between taxes and levies, people will be losing as much as 30 per cent.”

Meanwhile, the people who have managed to find an equilibrium between barely affordable mortgages acquired in the last years of the boom and a dwindling pay packet have little reason to be cheerful. Bargain-basement interest rates will not last forever as the US and the UK print money; at some stage the ECB will have to step in and raise rates.

Part of the problem with looking back on the early years of the decade is the urge to wonder what might have been. As long ago as 2000, says Dr Peter Bacon, the germ of the property speculation bubble was well in place. He is well placed to know, since he was the government-appointed consultant charged with drawing up several reports to dampen the property flames already licking around the economy in the late 1990s. Even then, he says, the lenders he spoke to about affordability criteria were chucking something called “PGs” into the mix, a term he had never heard before. And what were they, he asked? Parental gifts, they said.

“There was this whole emerging culture and this was the way forward [in the lenders’ view], you had to get your kid a house . . . It was a bit like enrolling your child in school on the way home from Mount Carmel.”

He recommended the reduction of tax reliefs on mortgage interest and the government agreed, implementing a special Act to that effect. The annual price increases of more than 25 and 30 per cent seen on new and second-hand houses in Dublin had already come down by nine and 13 per cent respectively when the government caved into industry pressure in 2000. And what if it hadn’t relented? “The bubble would effectively have deflated in 2002 and 2003. We would have remained on a sustainable growth path. We wouldn’t have the banks broke,” he says now. “By saying that the last 10 per cent of growth was unreal, Brian Cowen is implicitly acknowledging that the growth of the past five to seven years was not sustainable.”

He is not without hope, however. The 10 per cent fall might just remedy matters, he says. “But it depends on how quickly they move . . . It depends on a well-articulated strategy to deal with the public finances, with the banking sector, with increasing competitiveness and productivity in the wider economy . . .”

MEANWHILE, HOWEVER, SOURCES within the public and banking sector suggest that there are great oceans of drift and denial within both, and that banking interests continue to exert influence disproportionate to their strength. Where there isn’t denial, there is growing paralysis about decision-making, says one public servant, concerned that the lessons of the savage cutbacks of the 1980s are being ignored in a country still playing catch-up for the long decades of neglect.

Tuesday should go some distance to revealing whether this is so. But as well as articulating its remedial strategy for all-important international consumption, the Government needs to do it for its home audience also, says Moore McDowell.

“People are scared and they’re right to be scared, I believe. It’s very important that the government provides a road map for the next 18 months to two years, even it’s a somewhat fanciful one. It needs to give people a sense of what is going to happen, then they would know and uncertainty would be reduced. If you believe the opinion polls, there is a huge amount of anger at the Government as principal architect of the problem.”