ANALYSIS:The plan shows no clear vision of where the economy stands and where it is going, writes Eunan King
THE LAUNCH yesterday by the Government of a framework for sustainable economic renewal did little to inspire confidence in the midst of the current sharp downturn in the economy and the serious state of the Government finances.
While the aspirations in the document are admirable, the elephant remained firmly in the room. Economic planning requires vision based on a clear understanding of how the economy has reached its present state.
In the 1958 Whitaker Programme for Economic Expansion, there was a clear perception of what was wrong and a vision of how it could be corrected.
Nothing comparable is evident in the current Governments new document, entitled Building Ireland's Smart Economy.
There is no widely held view as to what exactly drove the rapid growth of the last decade.
Thus, there is no basis for well-founded vision to be incorporated in the plan for the 2009-14 period.
We would seem to have lost confidence in the future because we have no clear understanding of the success of the recent past.
Growth over the last decade was driven primarily by the expansion of the domestic market and this was founded on the large increase in the number of well educated people entering the workforce needing housing and other goods and services.
Of the 650,000 new jobs added since 1998, more that 330,000 were in private services. Construction added 150,000. Private sector employment grew by 43 per cent but public sector numbers rose by 66 per cent.
The reasons why this should be sustainable were not addressed.
It seems clear that fostering growth of domestic demand in the five years ahead is the key to regaining a growth path near that of the economy's still significant potential. The demographic forces at work in that decade will be present over the next five years, if at a less robust pace.
The plan focuses on efforts to boost enterprise, the knowledge economy and innovation, but our immediate problems lie in the weakness of domestic demand and the huge cost of the public sector.
The Government would appear to be moving directly against encouraging demand by imposing higher income taxes and VAT.
In addition, this new document envisages widening the tax base. The document makes reference to reforming stamp duty on commercial property but no mention is made of residential property.
Since the housing market is at a virtual standstill, little revenue would be forgone by cutting stamp duty on housing to zero, at least temporarily. This could help get some movement in that sector which would have a beneficial effect on wide areas of the retail economy. Intervention in the housing market is now eschewed when much needed, but was active when not required during the boom years.
The Government says it will be "tackling the recent growth in current expenditure", by means of the Special Group set up to look at public sector numbers and spending. That group will not report for six months and then its report will be "considered". It was notable that when Cowen was asked about how cost problems in the economy were being addressed, he said that "at enterprise level" managers were examining measures to ensure survival of their businesses. In the private sector, that means pay cuts are at least part of the measures. The obvious question is why pay cuts in the public sector are not being actively considered. We all face the challenge together, as was pointed out at the launch.
Currently policy resembles 1980s-style mistakes. The reason the Government increased taxes was because the public finances were completely out of balance. The imbalance has arisen because spending was raised on the back of rapidly rising property-related taxation.
Thus the public sector grew well in excess of what would have been feasible on the back of tax revenue growth from private sector employment. The initial policy mistake was to raise current public expenditure rapidly and the present mistake is to try to raise taxes on the private sector to support that error.