Corrective action to deal with the downturn will have to be taken before December's budget, writes Noel Whelan
RYAN TUBRIDY and others had fun this week dipping into recession nostalgia. Last Tuesday's ESRI report unleashed reams of pent-up commentary about how Ireland is set to return to the bad times. Those who spent the last decade predicting a crash see themselves as vindicated and are delighted to bandy the R-word around, while those who longed to wallow in economic misery have their wish.
However, while Ireland's current predicament has echoes of the economic crisis of the 1980s, it is not a repeat. Even the most pessimistic economists accept that our current difficulties are not as severe as those experienced then.
Our economy is larger and more flexible, having shifted from a predominantly agrarian and manufacturing-based economy to one increasingly based on the hi-tech and internationally traded services sectors. Ireland was the basket case of Europe in the 1980s; it is now its second wealthiest country.
Thankfully, our politics is also more stable. As a result, the required early intervention is more likely. Two questions now loom large in political debate: first, how did we get into this situation; and secondly, how do we get out of it. Inevitably, the Opposition's focus will be the first question as they seek to blame all on Brian Cowen's stewardship in the Department of Finance.
The truth is more complex. In all of his significant speeches before and after the election, Cowen was generally positive about the economy, but was also careful to warn about a number of threats, any one of which could undermine economic growth.
External threats included the prospect of a downturn in the US economy or a sharp rise in oil prices. Internal threats included an overheating property market and an over-reliance on the construction sector for economic growth and tax revenue.
Unfortunately, all four threats have materialised, precipitating an end to the consumer boom and coinciding with the fallout from an international credit crunch.
One can argue that the Government could and should have done more to cushion against the consequences of such threats, but the priority now is that our politicians have the courage to take the necessary corrective action quickly.
The immediate challenge will be to plug the €2 billion deficit opening up between tax receipts and public expenditure.
The elements of a plan to address our current economic condition are easily identifiable. The political challenge is to decide which treatments to apply, in what measure and in which combination. The ESRI itself suggests that the Government increase borrowing to ride out the downturn but the Minister for Finance Brian Lenihan has ruled this out. Not only would it breach EU rules, it would postpone tackling the underlying problem of current budget overspend.
An explosion in public sector pay and pension bills in the last decade inevitably means cutting current public expenditure must include some cuts in public sector numbers and/or a reduction in real pay levels. Ideally, the Government would implement a public sector hiring and pay freeze; however, that would be impossible while also maintaining industrial relations peace.
Pruning the National Development Plan must also be part of the solution, although the Government has been careful to emphasise that crucial capital projects will not be compromised.
A slight increase in the top income tax rate in next December's budget should also be included in the treatment plan, but political resistance means it will probably not happen. Instead the fall-off in property and consumer taxes must be met by an increase in taxes on the old reliables like alcohol and tobacco.
More widely, the Government will hope to complete a new social partnership to alleviate rather than add to the current economic difficulties. Initial exchanges between Ibec and Ictu do not augur well. The animated response by David Begg to suggestions of a wage freeze was particularly interesting. He rejected calls for pay restraint on three different bases.
First, he appeared to dismiss the ESRI's diagnosis as overly pessimistic. He then accused business leaders of having a cheek in calling for pay restraint while top company executives pay themselves massive remuneration packages.
Finally, he suggested it was unfair to ask workers to forgo pay rises while facing rising fuel, energy and food prices and the spectre of higher mortgages.
Begg may be partially correct, but compensating workers for cost increases will only worsen economic conditions and trigger a cycle of further costs for workers.
Economics has come centre stage in our politics, where it will remain for at least a year.
Mid-year tax returns will be published next week and are again likely to make depressing reading. The Government will have difficult decisions to make, some of which cannot wait until December's budget.