Could it get any worse?
The answer to the question in the title is most certainly, yes. If you want to visualize the current condition of the Irish economy, I suggest you recall the image of the cartoon character who has just stepped off the cliff and is now freeze-framed in mid-air waiting for the inevitable plummet to the rocks below.
When I was last in Ireland in May discussing the only topics on anyone’s lips these days, - the economy and politics - someone suggested that the current Fianna Fail government might be the only government on the planet that would actually welcome an election defeat at the moment. I mean they are faced with a series of decisions they need to make in the next few months none of which contains an ounce of political gain. In fact, they are already so completely bereft of political capital that they have none left to spend on even the tiniest economic reform. But have a wee look at what they are facing….
- The economy is in deep recession – negative growth of 8.3% predicted for this year and only the Brothers Grimm could imagine a scenario of positive growth before 2012.
- One of the three major banks had to be nationalized last December and the other two are teetering on the edge of bankruptcy. The government - it now seems foolishly - guaranteed bank debt up to €400 billion when the crisis began last September.
- The government just created a “bad bank” to buy the non-performing loans of Irish banks at a value which will allow them to properly recapitalize and start lending again. If the price they pay is too low, the banks will not have enough capital to survive. If the price is too high, the taxpayer will have to absorb the loss.
- Unemployment which was 4% two years ago is hovering around 12% now and expected to reach 16% by year’s end. However, the true picture is obscured by those who just leave the country because they can’t get a job– Irish emigrants as well as the foreigners who came to Ireland during the Celtic Tiger – meaning that the jobs actually lost are much higher than the number of people declaring themselves as unemployed in Ireland.
- The property market which was in nosebleed territory two years ago is now in complete freefall. Nobody knows by how much because there is not enough buy and sell activity for a statistically relevant analysis.
- Tax revenues have collapsed having been heavily bolstered by the property market in recent years, primarily through “stamp duty”, a tax payable by all purchasers which could be as high as 9% of the purchase price. However all the new spending programs that sucked up that cash are still around.
- As a result, the government now has a “structural deficit” of €18 billion. In other words they have to find ways to either raise taxes or cut spending by that amount every year. Let me press the pause button here to give you an idea of the magnitude of that number. That comes to €4,500 for every man woman and child in the country. Or, in Canadian dollars, an annual contribution of $27,000 – after tax - for a family of two parents and two children. Gulp.
The dogs in the street, as they say in Ireland, can tell you what the solution is. The government has no choice but to slash spending by €18 billion a year. Or, they could hang around and wait for the economy to improve and tax revenues to pick up. But the economy will never improve to that extent. The flow of inward investment from the US that sustained the Celtic Tiger has completely dried up and when the US starts spending again it won’t be in Ireland because it now costs too much to do business there.
So how will they raise all that cash? The government commissioned a group headed by Professor Colm McCarthy of UCD to report on how some savings could be made. Nicknamed “An Bord Snip Nua” (the new “snip” board), it reported recently suggesting a long list of possible cuts that could save €5.3 billion annually. But where does the rest come from? It comes from castrating the elephant in the room which An Bord Snip was mandated to ignore – the pay and conditions of the bloated Irish public service. At the moment, the pay differential between the public and private sectors is estimated by some commentators to be as high as 50%. On top of this, the public sector enjoys security of employment and generous pensions. In all, An Bord Snip Nua has potentially pissed off about 145 special interest groups each of which will be singing that well-loved ditty “don’t cut you, don’t cut me, cut that stranger behind the tree”. The government, suspended in mid-air as it is, has not yet made a decision to cut anyone. As soon as it does, the floodgates will open and the strikes and demonstrations will begin in earnest.
Politicians are not programmed to piss off voters so the general expectation is that they will do as little cutting as they can get away with and then round up an eminent economist or two to predict a rebound of the Irish economy in the short term which will raise tax revenues enough to cover whatever shortfall is left. In other words, they’ll kick for touch.
But what if they’re wrong and tax revenues don’t pick up? The dogs in the street know the answer to that one too – the IMF. The International Monetary Fund infamously does not do “snip”. They are more the “hack with a machete” dudes. If Ireland runs out of borrowing capacity, it can always go cap in hand to the IMF as a last resort. That’s like the bank turning you down for a loan and you give Guido a call. The IMF does what the politicians choose not to do and the problem gets solved after the mass demonstrations and general strikes have run their course.
Is there a bright side to this? Well, perhaps. The association that represents Irish publicans agreed not to raise the price of Guinness for a year.
Fantastic!
But wait a minute…this just in….breaking news…… the High Court in a recent ruling has decided in favour of the Competition Authority who took the publicans to court for “price fixing” when they announced the freeze.
Groan - all is lost!
