Wednesday, January 28, 2009

Government's Plan for Ireland: Exclusive... Part 1

Watch this space - I will be publishing Government's Briefing to the Social Partners - received from my academic sources - as soon as I read through the document. For now, part 1 of analysis...

Since the beginning of this week, a media circus surrounds the hot air factory we call the Upper Merrion Street.

Yet, ask anyone in the street what they think will be the outcome of the Social Partnership talks and the responses you get are pragmatic. "Taxes will go up for all!" "[the unions] will make us pay for public sector salaries and job security." "The Partners will get nowhere. Look, the Government can't control its own spending."

They are right. Common sense tells us that the Government that sat on its hands as the crisis unrolled through out 2008 is simply incapable of change. Our Cabinet has no progressive thinkers at the top.

When Mr Cowen took over from Bertie the reigns of this state, his first economic argument was in favour of preserving lavish wage increases granted to senior public sector employees and politicians. Incidentally, this was also the last thing Bertie did as far as economic policy is concerned. When President Obama sat down for his first day in office, he froze salaries of senior public officials.

Notice the difference? Right, it's that leadership thing that Obama seems to have, while our Brian- Brian- Mary Tri-Headed Hydra appears to absolutely lack.

But don't take my words for it. Look at the economic policy tofu they've been feeding to the markets and the Social Partners in the last couple of weeks.

Per sources advising the talks participants on economics side, the Government has forwarded a proposal to the Partners that includes:
  • significant 'income adjustments',
  • the adoption of budgetary 'stabilization' programme for 2009-2013,
  • a nationwide 'jobs and skills summit' to be presided over by FAS,
  • a reform of taxation – after the Commission on Taxation produces its recommendations, and
  • unspecified public expenditure 'savings' after mid-2009, and a reform of pensions.
All of these ideas have been floated by the Government since July 2008 and none have seen any progress, with exception for the first round of 'income adjustments' (oops, tax increases) passed in Budget 2009.

In fact, the Government has now fallen so far behind the news curve, that it is undoing its own earlier plans. For example, Department of Finance January 2009 Stability Report factors into its budgetary deficit projections the minimum level of public expenditure savings of €16.5bn through 2013. Yet, according to the news coming out of the Partnership talks, the Government was asking for 'up to €15bn in spending cuts in 2009-2013'.

So much for the adoption of a budgetary stabilization programme. DofF's forecast is for the Exchequer deficit to run at 9.5% of GDP in 2009, 9% in 2010, 6.5% in 2011 and 4.75% in 2012, assuming the Government cuts €16.5bn starting now, not in the second half of 2009. Without these cuts – we are likely to be in an Icelandic deficit territory through 2020.

Surreal? Wait till you look closer at the rest of the Government proposals.

'Income adjustments' for 2009 and beyond are nothing else but tax increases on ordinary families and consumers who already face higher taxes (income and VAT), rising unemployment, falling wages and upwardly mobile public services costs. If anyone thought that a near tripling in personal bankruptcies in 2008 was a sign of a serious problem, wait until our Government's efforts to 'stabilize' the economy take a massive bite out of ordinary incomes.

No FAS-led "Jobs Fair" would be able to mop up even one tenth of the unemployment created by these Government-induced 'income adjustments'. FAS spends ca 7 times the average annual wage per each job created. At this rate 85,000 jobs that the Department of Finance forecasts to be lost in 2009 will take a cool €20bn 'Job Fair' to replace. And 85,000 is the number not counting in the jobs lost by the rapidly evaporating foreign migrants.

Finally, don't be fooled by the lofty ideals of reforming taxation and pensions. The official brief has only one stated purpose for such reforms – to raise more revenue out of the private sector economy to pay for more spending. Public sector's favorite folly is to tie us all into a mandatory pension scheme and then take away tax incentives to save.

Not to help up to 250,000 homeowners who will be stuck in the negative equity by the end of 2009, nor to aid families crippled by childcare costs or healthcare bills. Most certainly – not to give an inch back to the pensioners and savers whose funds have been devastated by the collapsed market.

Our only hope is that a handful of economically literate Partners might stand their ground in these absurd talks. Otherwise, as a fellow panelist of mine exclaimed at a recent radio discussion concerning our economic future, "We all will be truly screwed…" By those who are supposed to serve us, I might add.

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