Economics 12/10/2009: Green Party 'Programme' - a bark without a bite?

First Update: see second section below

It is time now to start chipping at the latest Programme for Government published this weekend.

First, the Programme was clearly written in haste. Forget its economic thesis that fails in its entirety to recognise the scale of the crisis we face. It is simply written in haste: page 1, just above the signatures of Mr Cowen and Mr Gormley reads "It was negotiated prior to the worst to the worst global downtown (sic) since the 1930s."

Now to the core of the 'Programme' itself.

Introduction: "The time for crisis management is over. Now we must set about re-creating the Republic. This Renewed Programme sets out the Government’s vision of national renewal and economic."

This statement is truly extraordinary for several reasons.

Firstly, neither our fiscal nor financial nor economic data show that 'the time for crisis management is over'. If anything, given that this Government is appealing to the EU to extend its holiday from the Stability and Growth Pact (SGP) compliance beyond 2013, the country is yet to face the stage of the real 'crisis management'. GP leadership is simply in the state of an even deeper denial than their FF colleagues.

In fact, the Green Party leaders are now firmly in the denial of economic reality as outlined by

• Jean-Claude Trichet last week when he said that the crisis is far from over,
  
• the IMF as outlined in their World Economic Outlook and GFSR reports from two weeks ago where the Fund economists warned of the upcoming second wave of financial, fiscal and economic crises;
• the OECD which late last month has warned that the Eurozone economies are facing renewed pressures on exports and growth;
• the Bank for International Settlements which, also last month, warned that more banking sector woes are inevitable for the Eurzone (to which we, of course, belong and of which we represent the sickest member state);
• the ESRI which forecasted prolonged recession through 2010 and anaemic recovery through 2013.
  

Second, a promise of 're-creating the Republic' is not a matter for the competencies of the Government (it is rather a matter of an entirely separate mandate which has to be explicitly delivered to the Government and cannot be assumed by the bi-laterally negotiated Programme for Government).

Third, the Programme must have far reaching, wide ranging economic, social and political reforms in order to live up to the promise of 're-creating the Republic'. As all analysis to date shows, it fails to do so, qualifying more as an interim shopping list for a minority partner in an unstable and unpopular coalition than an ambitious 're-creation of the Republic'.

I am amazed that the above-average educated Green voters were actually willing participants to this ridiculous posturing by the party leadership that also reaches beyond their democratic and, potentially, legal mandate. Can the premise that the GP-FF deal attempts to 're-create the Republic' be challenged legally, one wonders? If the claim is a statement of true intent, the Programme is a constitutional challenge to the status-quo. If it cannot be, then it is simply a case of grandiose over-hype - a crime of sick marketing over-reach, perhaps. Let the GP leaders make their choice...

"Any wrongdoing will be uncovered by the institutions of the state and brought to its logical conclusion. We cannot accept a return to the old ways and we will simply not allow this to happen." I would like to point out, to the GP leadership two facts. First, it was not the institutions of the state that unearthed all recent expenses scandals and all past over-spending scandals, the white elephants and corruption scandals. Instead, it was private sector media that did their jobs. Second, there is absolutely nothing neither in the Programme, nor in the conduct of the GP leadership to date that indicates the GP position of a watchdog over ethics and legality of Irish economic and political elites conduct. Nothing whatsoever. What the GP had, so far, contributed to the 'governance' or the banks, for example is a sweetly irrelevant promise to replace the boards of the banks within 2 years of Nama initiation. Given that countries change their entire governments within a span of several months post election, this is a puzzling anaemic 'watchdog' effort by the GP.

"The credit crisis hit more than our banking system. It is hurting homeowners and those in arrears. Government will support families having difficulties with their mortgage payments." Again, a bark that is not matched by any bite whatsoever in the Programme. There are no envisioned supports for the defaulting homeowners, no measures to address the issue of real debt rising in light of negative equity and tax increases. If anything, the Government (and the Programme re-enforces this effect) so far has been at the forefront of increasing financial strains on homeowners.

" Moving to a low-carbon economy, we will take advantage of our own natural resources in energy, forestry and food. " Another statement that is not grounded in reality. For example, Ireland is the least forested country in Europe and as such has no natural resources in this area. We have one of the most expensive food production sectors in the OECD, reliant more than any other OECD country on subsidies for agriculture. Our energy sector is at best can be described as a failure. The GP has neither the capacity to recognize these realities, nor to address them.


Update 1: Economic Policies (Section 2)

Economic policies, section 2: this and section 3 following it are the rehashing of the already woefully outdated and thin on reality December 2008 Smart Economy platform.

“We will introduce a new national performance indicator… formulated … with other quality of life measurements”. In other words, given that we already have non-descriptive stats, such as GDP-based measures that do not reflect our true income, the GP is offering more smoke to cover up the real rate of economic decay in this country. This fits well with their claims that the party stands for more transparency. For example, the new indicator can simply induce an artificial rise in the standard of living by assuming that our public sector spending (all of it, including wasteful pay and pensions practices) yields significantly higher multiplier than 1.

Even more worrisome in this is the possibility that such a ‘cover-up and pretend all is going on swimmingly’ approach to statistical valuations can be used to ensure that Nama yields a ‘success’ in some future. Thus, the new Programme for Government has started the process of politicization of Nama - the process that the Government was explicitly trying to avoid.

What is even more egregious in the GP policy platform is that it cuts across Brian Lenihan's (unbelievable, nonetheless explicit) promise of no new taxes in Budget 2010. The entire Programme's outlook on public finances is more resembling of the 2004 Social Spending Boost programme rather than anything even theoretically close to what will have to be done to return Ireland to some sort of fiscal solvency.

While re-affirming the Government commitment to bring deficit to 3% of GDP levels by 2013, the Programme for Government envisions more than Euro1.5-2bn annually in new spending and not a single cut to the existent spending. This would imply that reaching the SGP target by 2013 will require freezing all expenditure at the current level and yielding real economic growth of 4.21% per annum on average in real terms over the next 3 years. This is simply an unrealistic assumption of highest order.

"The future of the economy lies in exports... we must drive down our costs..." It is amazing that the focus on exports does not really figure whatsoever in the entire programme, apart from a sickly Euro100mln mixed-used (not exclusive to exports) support fund (see below) - which was already announced back in the beginning of 2009. If the future of our economy does lie with exports, why is the entire Green Party platform focusing on domestic energy independence and broadband and knowledge economy development?

As far as driving down costs - the GP does absolutely nothing (other than very generalist aspirations for productivity improvements in the public sector) to reduce the greatest historical drivers of inflation in the country - public services and state-monopolized or controlled sectors.

Tax Reform section explicitly ignores the need to grow the real economy, focusing exclusively on 'Green and Smart Economy', thus betraying deeply rooted inability of the authors to understand the issues of economic growth.

Serious contradictions emerge in the treatment of income tax policies. The first bullet point claims that the Programme aims to "Abolish the employee PRSI ceiling in parallel with the reduction of the temporary income levy in order to remove the inequity whereby higher paid employees pay proportionately less of their income for social insurance than low paid employees." Several things are simply out of order in this statement:

1. PRSI is paid by self-employed and sole proprietors as well as PAYE workers, yet the former have no access to PRSI-financed benefits. What inequity is the Green Party platform removing here?
2. PRSI and Income Tax are largely paid in this country by those with incomes in excess of 70,000 per annum. Given that some 80% plus of our tax revenue comes from these employees and business owners, what inequity is the Green Party aiming to remove by levelling even higher tax on them?
3. The statement explicitly states that the income levy is viewed by the Green Party as temporary. Will abolition of PRSI ceiling be temporary as well in line with income levy? Not a word on this in the document, implying that the GP wants to replace a temporary levy with a permanent tax increase which will disproportionately adversely impact those on wages in excess of 52,000 per annum and who are already bearing the disproportionately higher tax bill and many of whom have not even a theoretical chance of benefiting from PRSI-financed services.
   

The last point is important, as in the second bullet point of the section, the document states: "simplification and rationalisation of the various levies into the income tax system beginning in 2010". Now, once again, levies were set by the Budget 2009 explicitly as a temporary measure. The Government at the time advocated this approach precisely because they did not want to raise taxes permanently. Now, the Green Party is pushing for a permanent increase in taxation.

The third bullet point is simply an example of 'redistributive' quasi-socialist policies that the Green Party leaders are pursuing across their platform. Imagine two individuals - one earning 50,000 per annum, another 30,000 per annum. If the first person saves 10,000 in a pension fund, her tax reduction will amount to the same 3,000 as that of the second person. Net marginal tax paid by each person will thus be: +2,000 for the first saver and -1,200 for the second one. In effect, the first person will subsidise the second person's pension and consumption to the tune of 2,200 (assuming both share equally in the benefits of general tax revenue). Why? What does this have to do with any notion of fairness? Have Messrs Boyle, Ryan and Gormley think any of this through?

Taxation for sustainable development is perhaps the only thought through section of the entire document. However, on Business Taxes and Local Taxes the GP is once again goes flat.

Overall, GP's platform on economic policies is un-ambitious, unimaginative, poorly thought through and outright destructive to the real economy.


Stand by for further detailed analysis of the Programme