A couple of days ago, a friend dispensed with the usual ‘all the best’ seasonal greetings formulae by saying ‘This New Year, remember: what doesn’t kill you makes you stronger’. An apt seasonal greeting for the Brave New World awaiting us!
Triumvirates of Government and PunditryFirst, for the establishment, expect more unconvincing and clichéd emergency announcements punctuating lengthy stretches of deafening silence. This is the modus operandi our Brian, Brian & Mary (BB&M) triumvirate prefer to active policy engagements.
The economy will wobble through the mud of international recession and domestic problems at an even slower speed than in 2008.
By March, this will trigger a fresh round of forecast downgrades editorialising calling for higher taxes to pay for public services from another triumvirate - the ESRI, Irish Times and RTE. Just in time for an emergency mini-Budget that will see more pain doled out to the embattled households. Last Fall, months after many economists warned about it, our official policy pundits agreed that massive household debt and falling incomes are the central drivers of this recession. Both have managed to suggest, however, that taking more money away from the households in higher taxes is a good thing. Forgive me for stating the obvious, but this is a sign of policy psychosis gripping Ireland’s intellectual elites.
The commentariate will be upstaged by occasional outbursts by our honorary President and her endless entourage of NGOs singing the end of the Age of Prosperity and the dawn of Enlightened Poverty. What kills our economy will make our chattering classes louder.
Elections and OppositionSecond, the opposition will go on scoring talking points, but no one will honestly challenge the status quo in fear of actually winning the poison chalice of running this economy.
Labour, the kingmaker-in-waiting, will play a safety strategy of catering to everyone: ‘No cuts, no taxes, no borrowing’. Fine Gael, forced to counter this will subscribe to equally contradictory ideas that, mixing in real economic incentives for growth with the programmes for stamping out more PhD graduates, building windmills and squeezing more knowledge economy ‘investments’ out of the already impoverished households.
This state of paralysis will take us into European and local elections, when a token lashing of the Soldiers of Destiny by the electorate will take place. But, what doesn’t kill the Government will leave it more resilient to change.
An IMF BailoutBy late Summer, collapsing state revenue will spell another set of emergency measures that may result in the state asking for an external bailout. By that time, a second round of income tax hikes (most likely to be passed in April) would have induced an even more severe contraction in tax revenues. With a rising army of self-employed fuelled by ‘shadow’ layoffs, tax evasion and cash economy will lay claim to a greater share of our GNP. What doesn’t kill our entrepreneurs and displaced workers will make them less visible to the taxman.
Things will become even less palatable after the new issue of state bonds fails to find willing buyers. By mid 2009, sovereign debt markets worldwide will be feeling the heat. Irish debt, that is becoming progressively costlier to place than that of many developing countries, will most likely be out of favour with international investors.
External donors – the ECB and European Commission – will be likely to respond positively to a request, especially if it is filed before the Lisbon II referendum. But an IMF loan will come with some austerity measures attached. By my estimates, based on the conditions imposed on other European borrowers, the IMF will require the Government to cut 15-20% of the entire budgeted expenditure.
Before that, following a mildly critical report by the An Bord Snip, BB&M will do some magic with public sector figures. Pushing ahead with a reduced raise in public wages (my guess would be a deferred hike of 2%), the Taoiseach will boldly ‘cut’ the bill by ca 3% in 2010, implying a real reduction of only 1.1%. Thus, the Government will issue yet another IOU to the State employees adding to banks’ guarantees and recapitalization, green and techy ‘investments’, and credit injections into some semi-states which might see cash drying out by mid 2009.
With this Enronesque fixing of the books, BB&M triumvirate will secure an IMF-led injection of some €5-7.5bn. They will blow through this sum 2 or 3 months later.
Down the economy’s slopeBy the time our civil servants ‘tighten’ their belts, private sector workers will see their incomes shrink by up to 15% due to a combination of cost cuts by the employers and layoffs. The retail sector will face a wave of bankruptcies that will eat even deeper into VAT returns adding to a run away train of welfare costs.
By next year’s Budget day, we might see real per capita income shrinking almost to 2005 level, inflation at near zero and public sector inflation at around 3-4%, as semi-state companies in electricity and gas, transport, health and aviation sectors pass the Exchequer dividend demands onto ordinary consumers. Unemployment could be reaching above 11-12%.
Net emigration will be taking our guest-workers and educated young Irish out of this country. At a recent conference attended by Ireland’s top 2009 graduates, over half expressed their intention to get the hell out of Brian Cowen’s ‘paradise’ of competitiveness. In the last two months of 2008, I wrote a dozen recommendation letters to some of the best of my former students seeking jobs outside Ireland. All of them held very good jobs here before the current crisis.
Industrial and Social StrifeAnd this brings us to two most recent worries that, in my view, will form the backdrop of 2009.
The first one is a concern that Ireland might see a wave of industrial unrest in 2009 expressed by many between the Budget day and the publication of the Finance Bill II. While some strikes are inevitable in a recession, industrial strife in Ireland is exclusively the domain of unionised public sectors. They will have little reason to worry in the New Year. No one will seriously ask of them to raise their productivity (on average about 30% below that in the private sectors) or to take a significant cut in their pay (on average about 40% above private sector). Overpaid and under-performing, they will see their incomes rise relative to the rest of the country. For them, what might be killing the rest of us is of little concern, but they will fight tooth and nail for their position of privilege should the Exchequer cuts be contemplated.
On the other hand, public unease that swept across several EU countries in December may become a reality here. The December unrest was led by educated youth – dubbed the ‘€600 generation’ because of their low pay and poor jobs prospects. Few days before Christmas one of my students in Trinity summed up the feeling many of her classmates are harbouring: “Let’s hope that tens of thousands of Euros we spent on tuition will not be wasted in this knowledge economy of ours”. Given the prospects for 2009, she is right to be worried. Given the state of our Government’s capacity to manage this economy, she is right to be sarcastic. And so are all of us.
May we all spend this year getting stronger!
An edited version of this article appeared in the Irish Mail on Sunday, January 4, 2009.
First chart above shows a robust pick up across the entire manufacturing sector in November. So much for 'uncompetitive' manufacturing story, but do not a massive overall increase in the range of volatility last year compared to 2007.
The second chart shows that most of the November increase can be accounted for by the 'Modern' sectors - aka US multinationals. This is quite interesting as December Exchequer returns have shown a massive (20%) drop in corporate tax receipts, suggesting that increased multinationals' activity was associated with increased transfer pricing. Exchange rate movements - stronger Euro - did not help either, exacerbating the impact of transfer pricing.
Really positive piece of news in on expectations front, with all but two sub-sectors (Basic Chemicals and Office Machinery & Computers) shown upward trending new orders for 2008.
