This is an unedited version of my Sunday Times column from June 2, 2013
This month, welcoming the start of the silly news season, interest group after interest group has been appealing to the Irish Government to "act decisively" on dealing with the crises sweeping across their sectors. From retail services to construction industry, from early age education to public sector unions, from pensions to faming, and so on every lobbyist is loudly demanding that the Government divert its resources to the plight of his clients.
The Irish School of 'Growthology', spurred on by the 'end of austerity' noises emanating from Brussels, as well as by the promised departure of the Troika, is out in public once again. One quango after another is promoting its sector as a core driver for future jobs creation, economic activity and a wellspring of exchequer returns subject to the Government taking the correct action on growth today.
The reality is that no one involved in this policy circus - not the economists launching reports, nor the quangos backing them, and least of all the Government - has a faintest idea as to how the Government really can do anything about growth. Everyone at the launches knows this and no one admits it. So after two or three iterations of the Growthology events, the entire Irish establishment begins to believe that if only the Government threw its support behind the latest fad, the crisis will be over. Hungry for PR opportunities, Ministers spin exports growth numbers like greyhounds bets, and green-nano-bio-gen-cloud-tech working groups and centres of excellence for knowledge-food-wind-agri island spin jobs promises in tens of thousands.
The ministers love Growthology, As George Bernard Show put it ages ago "a government which robs Peter to pay Paul, can always count on the support of Paul".
Since the Irish state cannot print its own money, the Cabinet can only tax one side of economy to 'invest' in the other. Which is just fine with the Growthologists, as long as the Government robs someone else to pay them.
There are three basic variants of these 'multiplier schemes' being offered to the Government for post-Troika days.
The business lobby and the unions have been busy pushing the Government to do something to 'unlock' the spending power held in people’s savings. The preferred mechanism for forcing households to part with their safety nets varies from deploying inflationary pressures to expropriating funds via levies. Unions are calling for higher taxes on someone else (usually, the so-called 'rich'). The fact that such policies can leave households exposed to adverse income shocks in the case of a job loss or unexpected illness or a rise in necessary spending, such as children education fees, is not something that our Social Partners are concerned with.
Another option, usually favoured by the official economic policy quangos, is finding rich foreigners to invest in Ireland. Which, of course, sounds much more palatable than expropriating from our own. However, inward real FDI (as opposed to retained earnings accumulating in the IFSC) into Ireland has peaked. Worse, as the data from our external trade over 2010-2012 indicates, the FDI we are bringing in is linked to services exports. The latter have much lower propensity to support new employment, and when they do hire workers, they tend to import them. The activities of these new MNCs do increase our GDP, but this growth is illusory when it comes to the real economy.
About the only new value added generated by the MNCs activities in Ireland today relates to clustering and partnering models that some - but not all - R&D intensive MNCs are engaged in. These are in their infancy still and require serious changes in the way we do business in this country to nurture to strengths. Examples of what needs to be done here include changing the way we tax equity investments, reinvested profits and how we deal with currently protected sectors of our economy. Again, promising, but not a Big Bang idea for jump-starting the economy without taking serious pain of structural reforms first.
The last pathway for Growthological 'stimulus' is to convince the Irish Government to borrow more funds to invest in some capital programmes. This is the preferred imaginary source for ‘funding growth’ for the Unions and the Labour Party backbenchers. However, even the current Government finds this theory infeasible. The reason is that we cannot sustain an increase in borrowings over 2013-2016 horizon without triggering a cascading effect of higher interest costs on existent debt.
In a way, in contrast to the Irish Growthology movement, this week's announcement by the Minister for Finance, Michael Noonan that he is working on a multi-annual plan covering the period of 2014-2020 to commit his and future Governments to continued fiscal discipline and structural reforms was a courageous and correct thing to do. By pre-empting the spread of Growthology across the Cabinet, Minister Noonan tried to focus our attention on the longer-term game, as well as on the present reality.
Irish Government will need to take some EUR5.1 billion more out of the private sector economy in 2014 and 2015 under the current Troika programme. Thereafter, just to keep on track toward reducing Government debt/GDP ratio to below 100% by 2020, total tax take by the Government will have to increase from EUR39.8 billion in 2012 to EUR54.1 billion in 2018, with expenditure, excluding banks measures, rising from rising fromEUR65 billion to EUR69 billion over the same period. Even that requires rather rosy assumptions, including the projections for government debt financing costs being flat over the next 7 years and economic growth averaging almost 3.7% per annum on GNP side through 2018.
Absent the pipe dreams of Growthology, the only real chances for Ireland to regain sustainable growth momentum is through organic and persistent long-term reforms. Instead of ‘Government must act decisively on growth’ mantra, we need a ‘Government must help change the way we work’ model.
Start with the elephant in the room: private sector debts. Write down using debt-for-equity swaps and direct write-offs all principal residences mortgages to the maximum of 110% of the current value of the house. By my estimates, this will require banks capital of less than EUR20 billion. To reduce capital call on the banks, change the rules for capital provisioning against legacy equity assumed by the banks and push out to 2020 the requirement for Irish banks to comply with the EU baseline capital targets. Restructure and convert all remaining mortgages into fixed rate loans. If needed, assuming the EU does not come to our help in doing this, exit the euro by monetising the economy with own currency, and make euro, dollar and sterling fully accepted as legal tenders.
Thereafter, levy a significant tax on land and use raised revenue to eliminate property tax and create a flat rate tax on all income under, say, EUR200,000 per annum per family of two at a benign rate of around 15%. Equalise corporate, income and capital gains tax rates. Remove all targeted tax breaks and incentives schemes, leaving only one standard general tax allowance per each adult with half-rate applying per each child.
Reform local authorities by consolidating them into 5 regional governments with half of all land value tax revenues accruing to them. Put in place a 4-year balanced budget rule for central and local governments. Break up all semi-state companies excluding infrastructure utilities (e.g. EirGrid) and privatize or mutualize them. Put a statutory cap on market share of any company or governing body (for professional services organizations) in any sector of domestic economy not to exceed 33% to reduce regulatory capture and incentivise exporting activities. Remove all restrictions on access to professions.
In the public sector, gradually identify and develop opportunities for linking pay and promotion to productivity. Shift – where possible – public sector operations to revenue generating models with staff sharing the upside of any exports and new business creation revenues. End life-time contracts and link hiring, tenure and promotions to on-the-job performance. Identify flagship public services, such as higher education and health as spearheads for developing exports potential and, again, incentivise staff to compete globally. Benchmark all non-revenue positions to EU27 average earnings and all political and politically-appointed salaries to a scale linked directly to GNP per capita. End fully all defined benefit pensions schemes and create mandatory pensions and unemployment insurance funds based on a mixture of public and private provision models.
Open up Irish immigration regime to new entrepreneurs and key skills employees with strong incentives to naturalise successful newcomers and anchor them here. Use early immigration incentives such as social contributions tax credits in exchange for zero access to social welfare net over the first 10 years of residency (including post-naturalization).
Lastly, we need to gradually, but dramatically reform our social welfare and health care systems. We need to retain a meaningful, high quality safety net, but we also need to eliminate any possible disincentives to work and undertake business activities currently present in the system.
Aside from the changes mentioned above, we also need political reforms, changes in the way we shape and enact policies, enhancement of direct democracy tools and building robust systems of transparent governance and administration.
The main point, however, is that we need to end our addiction to the Growthlogist interest groups politics.
Box-out:
The latest data on earnings and labour costs in Irish economy was published this week. The data shows that average weekly earnings in the economy in Q1 2013 stood at EUR €696.59, basically unchanged on last year. In contrast, average hourly earnings rose from EUR 22.15 in the first quarter 2012 to EUR22.31 in 2013. In other words, Irish labour cost competitiveness remained at the same levels as in 2012 solely because over the period of 12 months through March 2013, average hours of paid work have fallen by 1%. Given that over the last 4 years weekly paid hours in the private sector have fallen by 2.2%, the latest data suggests that the average quality of employment in private sector has declined at an accelerated rate in 2012, compared to the 2009-2011 period.
