The grand old man of Irish social democracy speaks on the financial crisis… No doubt he’ll have calming progressive thoughts. So, what’s that he’s saying? “We can afford no relaxation of austerity drive”. Oh.

Some of you may remember a spate of articles in the Irish Times, and other Irish media, during the late 1980s when emigration was at its highest point and when the country appeared to totter on the brink of bankruptcy. The line these took was quite simple, and an example from January 6th 1987 will suffice…

Under the headline, “Is emigration really such a curse?” (and to ask the question is to answer it, for most), Dr. Jim McCabe, senior “education planner’ at the World Bank sought to argue that since we were but a small offshore island with a population not dissimilar to that of Wisconsin relative to the rest of the United States we should expect emigration as a part and parcel of our daily lives…

‘In present circumstances the lesson for us is clear: there is an increasing manpower shortage in Europe. If we are true EEC members and believe in European integration we should see this as a fortuitous opportunity for our young people facing unemployment to look east towards Europe and think of ‘mobility’ and ‘migration’ as normal options.
We should not feel bad about this prospect but grasp the opportunity and put it to good effect.

No doubt.

I should add there was also a sub-genre of these which argued for population control, from a not dissimilar stand-point, being that Ireland had yet to accord with European ‘norms’ on that front (look up September 20th 1989 for one such piece).

Anyhow, the point is that each article was written from a point of view which assumed that the situation in the state could simply not improve. There was no question that emigration would falter, let alone reverse within a short ten years, no chance that the economy might actually strengthen and then strengthen again, or that growth would not merely appear but would be sustained for the best part of twenty years.

And underlying it all was a near-eschatological view that the situation tomorrow would inevitably be worse than today. This, by the way, shouldn’t be news to many of us on the left. We’ve our own eschatological creeds whose precepts one might expect to have been dented, at least a bit, by this latest crisis of capitalism. Garibaldy and myself have argued that now is the time to hit the economics texts in a serious fashion (not least because in this society progressive economic voices are few and far between).

That said, it was puzzling reading Garret FitzGerald last weekend. You would think, would you not, that our greatest living social democrat – of sorts – would, at the least, the very least, be keen to perhaps strike out for new ground, to consider the social impacts of policies that he propose (D_D noted this, incidentally, in the comments of this article by Michael Taft – an article which contains data I will return to).

If so, you would – like me – finish reading the piece a very slightly older but considerably more disappointed person. Because he too appears to have been converted, although judging by previous columns that took no great effort, to the economic orthodoxy that rages in our polity.

For he believes that… A return to growth is a hypothetical solution; it’s time to get real about reducing the deficit. Well, perhaps a sub-editor believes that, I wonder did GFG actually use the phrase ‘get real’. Still, why not? He’s down with the kids.

No, he certainly believes that:

TO ENABLE us to continue to borrow the tens of billions currently needed to keep us afloat we have had to commit ourselves to a combination of spending cuts and tax increases adding up to €26 billion between 2008 and 2013 – on top of which we may have to borrow as much or more again to save our banking system.

Actually, that last is an odd statement, the figures being bandied about for the banking system are multiples of €26bn, not just ‘as much or more again’.

While the final €7 billion of this €26 billion recovery programme, to be found in 2012 and 2013, has yet to be allocated between tax increases or spending cuts, it seems likely that over the whole five-year period increased tax revenue will have to produce at least €10 billion of this total (almost €6 billion of which has still to come), with spending cuts of up to €16 billion – of which €12 billion has still to come.

These are huge figures for a State which this year looks like having tax revenue of only about €33 billion and current spending of €46 billion.

They certainly are, aren’t they? And he goes on to make them seem even more huge…

For, even if we can manage to cut current public spending by over one-third by 2013, the burden of taxation will also have to rise by 30 per cent. (The figures on which these conclusions are based have been verified by the Department of Finance.)

Now this is a real puzzle to me. Because what sort of a society does he envisage will remain, what sort of state provision, what sort of public sector/services after a contraction of a 1/3 in expenditure? And this at a time when demographics continue to nudge upwards with all the calls on those services that that will entail both for the young and the old – and heck, those of us in between who are made redundant, not to mention other state services, like building and maintaining our rail infrastructure (off the point a moment, but I’ve made that journey many times and often wondered about that particular leg of it. It would make one less sanguine about traveling by train, which I guess in Noel Dempsey’s eyes would be a result of sorts).

Anyhow, he’s not merely being pessimistic, but is allying himself with the most pessimistic analyses out there.

It is of course possible that, if we could secure significant cuts in our grossly inflated level of private and public sector earnings (which during the past decade we rashly raised to levels well above those of any of our competitors) a combination of an early global recovery together with rapid growth in what would then be a more competitive economy after 2011 could somewhat alleviate the later stages of this programme of austerity. But that must remain a hypothetical possibility.

Well, not entirely. Both France and Germany are emerging from recession, or already out of it. This week Britain appeared to be moving, even on the level of sentiment, out of it too – and before we knock sentiment let’s note that a considerable amount of the actions taken in our name in terms of cuts and suchlike are in order to assuage the sentiment of bond markets. So that’s not entirely hypothetical.

Whatever alleviation of our lot might prove possible under very favourable conditions in several years’ time, at the present stage we can afford no relaxation of the 2010-2011 stage of our recovery programme, especially given the disappointing end-July tax returns, which suggest that by the end of the year tax revenue may fall short by a further €1 billion.
Disappointing, surely, only to those who are puzzled by increased taxation and reduced wages and an explicitly deflationary economic policy resulting in lower tax revenue.

What proportion of this €26 billion recovery programme has already been secured by steps taken during the past 12 months? The answer is about €8 billion, or 30 per cent of the total, with a further €11 billion due in the next two years.

Well, hold on…

While it is fair to describe the McCarthy report’s €5.3 billion of proposed cuts as a menu from which the Government can draw in order to find the €3 billion cuts it needs in the next two budgets, it could be necessary thereafter to return to that report to find additional cuts towards the further €7 billion of expenditure savings or tax increases needed in 2012 and 2013. However, the extent to which further cuts in public services would be needed in those years would depend upon whether further measures to reduce public service pay and pensions can be brought back into the equation.

But the thing I find difficult to understand is how much of our public services can withstand not merely McCarthy itself, but a further return to that well in subsequent years. Because it’s not just about salaries and pensions (not covered in McCarthy, or rather given a thin fig-leaf since he willingly opined on them).

It is indeed possible that this public service pay issue will in any event have to come up for review in the context of this December’s budget, with a view to avoiding or perhaps postponing some of the McCarthy cuts.
In this connection, much may depend upon the outcome of the study comparing pay rates here and in countries with which we have to compete. This is a long overdue research project which, if it had been undertaken at the beginning rather than at the end of the present decade, might have helped us to avoid the pay splurge of recent years.

Now, I can’t be the only one to wonder precisely what the outcome of such a study might actually reveal. Given we have lived in one of the most high cost economies in Europe perhaps an equally useful comparison might be between costs and wages…

And here’s another thought. We already know that while wages in general in the private sector have been frozen, or in a smaller number of cases been cut, we also have seen evidence that for higher management and above wages having been increased. There’s little mystery to this. Front loading salaries in order to minimise the effects of tax increases is an old old trick. In the context of a global recovery are we seriously being told that Irish companies will buck the trend and eschew salary increases – if only in order to compete at an international level? And in this capitalist economy there is no appetite to curb higher salaries in the private sector, so we know that wage costs will be kept low in the public sector and at lower levels in the private sector.

The figures mentioned above, and summarised in the table below, provide the background against which to assess the seriousness of the reactions by a wide range of interest groups to the McCarthy report. There are, of course, criticisms that can be made about several aspects of that report – and I shall later address some of these – but the fact is that there is an air of total unreality about most of what has been said and written by many of those who have attacked these proposals and who are still in absolute denial about the scale of the crisis we currently face.

Note that he makes no argument against McCarthy, indeed the tone of his piece is that McCarthy is insufficient and that those who disagree are simply not serious. It’s a more roundabout way of arriving at much the same conclusion as Jim O’Leary did a week or so ago where he argued that the only serious analyses were those that agreed with the positions adopted by himself and others who cleave to the new orthodoxy.

So far as I am aware, none of the interest groups that have attacked aspects of the proposed cuts has been willing or able to suggest any alternative means of saving our economy and society. We are at present a country of ostriches. It is time for everyone to wake up to reality.

Which being the case, perhaps he might care to explain how the ESRI, an august body which I believe he has a familial connection with, argues that even if McCarthy is implemented the result would be a grand total of .6 reduction in the borrowing requirement. Given that any forensic reading of McCarthy indicates that it constitutes a fire sale of much (although not all – since some of its suggestions are good and useful) of the public sector in terms of provision of services how does he square that with his much vaunted social democratic sentiments?

Indeed how is it that he can entirely evade the central paradox of this situation, that the measures he champions if taken would, although reducing much of the public sector service to the public to a fine sandy rubble, not in and of themselves do anything to significantly bridge the gap between expenditure and deficit. My read is therefore that for those from a progressive background the project should be to fashion viable alternatives. His is obviously very different indeed.

And an hint of this was raised in this weeks Letter from the Economists to the Irish on NAMA where they noted, in passing, that…

Nama has unfolded against the slow but steady deterioration in the State’s finances. We now look to be on course for a Government deficit of close to €30 billion. In short, this means that for every €1 the State spends, it takes in tax only 50 cent.

To close this gap in State expenditure would require the implementation of more then five times the identified savings of the McCarthy report.

How does anyone seriously suggest that this society could function if such ‘savings’ were made? How do those who say they are social democrat seriously stand over what would be an effective gutting of what few socially democratic inclined aspects of this society (free education up to third level, child benefit, urban and rural transport, a raft of cultural endeavours and so forth)?

Sure, we read from Frances Ruane, head of ESRI, that…

Additional fiscal stimulus is not an option for the Government. Since reducing the general government deficit is key to re-establishing international and domestic confidence, the Government must raise taxes and/or cut spending further. Tax increases can place recovery at risk by undermining competitiveness, while spending cuts place public services at risk, as well as income transfers to those worst hit by the recession.
The extent to which reduced spending leads to a real reduction in services depends crucially on two factors: the cost of the inputs used to provide those services and the efficiency with which services are delivered. This is good news, as it means not all of the reduction in expenditure needs to result in a reduction in services. With regard to input costs, for example, it is still possible, though difficult politically, to achieve further cuts in public sector employee costs, and the cost of produced inputs can be reduced through more effective public procurement.

We have recently seen in the pharmacy sector how the Government can use its role as a buyer of services more effectively in the national interest.

But little of this makes clear sense. For Ruane continues:

The McCarthy report has made some suggestions as to how inefficiencies might be reduced. It is clear from the report that we need a forensic approach that cuts waste in a way that minimises economic and social damage, rather than cutting mindlessly across the board. A further advantage of such careful cuts is that other necessary cuts will be more acceptable when it can be demonstrated that public money is not being wasted.

How is it possible to wring five times the level of ‘efficiencies’ that McCarthy purportedly seeks? I simply cannot see that as achievable. And if that is the case then something is very seriously wrong with the picture we are being presented.

And even if we try to hack at wages in the public sector we know, for example that the returns would be minimal in the context of the deficit. Take John McHale’s most interesting piece in the Irish Times from last week.

Second, the McCarthy cuts are supplemented by a 5 per cent cut in public sector pay phased in over a two-year time frame. This would save roughly an additional €0.7 billion. It would be part of a balanced reduction in wages and benefits in the economy, achieved through a renewed social partnership agreement.

But note that he doesn’t actually say how much that would dent the borrowing requirement. For that you go here, where you will learn that that would result in just .3 per cent of a reduction, and perhaps less. Scale that up to bring us to a 20 per cent cut and – this is rule of thumb, the returns would most likely be much less – we would see 1.2 per cent of a reduction. But think of what such a 20 per cent wage cut would do in terms of cutting consumption and indeed in terms of reduced tax take for the state.

This is – for me – the central paradox of what we have been, and in some instances are being, told about our situation. On the one hand we face an existential threat that will pull this state and society down. On the other hand, awful as many of the McCarthy proposals are they simply cannot bridge the gap. And yet we are continually told that they are the only way forward.

In truth, it seems to me there is no way to bridge that gap in the short to medium term, which suggests to me that either we’re being told a crock, or that we must look at some alternative strategy.

None of which is to argue that there are no reforms or savings that are feasible at this point in time, merely that they are a separate and essentially unrelated issue that will have no genuinely significant bearing on our situation. That by the way is not an argument for not doing them, indeed now is the time to do it. I’ve said it before – a single employment pool for the public sector is a damn good idea, cutting certain ‘privileges’ accrued in questionable ways is likewise. But this is not the central problem (unless we believe we can do away with a large portion of the public sector services with no ill effect to this society and economy) and in dealing with the central problem appears to have little part to play.

FitzGerald might also think a little about the thoughts of Michael Somers of the NTMA who has publicly stated that this state does not face an existential crisis in terms of borrowings, and others who have pointed out that our borrowing situation is – at worst – analogous not to 1985 but to a decade later, and now, as appears to be evident, that in a global economic environment where the picture is improving more rapidly than might have been hoped – perhaps off the back of significant interventions by states. A lesson there surely.

For us to read such eschatological language, and to see such a conformity to the current orthodoxy – and a seemingly unquestioning conformity at that – is a truly dispiriting moment in this crisis.

………………..

As an addition to this, last month in the wake of McCarthy I was talking to someone reasonably close to the government, and in particular one of our smaller progressive parties, who told me that they wished that all those who criticised McCarthy could be publicised so people would see the range of vested interests against it. I asked what the point of that would be and the answer was that it would show that not everyone was willing to take their punishment through the implementation of cuts. When I demurred at the use of the word ‘punishment’ and wondered whether that was appropriate in the context of a society there was, to be fair, a degree of row-back. But, I couldn’t help thinking that this trope about ‘punishment’ and ‘pain’ has gone quite far enough, thanks.