2 July 2009 Edition
IMF report: Catalogue of Fianna Fáil policy errors highlighted
Ahern, McCreevy and Cowen must shoulder blame
BY ROBBIE SMYTH
MORE than one in six workers in the 26-Counties will be unemployed in 2010 and economic activity will fall by nearly 10% by the end of 2009 while the gap between spending and tax revenue will widen to 12%.
These were just some of the findings in two reports published last week by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). The two most conservative, market-driven international think thanks delivered a withering indictment of Irish Government economic polices over the last decade, as the gains of the tiger economy era were sacrificed to the expediency of Fianna Fáil’s relentless drive to secure re-election.
Even though the IMF report outlines how Fianna Fáil allowed the international competitiveness of the Irish economy and its workers to be recklessly squandered, Taoiseach Brian Cowen still sought to deflect the blame claiming that, “All of the decisions that were taken at the time were taken in the context of what the best advice and indications and forecasts were”.
There are many elements of IMF policies and strategies which are objectionable to those who believe in social justice and equality but in this context the IMF are measuring the performance of Fianna Fáil as economic managers of the Irish economy and have found them wanting.
The IMF and OECD reports which will be debated in Leinster House this Friday are based on nothing more than the coldness of figures and a straightforward accounting focused approach to the economy, rather than on how to build a fairer society with equal opportunity for all citizens.
It will come as no surprise that the IMF found that “easy credit fostered a property bubble” and that “bank exposures to property lending soared” or that at almost 20% of GDP, the measure of wealth created in an economy, was from the construction sector. Compare this to a 10% share of GDP for the construction sector in the USA, an economy ravaged by the imprudence of sub prime lending.
The IMF estimate that in 2007 Irish house prices were overvalued by more than 30%, a figure that leaves tens of thousands of Irish families with negative equity and massive loans which will take a life time to pay off.
The IMF forecasts that GDP will fall by 8.5% in 2009 and 3% in 2010. The OECD predicted a 9.8% fall in GDP, while the latest European Commission forecast put the fall at 9%.
Unemployment, which hit a 12-year high last week of 10.2%, is predicted to reach 15.5% in 2010.
Throughout the IMF report, 2001 repeatedly emerges as the crucial year for the Irish economy and now they estimate that it will be 2014 before the 26-County economy begins to register growth in the 2% range after years of being “perhaps the most overheated of all advanced economies”.
In 2001, the triple strikes of foot and mouth disease, the collapse of the dotcom boom and the economic fallout from 9-11 all dampened international economic growth and the Irish economy as it is one of the most import-export driven economies in the world.
The foot and mouth outbreak early in 2001 significantly reduced domestic consumer spending and demand. The global economy was already in a period of decline dealing with the consequences of the so-called Asian Flu, an international banking crisis that now seems like a minor cold, when in the aftermath of 9-11 falling US consumption further dampened growth in the Irish economy.
In the growth period 1986 to 2001, the 26-County economy was “characterized by improving competitiveness and rising potential growth”. The economy was growing from a very low base, there had been significant government-funded speculative investment in energy, telecommunications, transport infrastructure and third level education, and now there was demand for these factors and the economy could supply them cheaply and relatively efficiently.
In the period after 2001, according to the IMF, unit labour costs rose at the same time as the economy’s share in export markets were falling. The IMF write that “This decline is evident since 2002 in all of Ireland’s major export destinations”.
At the same time Irish shares of Foreign Direct Investment (FDI) also fell, and in 2004 the 26 Counties crossed over from an economy that was outperforming the rest of the eurozone in terms of FDI coming into the state to one that was underperforming the eurozone states.
The economy had peaked in 2001 and from 2002 onwards, labour costs rose, driven partially by a government failure to control inflation, and the need for higher salaries to pay for increasingly expensive homes. Irish prices had since 1996 become higher than the eurozone average but from the beginnings of the Euro in 2000, this price gap grew larger and only Luxembourg had higher gross wages than Ireland.
It is now clear that in 2001 the economy was at the crossroads. There was a pressing need to bank the gains of the Tiger years and begin a long term period of building much needed infrastructure which had been the original driver of the Tiger era. In 2001 the roads were jammed with traffic, the health services were in crisis caused by more than a decade of under funding. House prices had grown relentlessly pushing many off the property ladder in a society that values home ownership highly.
In this period two key reports, both commissioned by the Dublin Government, highlighted the failures of property based economic strategies. The Bacon Report on house prices contained a series of measures to dampen house price growth, none of which were implanted for more than a year while the Goodbody report on the benefits of property based tax reliefs threw up serious questions about the long term economic value of such strategies that had brought a building boom to every town and village.
Fianna Fáil and the Progressive Democrats ignored these findings and instead let the economy roar on well past its actual potential. Prices rose more, particularly those of houses, wages grew to match them and our international economic competitiveness slipped away.
There was not enough investment in physical infrastructure, like roads, public transport, or social housing, education or health services. In 2002 Fianna Fáil, now safely re-elected, abandoned the Part Five commitment in planning law to reserve 20% of all development sites for social and affordable housing and the property boom continued unabated while exports of Irish firms fell as did spending on R&D.
During all of this pseudo boom of the noughties the economy underperformed on all the important social indicators particularly in terms of the public health service, equality in education, early school leavers and illiteracy rates which were stubbornly hovering under or around 20% of the population as was relative income poverty.
So faced with unsustainable economic growth Fianna Fáil, the PDs, Labour and Fine Gael entered the 2007 election outbidding each other with lavish tax cuts and spending plans while it was Sinn Féin alone who called for tax increases, for more state control of the banking sector, for an end to tax break driven property investment and it is only Sinn Féin who now are proven right in terms of the IMF reports conclusions.
Sinn Féin’s scheme for at the very least temporary nationalisation of all failing banks has been echoed by the IMF. Sinn Féin’s proposals that restructuring residential property debt as part of the bank bail out package has also been supported in the IMF report.
Brian Cowen claimed last week that, “I stand over the decisions I made” and “I got more right than I got wrong”. The IMF analysis offers a very different vista on the failures of not just Cowen but his predecessors Ahern and McCreevy.
Where Sinn Féin and the IMF agree
- Nationalise all failing insolvent banks to limit government liabilities
- Help restructure residential property debts
- Don’t let cutbacks dampen potential of economic recovery
- Expenditure cuts “risks hurting the most vulnerable”
- Increasing social security contributions. Sinn Féin had proposed lifting the ceiling on PRSI contributions.
Where Sinn Féin and the IMF differ
- IMF support further wages cuts, Sinn Féin don’t
- IMF don’t address issues of educational access and opportunity, quality of health services, housing, promoting enterprise and business development.
- The IMF don’t address the need for significant reform in taxation policies.
The IMF report in figures
15.5% forecast unemployment for 2010
20% share of 26-County GDP from construction
10% share of US GDP from construction
30% estimate of overvalue of Irish housing stock in 2007
2014 year that the IMF estimates the Irish economy will grow significantly again
2004 year 26 Counties share of FDI began to fall
2002 year 25 Counties share of export markets began to decline
2002 year unit labours costs began to rise compared to other euro states
2001 year that wage growth in 26 Counties outpaces eurozone average
20% difference in Irish prices compared to eurozone in 2007
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