Credible plan for stability and growth needs credible government, Gilmore tells Dail
Issued : Wednesday 27 October, 2010
Speech by Eamon Gilmore TD
Leader of the Labour Party, Tánaiste and Minister for Foreign Affairs & Trade
Yesterday the Minister for Finance told the Irish people that the Government has decided to make €15billion in cuts over the next four years. Double the amount that was previously expected.
We had been told that we had the cheapest bank bailout in the world
We had been told we had already seen the last of the really difficult budgets
We had been told we only needed one more push
We had been told we had turned the corner
Some corner.
What we still don’t know, is what is the basis for this figure. According to the Government, the opposition have been shown the books. Two meetings lasting a total of three hours. Now the opposition are supposed to know everything.
Let me put on the record what we were actually given. The kernel of the briefing last week was three sheets of paper, with a table on each, containing nine rows of figures. The first table shows what would happen if you went ahead with the 7.5billion plan, and what would happen to the deficit and GDP with a €15billion plan, assuming a €4.5 billion adjustment in 2011. That’s it. No more. GDP figures in ranges. On another page we are given the same table, this time assuming a 7billion adjustment in 2011. The GDP figure for 2011 in this table is lower, as you might expect, but the figure for 2012 is higher. What explains this particular form of ‘bounce back economics’. We don’t know. We don’t know because the table contains no data
on consumption,
on investment,
on exports,
on imports,
on inflation,
on wage growth,
on interest rates,
on exchange rates,
on the growth in the US, European or world economies.
When you ask how it could be the case that a massive hit on the economy in 2011 is going to produce higher growth in 2012, the answer is one word ‘confidence’. Not a worked out spreadsheet showing how different levels of interest rates will affect investment or consumer spending. Just confidence, or what Professor Krugman calls ‘the confidence fairy’.
Now, most five-year olds in Ireland are prepared to put their faith in the tooth fairy, but I’m not prepared to put my faith in the confidence fairy.
Despite all the damage done to the economy Fianna Fáil are still insisting on playing political games. The Fianna Fáil spin machine is putting it about that they have opened up the books to the opposition, and now it is up to them to produce the answer.
Based on a few so-called scenarios, about how the deficit might possibly be reduced, depending on two possible sets of adjustments, and two possible sets of growth forecasts. Possible, not probable, or definitive.
We have not yet been given the official growth forecast for next year, because they are still negotiating with the European Commission
We have not yet been given the official forecast for the three years after that, and we have not yet been given the figure for cuts in next year’s budget.
Nor have we been given what the Department’s estimate is of the additional impact of extra budget measures on jobs and growth – we have been told to believe in the confidence fairy
We don’t have a template for the four year plan.
We don’t have a figure from Government on what Croke Park will save next year
We don’t have an answer on how the bank bailout will be treated in the national accounts and how that will affect the deficit target
And if you ask for projections for 2011, you will be told that they don’t have the October or November exchequer returns.
The horrifying thought is that this might actually be the kind of information that has been used to inform cabinet decision over the past few years. Either Fianna Fail is genuinely uncertain about these key figures, which would be extraordinary after more than 13 years in office. Or they do know and they are simply not willing to tell the opposition or the public because it does not suit their carefully worked out political choreography.
Frankly, after everything that has happened up to now, you would have to be naïve not to be sceptical about any figures that come from this Government.
What we do know is that, after Black Thursday, there is an enormous bill to pay for the banks – at least 45 thousand million euro. We know that there has been a catastrophic loss of confidence in Ireland abroad, and that the cost of Government borrowing has shot up to the point where the Government feels unable to continue borrowing money. We know that there is to be a four year plan and a budget that are supposed to restore order to the public finances and confidence in the country. But after that, the government have provided very few specifics.
Today’s debate should be about solutions. The economic crisis that we now face is the worst in the history of the State. Disastrous mismanagement of the economy, and the catastrophic error of the blanket bank guarantee, has brought the country to the edge of bankruptcy.
The reality is that we now face a fight to hold on to our economic freedom and the right to make decisions about our own future, if the Government cannot convince investors to lend money to Ireland at reasonable rates again.
This crisis is not about economic jargon, or graphs or numbers. It is a human crisis. A crisis for the hundreds of thousands who have no work, for families at risk of losing their homes, for people who
If we are going to solve this problem, we need clarity on numbers. But we also need clarity on objectives, and a serious sustained approach to achieving solutions.
What I, and the Labour Party have been saying throughout this crisis, is that there is more than one objective. Yes, we need to get the deficit down to 3% by 2014, but not just for the sake of it. It is a means to several ends. Our objectives must be:
to get our people back to work,
to re-start economic growth,
to increase exports, and
to restore our reputation abroad and confidence at home so that people will invest and spend in Ireland.
We do need to come up with a plan not so much to satisfy our partners in Europe, but to convince international bond markets to invest in Ireland, while we go about the difficult work of restoring our public finances. We must combine deficit reduction with a strategy to re-start economic growth. And we must do all of this in a way that is fair.
Ever since the Government made its agreement with our partners in Europe to reach the 3% target by 2014, the Labour Party has supported them in that objective. We have done so, because we believe it is extremely important that Ireland sends a united signal to the wider world, that we are serious about dealing with our deficit. People who invest in this country don’t necessarily follow our politics or have any understanding of what a change in Government might mean. Labour wants to make it clear that a change in Government in Ireland will not result in the goal of deficit reduction being abandoned. I regret that Fianna Fáil have taken so long to grudgingly accept that this is the case. Had they done so earlier, they could have made more of it, to the advantage of the country.
It is important to be clear, however, about what Ireland has actually signed on for. We have agreed to try to get out deficit down to 3% by 2014. That means having a credible multi-annual plan that addresses the problem over a period of time. It does not mean that we are tied to any particular deficit figure for next year.
We will not solve this problem by resorting to ever greater and ever more crude adjustments. We will solve this problem by having a strategy that combines reduction in the budget deficit, with a programme of action on jobs and growth, and which puts in place reforms that signal to the wider world that Ireland is a serious country that will not allow this disaster to happen again.
Bond investors are just like any other investors. They want to see the whole story. If they invest in a country, they want to know how much debt it has, and how big its deficit is, but they also want to know whether the country will be able to pay the money back. They will look at headline numbers, but they will look also at the medium-term story. They will want to know, does this country have a growth model that is going to ensure it can service its debts. It is the presentation of that story – of a credible plan to reduce the deficit while re-starting economic growth that should be the focus of debate, and of the 4 year plan.
The figures produced by the ESRI and what we have been given by the Department of Finance, make it clear that the position is extremely challenging. A fundamental rethink of every aspect of the budget is required. But the situation also calls for purposeful and sustained action. What must happen now, and what should have happened long since, is that we must have a multi-annual approach to budget policy. Not just a set of announcements every December, and a set of projected multi-annual figures. But continuous and determined action on a multi-annual basis . We know we are not going to fix this over-night. We know too, that quite frankly, 2014 is a long time away, and for a Government that cannot forecast one week ahead, relying on their forecasts for four years from now is a bit uncertain to put it mildly. What we need now is a credible multi-annual Plan for Stability, Growth and Jobs that gets the economy moving again.
That means looking at each aspect of the budget, and how savings can be made while limiting the damage to the economy, and promoting jobs and growth. It means cutting expenditure, but it also means raising additional revenue. Unfortunately, taxation has to be part of the mix. This is a point that Labour has been making for the past two years while others were trying to pretend that the whole adjustment could be achieved by cutting spending. We are finally seeing some rational thinking on this issue. It is of course regrettable that extra taxes are necessary, but they are. And while everyone is going to have to contribute in some way, I do not subscribe to the notion that the only people who should pay more are those on modest incomes.
Broadly speaking, we should aim for an even split between additional revenue raising and lower spending – roughly 50:50. Given the scale of the deficit, we need to spread the burden of adjustment for it to be economically or socially credible.
On the expenditure side, we need completely new approaches to both capital and current spending.
In respect of capital spending, it is clear that the Government will have to go back to the drawing board once again. Our present level of capital spending is still high by European standards, and unfortunately that will now have to be reviewed.
A reduction of approximately €2.5 billion over three years would leave us with a capital spend of just under 3% of GNP – or approximately the same as the Eurozone average. But if capital spending by the exchequer is to be reduced, as it must be until we stabilise the public finances, we should be looking for ways to replace it from elsewhere. There have been numerous proposals put forward in this area to find alternative funding for capital projects. Labour has proposed taking €2 billion from the pension reserve fund to provide the capital for a Strategic investment Bank that could give the lead in this area. Similar banks exist in other countries, and the UK Government is establishing a Green investment bank on a similar model.
And while we are on the subject of the capital budget, it no longer makes sense to make payments into the Pension Reserve Fund. We are now borrowing money on the international markets at interest rates of 6% to invest back into the international market place through the purchase of shares by our own Pension Reserve Fund. Borrowing at these rates for this purpose is the wrong way to use our depleted resources and should be suspended until we return to some form of normality.
In the area of current spending, we must stop lurching from Budget to Budget, with crude cut after crude cut. What we now require is a proper Comprehensive Expenditure Review with a three-year time horizon, such as has been carried out by the new Government in the UK, but using the Canadian model. The truth is that the government-commissioned Bord Snip report has been a failure, because it has not produced either the savings it promised, or the reform we need. It was never likely to do so, because it never sought or got buy-in from Ministers and Departments. The problem with the Bord Snip approach is that it started by looking at the level of expenditure, and asked, ‘What can be cut’. What we actually need is a process, such as was developed in Canada, that is led by Ministers themselves and by the managers of departments and agencies. They started with the opposite question – what service do we want to provide? We have to have a root and branch examination of spending that identifies what we think is really important – keeping the schools open, maintaining a decent health service.
A proper comprehensive spending review would end up reducing both pay and non-pay costs. It would very likely result in a reduction in the number of agencies and merger of back-office functions in others. The results of a comprehensive spending review would then provide the basis for sustained and on-going reform of the public service, which should include negotiation with staff to bring about change.
That was supposed to be the idea behind the Croke Park agreement, but it isn’t happening. It is now abundantly clear, that having spent months attacking the Labour Party for not telling people how to vote on it, once it was accepted, the Government have done little or nothing to work it. We cannot keep lurching from one budget to the next, inflicting crude cut after crude cut. If we want to get costs down in the public service, including headcounts and payroll costs, but also input costs, while minimising damage to frontline services, then it has to be done in a determined and sustained way.
The revised estimates for 2010 show that total current spending, excluding social welfare and public sector pensions, was budgeted to be some 31.6 billion. A programme to reduce both pay and non-pay costs by only 3% per annum would yield savings of 2.8 billion over three years, including payroll reductions of 1.4 billion. That is readily possible, and it should have been started long ago. Public sector workers have already endured big adjustments in their pay. At this stage, however, it is unlikely that the necessary payroll reductions will be achieved through natural wastage and redeployment. . A voluntary redundancy scheme in the public service will, I believe, be necessary. The scheme should be strictly confined to areas of identifiable over-staffing, and should be tailored to ensure that critical front line public services do not have their essential staffing levels eroded.
Non-pay costs will also have to be addressed as part of the review. There are a number of areas that have long cried out for reform, particularly including the cost of drugs in the health service, which the IMO estimate could be cut by €300m through use of generics. It could be further reduced by a more robust approach to negotiations with drug companies that uses the states bargaining power more effectively. Professional fees are also a serious issue – the Boad Snip report estimated that GMS fees could be brought down by €370m over time.
The social welfare budget must also be curtailed. It is possible to achieve considerable savings in Social Welfare by reforming the way in which the system works. Labour’s Spokesperson on Social Protection, Deputy Roisin Shortall has recently produced a report for the Oireachtas Committee showing that major savings can be saved by more robust and modern enforcement of anti-fraud measures. Savings of at least €100m can be made in this area. A second area for potential savings is Rent Supplement. The state is now spending half a billion euro a year supplementing the cost of private rented accommodation at a time when there is an overhang of residential property. A saving of at least 10% of this amount, or €50m should be achieved in this area.
Of course the most effective way to reduce the social welfare budget is to get more people back to work. Every job lost costs the state €20,000 a year in tax foregone and direct payments. The number of jobs lost since 2007 now stands at 288,000 costing the exchequer an additional €5.8 billion per annum.
We now face a difficult challenge to gradually raise the total level of tax revenue as a share of GNP without hurting employment. Difficult, but not impossible. As the Governor of the Central Bank has pointed out, our ratio of tax to GNP has been higher in the quite recent past, when the economy was still performing extremely well. For example, if exchequer revenues as a share of GNP this year were to be the same as it was in 2001, then an additional €5billion would be coming into the exchequer.
That does not mean that we just go back to the tax rates that were in force at that time. Instead, the place to start is with broadening the tax base. It is time for a major programme of reform to finally curtain the network of tax breaks and tax expenditures. A recent paper by Micháel Collins and Mary Walsh, has highlighted this issue once again, which my colleague Joan Burton has been addressing for years.
Some 3 billion is being spent in the area of pension reliefs, which should be curtailed by at least 500m, particularly by limiting the total amount of relief that can be claimed by any individual, so as to make the system fairer.
The reliefs for property-based investment which are now costing €380m should simply be scrapped, and interest relief on rental income from investment property must be significantly curtailed by at least 430m. There are a whole series of minor reliefs mentioned in the report of the Commission on Taxation, including relief on trade union subscriptions, which should be scrapped. The relief on patent royalties which is an avenue for avoidance and that costs 50m should be abolished.
Labour has been arguing for some time that in the area of taxation, those who have the most, must contribute the most. We have proposed a 48% tax-rate for the highest earners. We also need a system whereby a minimum effective tax rate is applied to high earners to limit the total relief that any one person can obtain from all tax breaks combined. The Government claim to have done this, but the system it is full of holes, and deliberately so. There needs to be more equality of treatment of earned and unearned income, so that income from capital gains is subject to PRSI and levies in the same way as earned income.
There is room to increase the tax on second homes. It should also be possible to phase in water charges on a metered basis as part of a broader reform of how we manage and deliver this vital environmental resource. And, we should plan to bring in a new bank levy, once the capital levels in the banks are adequate. These will extremely profitable businesses again and they are not just going to be allowed to ride off into the sunset and leave the rest of us to sort out the mess.
We have to make hard decisions, but we have to make the right hard decisions. And they must include the decisions that are required to bolster economic growth. This is the hard work of economic management that really matters. Recently described by Will Hutton as ‘the policies that sit between the glories of headline-catching changes in tax, spending and interest rates, and the habitual invocations of labour market flexibility and deregulation’.
One of the reasons for the gloom in economic forecasts is the low level of price increases in the economy that is depressing nominal GNP. But we should not assume that there is no work to do in dealing with the cost base, and with competitiveness. Wages may fall on average next year, but underneath that average we are likely to see wage pressures re-emerging in more sheltered sectors. As of right now, the Government effectively has no pay policy, outside the public service. I favour a return to social dialogue, in a new format with a far more limited agenda than before. I would like to see a negotiated pay freeze for three years.
We must also tackle the level of fees and prices in the protected professions. While some in the legal profession have taken a major hit, I am concerned at what seems to be happening down at NAMA which has an enormous budget for professional fees. In this economic emergency, emergency measures are needed, including the state exercising its right to control fees in areas such as law and medicine, though a temporary Fees Commission. If we are to deal with the crisis fairly then everyone must play their part. The medical consultant who charges 150 euro for a ten minute appointment has to be reined in. Those cost controls must also be applied in the public sector, where we need to see stronger efforts to control input costs, including professional fees, but also costs such as drugs and other elements of supply chain management.
For all the doom and gloom of this emergency, the Irish economy actually has a great future. The real Celtic tiger was an export-led boom, before Fianna Fáil turned it into a property bubble. Last week, I had the opportunity to meet with officials from the Irish development agencies based in New York. They are doing excellent work and it is clear that there are enormous opportunities for Ireland in sectors such as food, tourism and alternative energy.
Ireland is, and will continue to be to be an attractive location for foreign investment. Our relationship with the US is vital to us, but we must also recognise that the centre of gravity in global trade is shifting to the East. The new world economic powers , Brazil, Russia, India and China, present a great opportunity for Ireland to develop new export markets. But to build up our business with these countries will require greater resources, and strong political commitment, including trade missions led by Government ministers. This is an area where Government must lead.
Labour has been strongly supportive of the knowledge economy, if not of the increasingly discredited buzz word ‘the smart economy’. A knowledge economy is one where innovation is pursued in every sector and region, not just in a small number of specialist areas. We must maintain our investment in science, but we need to do far more to promote applied, and down-stream research, which is focused on commercialisation of new ideas. And we must get away from the notion that innovation only happens in labs. Innovation can happen in any business and in any region. Tourism is a key example of this. There are tourism businesses in every county in Ireland, offering career opportunities across a range of skill levels. While core values such as good service are still essential, the industry has been profoundly affected by the IT revolution, and that change will continue. Having a coherent tourism strategy, and delivering on it, is essential. Equally, Ireland has natural advantages in areas such as clean-tech and food. Our food sector is still too reliant on exporting goods with limited value added to the UK. We need to see agriculture as Ireland’s great raw material, and develop our food industries accordingly. We do need a whole of enterprise approach, but we also need to look in detail at specific sectors and how they perform.
The role of the industrial development agencies will be critical. We will have to encourage the agencies to take more risks, to be prepared to fail, and to take a longer view on where they put their resources, particularly in building up our presence in India and China. We need a network of enterprise support that covers firms of all sizes, including start-ups, but also focusing on scale-ups. Ireland needs to do more to keep the companies that we do develop and grow, rather than getting a start-up to a certain size and then selling the company to a multi-national. We need to look at providing more support to firms that are over the size limit to avail of support form country enterprise boards, but who are not now getting back-up from enterprise Ireland.
To create jobs, we must have investment. Investment in infrastructure, investment in firms, and investment in people. Given the limits on resources, that investment will have to come in new ways, and will have to be strategic. Labour’s Strategic Investment Bank will act as a source of investment finance for major projects, and for companies. Even with the constraints on resources, we must also prioritise investment in people.
We cannot stand by as 442,000 people are looking for work. We must make a national effort, including both public and private sectors, to offer educational, training and work experience opportunities to our people. Many are already highly educated, but need experience. Some have been working, but need to address educational needs. There is no one-size-fits all scheme that will deal with this need. What we need, as outlined in Labour’s policy document Just the Job, is a range of schemes, meeting a range of needs. This does cost money, but relatively small amounts. Our proposals would cost approximately €230m in the short term but would save money because people will get off the dole queues more quickly.
Above all, we need to see that Government has a sense of urgency, and purpose, and direction on jobs. We need a three years jobs strategy, not just a set of PR events. When we have that, we may be able to unlock some of the savings that are currently being withdrawn from the economy by a public that simply has no faith in this Government. The idea that draconian budget cuts would restore confidence and boost spending is looking pretty threadbare just now. Confidence can be restored, but, in reality, it will take a new Government to do it.
The Government says it wants consensus on its four year plan. It can’t get it. Because a multi-annual plan is pointless without a government with a mandate to implement it. Fianna Fáil and the Greens simply have no mandate for a four year plan and the opposition don’t have a mandate to give them. We need a new Government, a strong and stable Government, with a new mandate to turn this country around. That new Government needs a multi-annual programme for stability, growth and jobs.
Labour has been responsible in opposition, and we will be responsible in Government. We opposed the banking guarantee, because it handed the banks a blank cheque, and we have been proven correct in doing so. We opposed NAMA, and we have been proven correct in doing so, just as we watch the developers continuing to enrich themselves through more tax breaks on interest they haven’t even paid. We supported the Government on Lisbon and we have supported the plan to bring down the deficit to 3% by 2014, because it is right that we send the signal to the world that a new Government will tackle the deficit. Unfortunately, it has taken to long for Fianna Fáil to grudgingly acknowledge that commitment. And lets be clear – the Government are still less than forthcoming about the kind of basic information that should have been available weeks before this debate – growth forecasts for next year, and the years beyond, figures on the adjustment to be made in 2011. Details of how the Croke Park deal will reduce costs, or of how the bank bailout is going to be reflected in the deficit target. This is all information that in other countries, would be provided to parliament and to the public as a matter of course.
What I have outlined is an approach to budget policy that will allow us, in a balanced and consistent way, to start getting the deficit down. A roughly 50:50 balance between taxation and spending, and new approaches to current spending, capital spending and taxation. These are reforming measures, that would allow us to make steady and consistent progress on the budget deficit, and while getting the country back on the road to recovery. It is on this basis that we can devise a credible plan for Stability, Growth and Jobs.
Fianna Fáil have been in office for 13 years, and they have left an enormous mess for the next Government to sort out. They have done so before, but the scale of this disaster is unprecedented, even for Fianna fail. Nor is Ireland the only country where this has happened. But is must surely be the only country where the opposition is asked to fix the problem while the Government remains in office.
This is a great country. We can sort out this problem. We can create jobs and growth. But it is clear that will not happen, until we have a strong and stable Government. with a mandate from the people. A mandate measured in years, not in months.
