RESOLVING THE ECONOMIC CRISIS

1. RESOLVING THE ECONOMIC CRISIS Paul Sweeney Economic Advisor, Irish Congress of Trade Unions AGSI Athlone 18 Oct 2010

2. Outline • Ireland has a good, (not sound) modern real economy • But the Govt blew the boom, bigtime! • Now - compounding the mistakes of the boom - deflation

3. The Tiger Phase – A Golden Era • The Celtic Tiger phase of growth was always temporary – catch up. • There was a real boom for 15 years to 2001. • Growth lifted Ireland on to a modern plane. • But seeds of destruction were sown from late 1990s • – deregulation, privatisation, pro-cyclical tax-cutting, tax breaks.

5. Wrong Policies Pursued • Interest rates, set by ECB were too low • Banks behaved badly – lending furiously • Financial Regulator was fast asleep • Govt. pursued strongly pro-cyclical policies • Cut taxes in Celtic Tiger Boom and • gave large tax subsidies to property investors • allowed Financial Regulator & banks’ to misbehave • Govt. boosted the Property Boom-Bust • Government blew the gains of the Boom

6. Labour market • Biggest fall in employment (and GNP) in OECD • Labour force participation rate falling rapidly (next) • Had it remained at 2007 level, rate of unemployment today would be c.21% • Youth unemployment has soared • Long term unemployment doubled • Emigration soaring • Private sector Hourly earnings rising very slightly • But with cuts in public sector and weak labour market, earnings down by 2% this year & no increase next year.

8. Ireland – World’s Worst Performer • We cant blame Lehman Bros or US • Ireland’s collapse in GNP is worst in world • It is worse than Iceland on some numbers • Ireland’s GNP has fallen by one-fifth since 2007 when at €161bn. • GNP this year @ €129bn will equal that of 2003 • Seven lost years of national income • Uncertainty - more to lose with bank subsidies? – give-in to bondholders? €?bns

9. Ireland – World’s Worst Performer cont- • Irish Govt policies caused the Domestic BOOM (2001/07) & bust (2008 to 2015?). • Bust could have been avoided • €58bn surpluses gone, now big deficits (-20% this year!!) • AND unparalleled subsidies for banks, while cutting welfare, health, education, pay, etc • When will we reach 2007 national income figure of €161bn again ? • 2018! If we achieve 3% growth pa, but GNP is still falling!

10. Source: CSO and Stability Report in Budget 2009.

11. The World is a Different Place • Governance system failed • Markets were so free that new rules were written by the key players for themselves • “Shareholder value” law for companies • Regulators failed, government failed, • Lack of coordination, eg no Financial Regulator in Eurozone

12. The World is a Different Place 2 • There are hard lessons to be learned :- • Government is back in market, as a main actor. • Bailouts far from complete. • Some banks, financials etc. should have been let fail. • Many businesses are failing, including some good firms. • Financial Regulators have finally woken up. • Governments are cooperating internationally on tighter regulation and market rule-making

13. Ireland Today • National Income has fallen by 20% from peak • Prices down but core wages hold in private s. • Unemployment up - 13.5% and growing • Fiscal crisis, after binge of tax-cutting • Severe Cuts & tax rises not working • Package of wage and welfare cuts – Deflationary. • Lenihan - senior bondholders will not share any of the burden with Irish taxpayers!

14. The Wrong Solutions • Keep to 4 year period of Recovery • Front-Load the “Adjustment” (Cuts!) • Make it mainly cuts, not much taxes • Also cut investment further • Increase taxes on all earners, not high incs. • Do not burn Anglo+INBS bondholders • No real reform of corporate governance But Deflation has not worked and will not work

15. The Correct Solutions 1 • The 4 year Plan cannot be achieved (3%) • Do not Front-Load the “Adjustment” • Make it judicious cuts + taxes • Do not cut investment further, but boost it • Tax “broad shoulders” eg extend 2% income levy to corporate profits - €630m plus CGT, CAT etc • Burn Anglo+INBS bondholders by 90% + save €20bn to 24bn • Reform of corporate governance ie co law

16. The Correct Solutions 2 • Negotiate with bondholders of Anglo/INBS • Thus share burden + save billions • Difference between Sovereign & private debt • Lenders may baulk for a while • But we have €20bn cash and €24.1bn in NPRF i.e. to end 2011 – can avoid markets • Boost Solidarity Bond, auto-enrolment in pensions, PRSAs in state pension fund etc. for cash • Lenders will soon lend again after billions in debt reduction & when economy finally begins to grow again • We have endured 9 continuous quarters of negative GNP - Deflation as a policy has patently failed!

17. The Correct Solutions 3 • Front-Loading is Saturation Bombing – no green shoots for years after! • Economy is a dynamic organism -cant be cut to death to “make it” grow • Cuts vs Taxes debate should be over. • The Cuts Advocates have lost - it has failed to date. • But its adherents still are in office, in Finance, in Unis • Not so aboard, where “Stimulus” holds sway • Correct Answer is in between, but away from Austerity

18. Conclusion • Deal with 3 crises as one - Jobs, fiscal and banking • Radically amend “Austerity Programme” • Less cuts & more focused tax-raising • Investment programme in infrastructure and in education & skills (€2bn from NPRF X3yrs) • New Public / Private paradigm • New Corporate Governance system • Social Solidarity + Rapid Recovery • Build on strengths' of the real economy – while dealing with fiscal and banking crisis

19. Conclusion • Deflationary cuts will delay recovery • “the cure may even kill the patient” - Lex THERE IS AN ALTERNATIVE ends