Month: September 2010
I should start by saying that the views I am about to express are entirely my own and do not purport to represent any body with which I am, or have in the past been, associated.
It is important to keep a sense of proportion about the difficulties facing the Irish economy. It is true that these difficulties have been aggravated by the international credit crisis, but that crisis really did no more that bring to the surface an entirely home grown series of mistakes. Essentially we have been borrowing too much, and spending much of it on the wrong things, for the past ten years.
While it may have been difficult for financial regulators to quantify the risk involved in banks buying collateralised debt obligations, it is not difficult at all to see that for the private sector to be borrowing ever larger amounts to invest almost exclusively in a notoriously volatile economic sector ,namely building construction, was bound to be wrong.
Any student of economic history, and national economic history was part of my first year economics course in UCD, knows full well that the construction sector in Ireland has lived through a series of booms and busts in the twentieth century. Any family that worked in the building trade knows that too, even if they never went near a university.
Equally one did not have to have a degree in higher mathematics to know that setting ever higher levels of public spending and Government employment, and paying for them with revenue that depended on the ups and downs of the same volatile economic sector, building construction, was bound to lead to disaster sooner or later. You cannot responsibly pay for an ongoing liability, with revenues that are not ongoing.
These obvious mistakes, by both the private and the public sectors since 2000, were not sufficiently criticised at the time. Group thinking just went in one direction, unquestioning acceptance that present conditions would continue indefinitely, or at worst , that there would be a soft landing. No other possibility was seriously entertained. This unwillingness to hear contrarian views about the economy existed because there is a general tendency in Ireland to form one consensus view of things and to leave little space for dissent. Social partnership, which had delivered many benefits, also stifled critical debate on economic policy in the interests of consensus.
There were other deeper reasons for the failure to have widespread questioning of what, on the face of them , were pretty obvious mistakes that were being made by the Irish public and private sectors.
Democratic dissent is not something we value enough in Ireland, perhaps because we have had to put up with too much undemocratic and violent dissent in the past. When people say something that questions the consensus view of any topic, the first reaction in both media and private commentary is not, as it should be, to ask whether the dissentient has something valuable to add, but rather to look for his or her to hidden ulterior motive for saying what he is saying, or to search for some inconsistency or hypocrisy by reference to what he or she said years before.
We also failed to learn the right lessons from the last recession of the 1980s. The view became accepted that the recovery in the late 1980s was due to our own efforts, when in fact the improvement in our financial position after 1987 was mainly due to a sudden fall in international interest rates, and to a dramatic one off fall in our dependency ratio in the 1990s by comparison with the 1980s.
Thus, even those who knew in their hearts that there was something wrong with the way we were borrowing and spending after 2000, felt that, somehow or other , against all logic, everything would turn out right in the end, as it had in the late 1980s. Or, alternatively, they just kept their views to themselves, because they did want to be invited to commit suicide.
I hope that one positive outcome of the current problem will be that we will be that we will in future allow more space for debate and argument about options and risks before we take big decisions.
Equally, we must now ensure that we do not form a new national consensus of despair. Just as, between 2000 and 2007, we looked only at the bright side, we must not now only see the dark side of things.
Looking at our national economic situation now, I feel we are focussing rather too much on the liability of the banks, and too little on the ongoing huge gap between the Government’s daily spending and its daily revenue.
The net liability of the banks will be a finite amount, even if we do not have an exact figure yet. It will be a one off liability for the taxpayer, probably about 15% to 20% of our annual Gross Domestic product. That is a huge figure, but we should be able to spread it over a number of years, if we manage things properly.
The much more vital issue to discuss is the gap between spending and revenue, which is running at 10% of our GDP, every year…year after year. That is not a one off figure. It is something that could require us to add the difference to our debt year after year, inexorably multiplying the total amount we owe.
I would prefer if the energies of our lively economic “commentariat” were devoted as much to how we can bridge that recurring gap, as it is to the one off banking liability. I imagine that it is really the gap between ongoing spending, and ongoing revenue, that worries the more thoughtful participants in the financial markets more than the one off banking liability.
The recent Quarterly Economic Commentary of the ESRI draws attention to the fact that income per head in Ireland is now back to what it was in 2000. That is quite a drop from the unsustainable heights it reached in 2006, but nobody can seriously suggest that Ireland was a poor country in 2000.
We had a solid economy in 2000, something we did not have in 2006. I accept that averages, like income per head , do not tell the whole story. There are a lot of people who are worse off than they, or their equivalents, were in 2000. But that also means that there are also a lot of people who are much better off than they were in 2000!
Furthermore there are things, that are not measured in income statistics, that are better than they were in 2000. Our roads, our accessibility to hotels and cultural facilities, our public transport…these are all better than they were in 2000. But, of course, we tend to be much more concerned about things we personally have that we might now lose, than we are with the bigger things that have got better for the community as a whole. That is normal human psychology.
If we look for positive signs in the Irish economy, they are there before our eyes.
Exports are buoyant this year, rising faster than in most European countries. In fact, Irish exports fell much less in the recent downturn in global markets, than did the exports of most European countries. The pharmaceutical sector has been particularly strong. This general trend in exports shows that Ireland is invested in economic sectors for which there is consistent demand, whereas other European countries are heavily into sectors, like cars, where demand is much more volatile.
While the Irish public sector still has unresolved debt problems, Irish households have paid down a lot of their debts. The private savings rate is now 10% of GDP as against 2% in 2007. According to the ESRI, in 2009 there was an increase in net financial assets of Irish households of almost 25 billion euros , due to a reduction of personal debt of 4.6 billion euros and an increase in financial assets of 20 billion arising from an improvement in the value of pension funds and insurance policies. Of course, this improvement starts from a very high level of indebtedness, and it is unevenly distributed.
Some sectors have come through the crisis very well. The international financial services sector, which is quite separate from the domestic banking sector, has done remarkably well. It is spread all over Ireland and is creating and sustaining highly skilled jobs, especially for young Irish people with good mathematical skills.
Our competitive position has been greatly improved, as a direct result of the recession, unfortunately. House rents and new office rents, wages costs and prices are down more here in Ireland in the last two years , more than they are in other European countries. Staff turnover is much less than it was , so a new employer finds it more worthwhile to train recently recruited employees in Ireland. The legacy of our investment in education in the 1970s and 1980s is still there. Irish people are still inventive and adaptable. The industrial society, with its emphasis on disciplined repetition of tasks, may not have suited the Irish character all that well. But the information society, with its emphasis on adaptability and innovation, is ideal for us
Ireland is an open society and has handled the transition to a multi faith, multi ethnic , society much better than have some of our European neighbours. That will be a big help to us in attracting foreign investment here, especially from the emerging economies where the predominant ethnicity is not European.
I will be going to China this month, and to the Gulf States later in the year, to seek investment from those rapidly growing countries in the Irish financial services industry. The fact that Ireland has welcomed immigrants from those same parts of the world will make it easier for me to suggest that Ireland is a good place for those countries to invest in financially too.
Irish people have also proven themselves to be more sensible about accepting the need to make the painful changes needed to adapt to our reduced economic circumstances than have other societies. The contrast between Irish reactions and the street theatre in France and Greece is stark.
While the tendency towards too much consensus may have blinded us to some realities during the boom, it is now working to help us deal with our problems in a practical way.
Yes, we have a deal to learn from our mistakes. Yes, we will have to make some painful changes. Government services will be reduced and the direct and indirect tax base may have to widened. But the fundamental human resource base of the Irish economy is stronger than ever. That is what is really important.
Speech by John Bruton, former Taoiseach, to Wexford Rotary Club on Monday 13th September 2010