Boom & Bust is over? Don’t bet the house on it

Brendan Howlin said today that he believes Ireland has broken the ‘boom and bust’ cycle in economics. Forgive me for not holding my breath. It reminded me of when politicians said that, despite all the evidence from housing booms all over the world, Ireland was different and would have a ‘soft landing’. We are not really that different from everybody else. More to the point our politicians are just as vulnerable to the cardinal sin of believing their own hype.

You see we have been here before. From ’73 to ’86, successive governments made a mess of things and compounded an international crisis. The main factor was ‘borrowing’. Heed that word. It was the buzz word in Irish political circles for over 30 years. Eventually, things began to change. After ’87 borrowing was brought under control. This was followed by tax cuts and that made sense. If you are able to reduce your borrowing and pay your bills then you can afford to cut taxes to create a stimulus. A proper stimulus, not like the 1977 botched attempt.

Fianna Fail bred a generation of politicians for whom borrowing was the litmus test of everything. In fact in 1994 there were many of them who were worried about what FG and labour might do in government. They believed that all the good work on borrowing would be lost. They were wrong. FG and Labour showed that they too knew the importance of never returning to high borrowing. The economy continued to grow and thrive. FF returned to power and though spending was increasing it was doing so at a time when borrowing was still falling.

Here is the problem. In 2002/2003 there were a lot of calls for Ireland to improve its services and infrastructure. These calls argued that it was necessary and given that Ireland had such low borrowing figures it could now borrow for capital purposes and help fuel the economy. To FF this was heresy. They did not listen to these calls. Now you might be starting to get an insight into the FF mind at the time. They saw themselves as being the responsible voice against borrowing to fund things. FF believed that the only thing required to be a good government was to not have to borrow large amounts and to not be FG/Labour.

A property boom fed the economy like a goose laying golden eggs. The government saw astonishing surpluses of cash year on year. These surpluses were used to drive spending and meet demands. To FF this was sensible economics. They were not going mad borrowing like in the ’70s and ’80s. They were raising money and paying for stuff. This obsession with borrowing made them blind to the fact that there are other parts to a balanced economy. It was also an obsession that kept leading them to compare what they were doing with what FG/Labour might have done in the past. This made them foolishly scoff at criticism.

We all know what happened. We reduced taxes every year and increased spending like no tomorrow. However, it was spending based on unsustainable income. Eventually the cash would stop and what then? Where were we going to get the money from to keep going?

The point of all this is that borrowing has been replaced by a new buzz word ‘property’. Now we have a government that believes the only thing necessary for good government is to control property and not be FF. Replacing stamp duty with a household charge is not an answer. The income from it will still fluctuate with house prices and governments and local authorities will increase it and decrease it to get revenue or gain popularity depending on what the books look like.

We can already see how talk of changes to levels of property tax is gaining popularity. Income tax remains our best source but while we decreased it dramatically in the last 25 years we are still determined to decrease it more. Why? because its popular. We will tell ourselves it’s all affordable because now we are not having a property boom. We are doing things right.

House prices will go up. Politicians will say that they are ‘monitoring’ the situation. Revenue will increase and politicians will be rushing to spend it. Right now we are already ignoring international advice about our budgets and looking to ‘ease the burden’. We are doing this while blissfully ignoring the fact that our borrowing problem is now back with a bang.

So no, I don’t believe that cyclical economics is over. At the height of the boom FF politicians were convinced they were doing the right thing. They would never even consider halting the cash cow because that would mean job losses, cuts in services, and lots of annoyed voters. Niall Dowd (@zylon9) on twitter is a man I disagree with on pretty much everything in the world. This morning he did point out however, that no politician would ever stop a boom as to do so would be political suicide. He is correct in that.

Cyclical economics is not gone away. We are merely at the start of a new cycle. There is time enough for this crop of politicians to have departed the scene by the time we get to the next peak never mind the next crash. A decade ago we were told the boom got boomier. Today the gloom is less gloomier. That’s about the height of it.

Advertisement

Budget 2015…..Careful Now

Enda Kenny and Michael Noonan will be feeling pretty good right now. Tax figures are €1bn ahead of expectation. That will show the doubters. Despite promising to keep a calm head they are bound to be thinking that things are about to turn for them and this is their chance.

The reality however is a little more grey. Between 2004 and 2007 Ireland doubled its spending while cutting its taxes. An unsustainable model was in place all gambling that even a property crash would not derail things. The assumption being that the property crash would affect Ireland only as we sleepwalked into the International crises. From 2008 on some semblance of sense returned. Much of this has been forced upon us but there was no avoiding the fact that it was necessary. As a result Ireland is improving in terms of its economic bottom line. It’s still fragile but it is better. The government can now start to look forward with some certainty and they deserve credit for this.

In the 1970’s a national crises was compounded by an international oil crises, it took us much longer to emerge. Our most recent crisis was much worse but at least this time governments did not postpone action on spending.

The problem is that the bottom line suggests that with the extra tax boost we won’t need to cut as much, but we still need to cut. In 1987 Ireland started the process of pain to stabilise the economy. We had a couple of advantages back then. Spending was not being cut from an all time high so it was easier to control. Basic tax rates were at astonishingly high levels so we had plenty of room for cuts to rates once things stabilised. We do not have these things now. Once we entered the crisis Income Tax was not touched apart from the USC. The government will no doubt plan some changes to the USC. However there is also much talk of reducing basic tax rates. Just how much reduction in basic rates do we want?

It is popular for politicians to change the basic rates because its impact is easier to see and understand. Changing something like the VAT rate would be far more effective in redistributing wealth and reducing bills but it doesn’t carry the same impact when you announce it. The USC needs reforming but changes to this are not easily understood and communicated either.

Amid all of this is the central problem we cannot escape from. The international recovery is weak and outside threats are still very real. Our borrowing is still at unacceptably high levels and we have to reduce this or we are throwing money into a black hole in interest payments. Finally, our services are nowhere near fully funded. They have not yet even adapted to the cuts that were made. Further savings are required but we already can see that the Health service, Security services, welfare services and services to groups like the elderly are all struggling. We will still instigate further cuts in the next budget to these services.

Normally one would not start to discuss tax cuts and possible pay increases or other such items until spending is under control and you have a firm idea of what is required for an acceptable level of services. None of this exists in Ireland right now. Yet, we are already taking of sweeteners. Now I know the argument will always be about a stimulus. The problem with that is timing. A decrease in VAT might encourage spending but a decrease in basic tax may just ensure people save money against future bills or threats.

Worst of all I’m not even convinced the government can rely on these sweeteners to boost them. In the early ’90s Ireland had some great figures going for the economy. Growth hit record levels, taxes were slashed, and indicators looked very strong. This had no impact with the public on the ground. It took years before any benefit was felt and people began to agree the economy was moving. Moreover cast your mind back to the pinnacle of the Celtic Tiger. Anyone would think that the government was storming to popularity with its tax cuts. In reality even Fianna Fail was still not as popular as it had been in the ’80s. The problem was it cost hundreds of millions to deliver a saving of three or four hundred euro a year to an individual. Back then we took the money but in reality we hardly noticed it given that pay increases were expected to outshine this and that cost of living wiped it out.

Now we have a situation where the government may find it will cost a huge amount of the money that was so hard got to put a sweetener in the budget. In turn this sweetener will be wiped out by water charges or rising energy costs. We will be happy for a month but once the next few bills come in we will be thinking that the few hundred euro the government threw us was worth sweet Fanny Adams in the current climate.

Finally we need to stop the debate about who contributed to the recovery. We all did. Yes middle Ireland and those in employment gave a huge sacrifice. In time this should not be forgotten. However, do not forget the sacrifice of the unemployed, many of whom lost not only their jobs but much more. They suffered rate cuts and young unemployed were targeted specifically. Do not forget the elderly. We talk a lot about protecting basic rates. Yet we forget that we slashed services and this hurt every bit as much. The cuts to services disproportionately affect poorer people and elderly people more than any other section in society. We all have a claim to make. it’s not a competition. The sooner we all realise that getting out of this is up to us working together the better. There is no room for complacency or greed. Beware of politicians bearing gifts and let’s hope that the lessons of the past have been learned by this government. There is an opportunity now and history will judge the next move.

Who cares about those who care?

Last October we took the difficult decision to place my Dad in a nursing home. He has been ill for many years and yet another stroke made it all but impossible for us to care for him at home. Trying to look at it logically it was the only decision open to us. I like logic. Emotion is far less of a friend. No matter how many people agree with the decision, friends and professionals, the fact that he is now in a nursing home is an emotional scar. The home itself seems excellent, the standard of care is high and the staff are lovely. That helps. Yet I find myself visiting him and he still cries about missing home. In this recession everyone knows business is tough, I flit from place to place and meeting to meeting chasing work everywhere to keep my own family afloat. Between these meetings I try to visit him when I can. Just the other day he cried and said ‘Please don’t go…’ . That was tough. He was the man who collected me from every place I ever ended up, every time I had no lift, every time I got stranded or any time I felt alone and just needed to get home. Life can be very cruel.

Those who act in the role of carer do an amazing job. It is a 24/7 responsibility, its stressful and demanding. All across our country we have people doing it. Parents who look after disabled children, spouses or family members looking after an elderly relative or care workers who come in for a few hours to help. My Dad would have been in a nursing home many years ago were people not willing to give up so much to care for him and keep him at home for as long as we could. Thousands of people manage to live out their days in the comfort and peace of their own home thanks to a sacrifice by others. It is a good thing to see in a society. However, aren’t we used to good things costing us a lot of money? Well, that’s just it, these carers are not costing us money, not only are they managing to help improve the lot of those they care for but they save the state hundreds of millions of euro by ensuring that people are not placed in expensive full time care. It is a classic case of a win win scenario. The state saves money, the people are happy and everything works out………so why is it not that simple?

Why is it that successive ministers pay lip service to the idea of homecare and yet fail to deliver? Why is it that we say the aim is that more people will be able to stay in their own homes but then do the opposite? The real problem is how we view Carers. We pay them €204 per week. That’s fine but it takes no account of the hours worked, the fact that it is often at times when any other job would be getting overtime rates and so forth and it is nothing in comparison to what is being saved. All you need to know is apparent from the budget we pay it out of. It’s not the health budget it’s the Social welfare budget. Why? because it’s not a job, its seen as a welfare benefit. Carers are not employed workers doing a job on behalf of the state they are instead seen as people benefiting from state payments.

Now, in our own case it was my father’s ill health that led to him going into full time care but increasing budgetary strain is placing many families in a situation where they will be forced to reconsider home care. The Department will tell you that they will change the means test and increase the budget. This again ignores the long term saving to the state in the hope of making a quick budget buck. It is based on the premise that people will not flood the nursing homes, if they thought that would happen there would be no cut at all. No, it’s a calculated gamble that families will sacrifice even more to help their loved ones stay at home. We say that we understand the economics of it, we say that keeping people at home makes sense and we say that these people are saving the state a fortune. Then we cut the respite care grant, we cut the home help hours, and we cut the amount of people eligible for housing adaptation grants. This at a time when we are offering all kinds of other incentives in areas for people to get construction work done and houses made more efficient. However the construction and home improvement work involved in housing adaptation was not seen as such a ‘stimulus’. No, because it’s just another benefit. In a world where executives get ‘top up payments’ and bonuses that would make any fair person blush, we say that if a carer were to double their workload and care for two people they don’t get double the allowance they get 1.5 carers allowance. How’s that for salary efficiency?

I don’t blame the politicians to be honest. They just follow what seems to be the advice within their departments and take the path of least resistance. Nothing new there. Bigger fish to fry. I do however blame the people who are supposed to be experts working within these departments who can see the figures but just don’t like accepting them.

What kind of society are we, if the sick, elderly and disabled are seen as just a drain on resources? There can be no planning for the future if this is the road we set ourselves. It’s a future we all face and let me tell you now, it looks bleak. Who is going to say enough? Where do we draw the line? When are we going to start caring about those who care?

How to spin the budget – a difficult political problem

The government has announced that the upcoming budget will see €2.5 billion taken out of the economy rather that the €3.1 billion that was originally targeted. They say the difference will be made up by resurgence in the Irish economy. That should sound like good news to us all.

For many weeks the figure mentioned around Leinster house was 2.8 billion so the extra reduction might signal some kind of victory for those proposing a somewhat easier budget. It allows a good news story today but it has some problems beneath the surface.

Firstly, the figure of €2.5 billion is certainly as low as the government can go without getting the troika and markets completely spooked. This means that the government is taking a bit of a political gamble. They had some options here. It could be argued that they should either cut or raise that little bit extra in order to give them a cushion in next year’s figures. It is very important that the budget figures do not go off track in the coming year and fail to meet targets as happened the last time we were in the markets. If this happens our so called return to the markets may be a short lived one.

Ireland is undoubtedly at the very limit of the austerity it can take and the government seems to have decided that it must ease this as much as it can right now and it could not afford banking anything for next year. It does mean that there is no wriggle room in these figures. Everything has to work out exactly as we predict. Unfortunately fate has not always been kind in that regard. Ireland is still at the mercy of the world economy. If things pick up there then Ireland can accelerate quickly, however if they don’t or if the world situation dips, Ireland suffers more than most.

So, a political decision has been taken and it may represent the government efforts to restore its image. Surely this is also good news for Labour? On the surface it is. There is another problem though. €2.5 billion still represents a lot of harsh cuts and taxes. The €600 million difference can look paltry by comparison. Then there is the problem of presentation. Today, labour and others can praise the fact that they eased the austerity. However, we don’t know what that easing represents. It is impossible to state now what cuts are off the table as a result of this change.

Once the budget is delivered people will be annoyed at how it affects them. Telling them it could have been even worse will not really appease that. Without being able to put extra services on, or reinstate services, then this €600 million becomes nothing more than an illusion to the voter. How does a government make a good news story on budget day? Picture the quote being ‘Yes we cut the number of teachers and will close some hospital services, but on the upside we could have been closing entire hospitals’. Doesn’t really work does it? In fact it makes you feel even worse and probably angrier.

Now the government has one short term advantage. In the modern age, Budget day itself is never as bad as we expect. We live in terror of it then we hear the headline figures and it doesn’t seem too bad. The implementation of those figures and the detail behind them only becomes apparent as the year progresses so we don’t feel the pain or anger until the budget is long over and we then start paying the price. This gives some breathing room to a government. Their main task must be to avoid a big ‘headline’ issue. Like the medical cards were for FF in the past. It must stop any single cut or tax raise causing consternation on the day. That is achieved by keeping them all a bit vague or else highly complex.

The problem with the upcoming budget is that Ireland is at its limit and the difference between €2.5 billion and €3.1 billion will be lost on many that the budget affects. The economy has been cut to the bone, services are threadbare, those on welfare are in danger of going under completely, those with mortgages are just hanging in there, those on low to middle income jobs have been squeezed so much they are ready to pop. Any move, however slight is going to hurt deep now. It wont be forgotten either.

The government will gamble that it can do this budget and the next 12 months will see a significant change in the economy and a glorious return to the markets. If it works then they can be well pleased. However, since this crisis began, every government decision has been hoping for a change in the next year. A few more stable figures and markets making demands, as opposed to the troika, might sound good to the politicians but it won’t make a jot of difference to the people. Unless it’s going to put money in their pocket they will find this hard to accept and it’s difficult to see any money arriving in pockets anytime soon.

In 1989 FF faced the country having spent the previous 2 years stabilising the economy. That government was widely regarded as having done a good job with a little help from FG in opposition. The figures were improving. FF however, lost seats, not many, but it still hurt. Despite their work, nobody cared because people were still suffering the pain. In 1992 the outgoing government was pointing to a big improvement in figures and economic growth. That election was decided by the question of trust, ethics, honesty and a desire for change. The slowly improving economy was still not putting enough money in pockets for people to forgive the government the things they held against them. In 1997, the outgoing government faced the people with the economy improving steadily, complete budgetary stability, ongoing improving growth and increased spending. They too were pushed aside as the debate raged about tax decreases and how to spend money now. In fact the only government to benefit from an economic boost was in 2002 and this was because it came at the very height of the boom when pain was a distant memory and good times were rolling. We are a long way from that point.