OPINION:The budget provides a window of opportunity that will have closed by tomorrow evening, writes RAY KINSELLA
CONFIDENCE HAS been drained by the failure of three successive budgets to keep pace with the increase in the Live Register and with the burgeoning Government deficit.
The recent, albeit marginal, downgrading of Ireland’s sovereign debt rating by Standard Poor’s has further dented confidence. The biggest drain, however, is the new reality among domestic companies, particularly small- to medium-sized firms, that in the absence of decisive action by the Government they too will disappear. When such firms fail, they are gone. It is immeasurably more difficult to bring new start-ups to the same stage.
There is an obvious temptation on the part of the Government to frame a budget intended to impress or appease the financial markets. This would be misconceived.
Further expenditure cuts and tax increases will make little difference to the overall size of the borrowing requirement. But they will drive the economy – whose trading partners are also mired in economic crises – deeper into recession, eroding confidence and undermining the capacity of a stressed and debilitated business sector to stabilise, let alone recover.
Ireland needs a budget that is written, not in the Department of Finance, but in factories and on farms, in small businesses clinging to viability, and in family homes and hospitals.
Financial markets, whatever about their immediate reaction, will be more impressed by a country that holds its nerve and demonstrates a capacity to transform its mindset as well as its financial and regulatory system than one which rolls over.
There is an adjustment process well under way in the corporate and the household sectors which is not yet reflected in the Central Statistics Office (CSO) and finance data. Trade unions have a responsibility to maintain social solidarity. Many companies are talking to staff about how to mitigate the effects of an escalating recession on jobs.
Some companies will exploit this. Even more importantly, however, there is a new flexibility that can only be understood by individuals who have seen their friends and colleagues let go. There is a deep tide of empathy running throughout the country.
This adjustment is being stymied by the effects of a triple squeeze on Irish companies.
Firstly, there is a steep decline in demand, reinforced by uncertainty. Secondly, there is a ferocious pressure on cash flow as credit facilities tighten and companies are forced to act as creditors to one another. This pressure is breaking companies.
There is a real risk of a vicious circle of cash-starved companies failing, leading to more bad loans and further credit tightening.
This much is clear. Successive recapitalisations of credit institutions which are at the epicentre of Ireland’s economic crisis are neither feasible nor defensible. The provision of support to businesses should take priority over the allocation of costly and scarce resources to credit institutions that have already benefited from the deposit protection initiative and have had a capital transfusion of €7 billion into their balance sheet. Bringing companies back from the brink helps to strengthen banks balance sheets by reducing the probability of default.
Thirdly, by far the most important contribution that the budget can make to the survival of Irish companies and incomes is to reduce the administrative burden that is suffocating businesses.
It would cost nothing. Companies can no longer afford the kind of meaningless red tape that made no sense even in better times than now. This administrative “rent-seeking” is being driven by a mindset that is semi-detached from the lived experience of companies.
The banking system needs to be fundamentally changed. This could involve anything along a spectrum from an exchequer-capitalised “narrow bank” with a focus, not on shareholders (whose interests have been devastated by a malign corporate mindset that remains unchanged), but rather on the interests of depositors and businesses, employees and the public interest. Nationalisation may become inevitable.
In any event, the present structure needs to be changed to reflect the fact that systemically important banks are a utility whose stability is underwritten by the wider community whom they serve. The Government’s proposed “toxic” vehicle intended to strip out selected bad loans, underpinned by some form of insurance, is a necessary part of restructuring of balance sheets.
The household sector, too, is undergoing an adjustment process. The budget can either go with the grain of this process, or strain it to breaking point. A key driver of the crises is the secular rise in household indebtedness as a percentage of disposable income. This is now being reversed, both because of rising unemployment and the reality check brought about by the scale and suddenness of the recession.
John Kenneth Galbraith, in his iconic The Affluent Society, explored it best. He highlighted the distinction between “needs” and “wants”; how wants are driven by advertising and futile efforts to keep up with the Joneses; all of which is fuelled by indebtedness – until the whole process implodes. His analysis resonates powerfully with what we are experiencing.
In these circumstances, excessive cuts in productive (“needs”) spending and increases in taxes are counterproductive. The adjustment is already under way. It makes no sense to, in effect, take money from businesses and households, which have a higher propensity to spend and invest than do banks intent on rebuilding their balance sheets. Equally, further ad hoc cuts in service provision in healthcare and in education are indefensible, both in terms of economics and the common good. The effects of the health cuts of the early 1990s have never been exorcised.
The “old politics” which still dominate the political landscape – emasculated of their original values – make no sense to a new generation. The legislature cannot legitimately, and without consultation, push through unprecedented severe cuts without re-examining itself and how far it too has failed the country. There is much about the public sector and political institutions that makes no sense.
Tomorrow’s budget provides a window of opportunity that will have closed by tomorrow evening. The markets are more likely to give albeit grudging respect to a country whose fiscal policy facilitates on an adjustment process already under way – one reinforced by social and political transformation, including financial restructuring – than one which is transfixed in the headlights of the consequences of its past excesses.
Ray Kinsella is director of the centre for insurance studies at UCD’s Smurfit Business Graduate Business School