OPINION:IRELAND IS now four years into the deepest economic downturn in modern times. The Government cannot finance itself without reliance on official lenders, the EU and the International Monetary Fund (IMF).
The rest of the economy is effectively in the same boat: the debts of the household and business sectors to the bust banking system are also being financed in emergency fashion through the European Central Bank.
Both public and private expenditures have been squeezed. Since there is no likelihood reliance on non-market financial support can be brought to an end any time soon, it follows that neither public nor private spending has been squeezed enough.
Indeed, had non-market external finance not been available to both the government and the banks, the squeezing could not have been deferred and living standards would have crash-landed in October 2010.
The public, willing consumers of spoon-fed Celtic Tiger rhetoric for a decade, has shown no appreciation that things could have been much worse. Purveyors of the daily diet of complaint (“austerity has failed”) promise, but never articulate, a coherent alternative.
The volume of consumer spending has declined by about 13 per cent from the bubble peak in the final quarter of 2007 under the combined pressures of government expenditure cuts, tax increases, job losses and pay cuts. This reduction brings living standards back to roughly the mid-bubble level of 2005, at which point living standards in Ireland were higher than in most European countries and higher than they had been before.
There should be no nostalgia for the few brief years of unsustainable and credit-fuelled excess as the bubble went into extra-time. The correction in living standards has not been enough to restore financial viability, so there will be further reductions before the bottom is reached.
Some households have experienced severe financial hardship and shuddering adjustments to living standards, while others have been more fortunate. The fortunate tend not to contact radio phone-in programmes or the constituency clinics of Dáil deputies. There is a permanent risk that media coverage gets monopolised not just by those in genuine distress but also by those with a political shopping-list.
The groups which have been hit hardest are easy to identify. If you worked on a building site a few years back, there is a high probability you are either in trouble or in Australia. If you are still in Ireland and borrowed on a variable rate mortgage, your monthly repayments are now higher than they were when you took the mortgage out. Many could tick all the boxes: out of work, in mortgage arrears and in negative equity. If your partner is also out of work, this is indeed the perfect storm.
The silent winners are, however, quite numerous. Social welfare rates of payment have been cut and scheme rules tightened, but not across the board. State and public service pensioners have been spared the cutbacks. Even high-income pensioners have had free medical cards restored. But pensioners reliant on funded occupational schemes are not so lucky: most schemes are underfunded and benefits are under threat – a situation exacerbated by a government levy on funded schemes.
The winners are those far-sighted enough to choose careers with employers who do not pre-fund for retirement, which means the public service.
If you borrowed to buy a home in mid-bubble but were lucky enough to opt for a tracker mortgage, your monthly repayments are now lower (in some cases, considerably lower) than the deal you struck initially. You are likely to be in negative equity of course, but the lower repayments are a big help.
Most of those who borrowed at the top of the bubble are on trackers, with interest rates as low as 2 per cent. The good news is the weak economy in Europe should keep tracker rates low for at least another year or two, so there have been winners as well as losers in the mortgage lottery.
Total employment in construction alone is down more than 160,000 in the last four years, with large falls also in industry and in most areas of private sector services. But employment has actually risen slightly in the combined sectors of public administration, education and health, the areas of activity dominated by the public service.
For workers outside these areas, the risk of job loss has been high, while redundancy for government employees has been ruled out by the Croke Park agreement. Even with pay cuts, public service employees are winners in the job security stakes.
This year the budget gap is expected to be under 9 per cent of gross domestic product (GDP) – the value of all goods and services produced within a country – a small improvement on last year’s outcome, but quite unsustainable.
Neither official lenders, in the shape of the EU and the IMF, nor the sovereign credit markets will finance continuing deficits for Ireland. One of the few predictions that can be made with confidence is the budget deficit will be zero in four or five years from now. In any plausible scenario for economic performance, this means more spending cuts and more tax increases.
The “Ireland’s Squeezed Middle” series carried in The Irish Times over the last week divides the community implicitly into three groups. The middle: squeezed to excess, it would appear; the poor: presumably to be spared squeezing; and the rich: promising squeeze material, but rather less numerous than a few years back.
If the bottom 20 per cent are to be spared, and the top 10 per cent unlikely to deliver 8 or 10 per cent of GDP on their own, it follows the 70 per cent who self-select themselves into the middle class are due for further reductions in living standards.
The only scenario in which this might be avoided is a sudden return to rapid and sustained economic growth. In an uncompetitive economy burdened with public and private debt, this does not look likely.
The best hope is that austerity is accompanied by the reforms that will build a platform for recovery once the budget deficit has been eliminated.
Colm McCarthy lectures in economics at University College Dublin. He chaired the government-appointed group which prepared the “An Bord Snip Nua” cost-cutting report