INSIDE POLITICS:The IMF supports the Government's approach – but that doesn't mean the public will find the measures palatable, writes STEPHEN COLLINS.
THE DAMNING indictment of the International Monetary Fund has exposed the stark political reality that Bertie Ahern’s second administration from 2002 to 2007 was probably the worst government in the history of the state. There were some bad governments in earlier times, but they had the excuse of struggling in times of adversity. How a government, riding the crest of the boom, could bring the country in five years to a condition that, in the words of the IMF report, “matches episodes of the most severe economic distress in post-World War II history” is something future generations will struggle to comprehend.
It was a dangerous combination of arrogance, incompetence and spinelessness that prompted the Fianna Fáil-Progressive Democrats coalition to pursue a range of policies that led inexorably towards disaster. The international financial crisis ensured the inevitable hard landing would turn into an economic catastrophe, but it is no accident that Ireland is in a far sorrier state than any other developed economy.
Of course, the Government did not do it all on its own. The social partners were active participants. Trade unions and employers colluded in encouraging the Government into a reckless bout of profligacy with taxpayers’ money that resulted in an unsustainable rise in public spending.
The creation of the property bubble, which in turn led to the Irish banking crisis, was encouraged by a spectrum of vested interests, ranging from developers to the media and from the trade unions to economic pundits. Those who attempted to point out that the emperor had no clothes were accused of a plot to talk down the economy.
Of course the voters endorsed it all by giving Bertie Ahern his three-in-row string of election victories. They have since taken revenge on his successor, Brian Cowen, but that was only long after the horse had bolted.
It is fair to say that the IMF, like many other prominent commentators, was not nearly as critical of Government policy at the time as it now is, with the benefit of hindsight.
However, there were enough warning voices, never mind the dictates of common sense, to have alerted even a half competent government that they were leading the country on the road to perdition.
To his everlasting credit, Fine Gael’s finance spokesman, Richard Bruton, was consistent all the way back to 2003 in exposing the danger of increasing public spending far faster than the rate of growth, allied to benchmarking without reform.
He was also consistent in pointing out the dangers of the rapidly inflating property bubble and its dire social consequences. He pointed out in his budget speeches year after year that the growing loss of competitiveness would do great damage to the country’s position in the long term.
On the other hand, most Fine Gael and Labour politicians attacked the Government for spending too little public money. Unfortunately, that is the way our adversarial political system works. The bottom line though is that the Government is elected to govern and the failures of its years in office are primarily its responsibility. The thrashing it got in the local and European elections was the electorate’s belated response to the Government’s mistakes. The scale of the drop in the Fianna Fáil vote and the fact that Fine Gael became the biggest party in the State for the first time should hardly have been a surprise, given the seismic economic changes.
The problem at this stage though, is that apportioning blame will not get the country out of the mess. Decisive leadership and a range of courageous and unpopular policies will be required for years to come.
The irony is that, despite its scathing criticism of policies past, the IMF is broadly supportive of the Government’s current approach. It backs the controversial bank guarantee scheme introduced on September 30th last, and broadly favours Nama as the best way out of the banking sector mess. The caveat that nationalisation may have to be considered at a future date simply echoes Brian Lenihan’s own approach outlined in his emergency budget speech. The IMF calls for a scaling back in the scope of Government activities and improved efficiency of the public service, as well as a broadening of the tax base and a reduction in labour costs.
“Episodes of large fiscal adjustments that focused on expenditure cuts, particularly the wage bill and social transfers, have been better sustained than tax-based consolidations and have often been expansionary rather than contractionary,” it says.
In blunt terms, the IMF is telling the Government to cut the amount of money it spends on public service pay and welfare, rather than relying on further increases in taxation to bridge the gap in the public finances. This is an endorsement of the Government’s approach, but that won’t make its implementation any more acceptable to a truculent electorate. One of the problems is that the public does not appear willing to accept the necessary tough medicine from the Government – but postponement of necessary action will only make things worse.
Over the summer, the so-called An Bord Snip and the Commission on Taxation are expected to make recommendations aimed at making public spending more efficient and at widening the tax base. Immediate action will be required on both fronts, whatever the political risks involved. The courage and competence of the Government will be tested, but the response of the Opposition parties and the social partners will also be a test of their competence and patriotism.