Sunday Business Post | Irish Business News

Breaking News Business Ireland World Sport Weather

Navigation (Home)News News Features The Market Media & Marketing Comment & Analysis Computers In Business Profile Property Motoring Agenda Letters

People In Business Budget Forum Events / Conferences Company Reports Tools Crossword Search the archives Newsletter IMODE RSS

Text-Only

As panic fades, gloom sets in
Sunday, November 02, 2008 By Pat Leahy, Political Editor
Juvenile Dáil debates on education cuts are not helping to drive home the message of our desperate situation.

Brian Cowen’s embattled government re gained some equilibrium last week, following a disastrous post-budget period which culminated in last weekend’s astonishing Sunday Business Post/Red C tracking poll.

The poll recorded the lowest-ever level of support for Fianna Fáil and a seven-point lead for Fine Gael.

Cowen’s administration remains under the most intense pressure that any government has experienced since the early 1980s and, as lobby groups target backbench TDs to protest against budget cutbacks, it remains in danger of collapsing altogether. But not as much as a week ago. The atmosphere among senior government figures who spoke to The Sunday Business Post last week was gloomy, but no longer panicky.

Given the current level of pessimism and fatalism in government circles, ministers and TDs were just happy to make it to the end of the week.

What happened last week is that Cowen and his government began to communicate to the public the appalling state of the public finances. In a speech last week in Dublin, the Taoiseach said global economic financial conditions were the worst they had been for a hundred years.

Crucially, the government has begun to link the fact of the economic situation to the cutbacks in government spending - something it had failed to do effectively, before and immediately after the budget.

Despite the rowback on another budget measure - a cut in payments to 16and 17year-olds with disabilities - the government stuck to its guns on the education cuts, rallying for a Dáil private members debate.

Though some aspects of the education cuts were - as some government TDs admitted privately - bad policy and bad politics, the TDs are beginning to understand that the scale of the economic problems will make many of the current contentious cutbacks seem like small beer in the year ahead.

Politically, it is astonishing the government did not communicate this effectively before it unleashed a harsh and hasty budget. But that’s just politics, and it doesn’t change the economics. In fact, it’s the economics that will change the politics.

The global financial crisis and the rapidly deepening domestic economic downturn is already having profound effects on Irish politics. In time, when the effects have fully worked their way through, many of the accepted public policies of the past two decades may be rewritten. The political landscape that has largely endured since independence may be remade.

The scale of the change suggested by last week’s opinion poll is staggering. One poll is just one poll, but while some of the froth may come off the public anger about the budget, the cutbacks and reduction of public subsidies and services will continue, and that is what’s driving the swings in the public mood.

The indications are that the government is in line for a period of deep and lasting unpopularity, which may remake the old two-and-a-half-party system into something altogether different. This may seem unimaginable, but it’s the sort of thing that happens all the time in democracies, and it tends to be more likely in times of extreme economic turmoil.

Economists are divided on whether the financial crisis and the associated recession into which the world is now tripping will be just one of the worst in modern times, or the worst. A forum of economists assembled by the Financial Times last week had different assessments of the dangers, but all agreed that the risks of a global depression equal or worse to that experienced in the 1930s were very real.

Some participants, including Jeffrey Sachs, cited Ireland as an example of a country where the bursting of a housing bubble would worsen the effects of the global crisis.

Another, Martin Wolf, warned of the danger of ‘‘a slump, as a mountain of private debt in the US, equal to three times GDP, topples over into mass bankruptcy’’.

He continued: ‘‘The downward spiral would begin with further decay of financial systems and proceed via pervasive mistrust, the vanishing of credit, closure of vast numbers of businesses, soaring unemployment, tumbling commodity prices, cascading declines in asset prices and soaring repossession.”

This isn’t economic gobbledegook or doom-mongering. This is the world we now live in. A global depression on the scale of the 1930s isn’t certain, but it’s a real danger. In any event, there is little that Ireland can do except try to put its own house in order, to minimise the effect on Irish people and position itself for a recovery.

This is the situation that Irish politicians and policymakers are dealing with. In the face of these possibilities, the government’s clumsy attempts to bring the public finances under control are only the start of what is coming.

We will still borrow far more than we earn next year to spend on running the country. Even as the government raises taxes, the revenue from those taxes is plummeting. It is becoming clear to politicians that further huge cuts in public spending will have to be made, probably in the first half of next year.

Next year, according to the budget sums, we will have to borrow€4.7 billion to fund current spending - the day-to-day costs of running the country.

When you add further borrowing to fund capital investment (roads, schools etc), total borrowing will exceed €12 billion - out of the €64-odd billion that the government will spend. There is a strong case for borrowing heavily to fund investment during a recession; but borrowing indefinitely to fund current expenditure is unsustainable.

It’s a recipe for disaster, for national bankruptcy. This is a real prospect: the list of countries calling in the International Monetary Fund grows by the week. They are countries that have lost control of their finances. That is the risk.

The playbook from the 1980s is beginning to look depressingly familiar. 1) International economic forces expose weakness in the national finances. 2) The public finances deteriorate rapidly 3) The government is unable or unwilling to reform its finances, and continues to increase borrowing substantially to fund day-today spending 4) Only with the country on the verge of insolvency does the government and society face up to the economic realities and impose massive cutbacks on public spending - by which time the country has been damaged politically, economically and socially for a generation. This is the prospect we now face.

This is becoming plain to politicians and policymakers, both in government and outside looking in. Last week, in the space of ten minutes, The Sunday Business Post had virtually identical conversations with two people, one a government adviser, the other a prominent opposition politician, both speaking frankly about the need to cut public expenditure next year.

Government TDs and ministers are unhappy and uncomfortable about many of the cuts, and about the many more to come. But they are also coming to believe that there is no alternative. But the public and political debate is some way behind catching up with the economic reality.

Despite the grim realities of the world economy, and for all the potential for historic political change (and the signpost of last weekend’s poll), in the Dáil, it was politics as usual last week.

Much of the private members’ debate on education was juvenile, demonstrating how unfit the Dáil can be as a policymaking forum. The debate was timed to coincide with a demonstration outside Leinster House, by teachers and parents against budget cuts.

The exchanges rarely got beyond name-calling and posturing, with government deputies donning the unfamiliar and unconvincing guise of fiscal restraint, after a decade of incontinence, while opposition representatives spouted platitudes about attacks on children.

Considering the abuse that has been heaped on him in the past fortnight, education minister Batt O’Keeffe acquitted himself reasonably well, even if he was defending a package of budget measures designed by the Department of Finance without the merest hint that it had been proofed for political impact or, more seriously, for its educational consequences.

Joan Burton, one of the more intelligent and able members of the house, read out a letter from a schoolgirl who said that if her teacher were sacked, she would be sad. Politicians have often bemoaned the fact that modern politics has eroded the central place of the Dáil. Sometimes, it’s easy to see why this has happened.

These private members’ debates on budget cutbacks look likely to become a feature of parliamentary life, but they would appear to have little constructive to add. Readers anxious to keep pace with the important developments in Irish politics would be better advised to watch the monthly bulletins from the Department of Finance about the state of the national finances, and read the international financial press for news of what is happening to the world economy.

Still, the education sector is worth looking at as a microcosm, not just of the way the public finances are spent, but of how they are now being cut back.

Some 80 per cent of the education budget goes on salaries and pensions. Under current budget plans, every one of those public servants will receive a pay increase next year, costing some €300 million.

Many will receive an increment - that is, their salary will be increased because they have been two, or five, or ten, or whatever number of years in the job, costing another €100 million, said Fine Gael, which called for a freeze on those salaries.

Teachers’ state-funded pensions are worth an additional 20 or 30 per cent of salary - probably much more now, given the collapse of private pension funds. And they can’t - save in the most extraordinary circumstances - be sacked.

Teachers also receive a payment of €1,789 for supervision and substitution that they used to provide as part of their jobs. Many will also be promoted, not by competition, but based on how long they have been in their school, though the Department of Education says it wishes to end the practice of promotion by seniority.

None of this is to pass judgment on any of the arguments that the teachers’ unions have been making in the past week - some of the cutbacks to school-book allowances and resource teachers are almost incomprehensible - but, as employment tumbles in the non-state sector of the economy, these are things we will hear more about.

Because the political realities of partnership Ireland mean that public sector pay, numbers, conditions and pensions are untouchable, cutbacks hit items like book allowances in the discretionary, non-pay parts of the budget.

But those political realities are changing. In the midst of further cutbacks, teachers and other public servants will find it increasingly difficult to justify any pay increases next year.

Fianna Fáil may be slipping into uncharted waters
Is it possible for Fianna Fáil to dig itself out of the trough that last weekend’s poll suggested the party has fallen into?

Certainly, Fianna Fáil has been deeply unpopular before, and it has been mistrusted before. During the global economic slowdown after September 11, 2001, the government slashed the growth in public expenditure. This led to a period of unpopularity that lasted until just before the last general election.

Fianna Fáil received just 32 per cent of the vote at the local elections in 2004 – an historic low for the party – which caused it to lose nearly 100 local authority seats.

But economic growth never actually contracted in that period: in 2002, the economy grew by 1.4 per cent, and in 2004, it grew by nearly 5 per cent. The public spending growth that was demanded by powerful and vocal lobbies – facilitated and amplified then as now by the media – was moderated, but continued to rise.

The situation in which the country now finds itself is altogether different, facing contractions in the economy this year and next year. If things turn out to be remotely as bad as many economists expect them to be, then Fianna Fáil has certainly not been here before. In that sense, last week’s poll may turn out to be more than just a blip – it may be the new political reality.

Click here for Sunday Business Post stories before this date