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Posted in Economic Policy News
12 October 2008
It is no exaggeration to say that people in Ireland are in a state of shock at the suddenness and severity of the downturn in the country’s economic situation. In so far as we thought about ‘Ireland after the Celtic Tiger’, most people assumed it would be a time where growth would be slower, but more sustainable, where there would be ‘a soft landing’ for house prices, and where the gains of the boom years would be consolidated. We did not envisage an economic recession, a deep and widespread crisis in the financial system, a sharp rise in unemployment, and considerable anxiety about the future.
In the face of the economic downturn we are now experiencing, many people are questioning the nature and the value of the economic boom which the country experienced for so long. There can be no doubt, however, that sustained economic growth over more than a decade resulted in considerable gains for the country. Job creation on a scale never before experienced by the country brought an end to mass unemployment and emigration and created job opportunities for young people leaving school and college, for tens of thousands of migrant workers, and for people wishing to work part-time. A rise in incomes from work pushed up living standards for the vast majority of the population. Increased social expenditure resulted in new or improved programmes in many areas of education, health and social care. Overall, economic success brought a new pride and confidence in our abilities as a people, individually and collectively.
However, this picture of the years of prosperity was only ever part of the story – although while the boom lasted it was often difficult to get a hearing for the other part. In many respects, the fruits of our economic growth were very unequally divided, and were often weighted more towards individual consumption and gain rather than towards improving the overall quality of our infrastructure of public services. For example:
- While almost all groups, including people dependent on social welfare payments, experienced an increase in incomes, the pattern of income distribution continued to be characterised by a high degree of inequality. Ireland remained a country with a much more unequal distribution of income than many other European States. In terms of income from earnings, for example, Ireland ranks as the most unequal of the Member States that made up the EU-15.
- As overall personal wealth grew during the boom, the reality of the extreme concentration of this wealth was often obscured. In 2006, 20 per cent of the wealth of the country was held by 1 per cent of the population; 40 per cent was held by 5 per cent of the population. When wealth arising from the ownership of a home was excluded, the degree of concentration was even greater, with 1 per cent of the population owning 34 per cent of household wealth.
- In a context where credit was vigorously marketed by financial institutions, many people met rising expectations regarding living standards by entering high levels of personal debt, often by availing of unsolicited loans.
- House building reached record levels, but the price of housing went up and up, locking many out of the chance of becoming a home owner and locking others into ownership on the basis of costly and extended mortgages, often for homes that were far distant from people’s workplaces. In the face of lengthening waiting lists for social housing (by 2005, these stood at 43,684 households, as against 27,427 in 1996 – an increase of 52 per cent), many times more houses were built for second or holiday homes, or for investment, than were built for social housing. Although there were improvements in emergency services, some homeless people were unable to obtain emergency accommodation or felt they would be unsafe in the accommodation offered and so remained on the streets. Even when emergency homeless services responded adequately, as they frequently did, the shortage of social housing and the cost of private rented accommodation made it extremely difficult for people to move on to a permanent home.
- Significant increases in public expenditure on health services failed to make up for the deficits of years of under-investment, and many people continued to be denied services or to experience long delays in accessing them. Rather than seizing the opportunity presented by economic prosperity to begin to change the inherently unjust structure of a two-tier health system, several policy decisions – for example, hospital co-location – actually consolidated and extended that two-tier system.
- Despite many positive developments in the education system, including initiatives to address educational disadvantage, stark differences in educational outcomes persisted, with many children, especially from the poorest areas, leaving school with poor levels of literacy and numeracy and few qualifications. Promised reductions in class size were only partially fulfilled and many children continued to receive their education in seriously substandard school buildings.
- Ireland’s economic boom was accompanied by serious damage to the environment, with a huge increase in domestic and industrial waste, threats to flora and fauna, and an uninterrupted increase in carbon emissions, which has given us the unenviable distinction of being one of the world’s most climate polluting countries per capita. We are falling short of key international targets for the reduction of waste and carbon emissions and for the improvement of water quality.
Values – then…
Underpinning the decisions we individually and collectively made during the years of economic prosperity were a number of core values. We valued wealth creation, economic success, enterprise and job creation, personal initiative, competitiveness. These are, of course, positive values, without which the economic growth and the good it produced would not have happened.
However, taken to the ultimate limits, the outcome of subscribing to such values can be a predominance of self-interest, rampant consumerism, overarching materialism, opportunism – and greed.
In some of the decisions taken by individuals, by businesses and by Government in the Ireland during the boom years there were signs of an over-weaning reliance on the force and flexibility of the market and an absence of concern for the common good, of a sense of social solidarity, of compassion for those who were poor or vulnerable.
… and now?
Great uncertainty exists as to what policies can and should be pursued in the context of the current crisis. However, what we can be certain about is what will happen if we as a society continue to adhere to some of the values that were allowed to gain ascendancy during the boom. It goes without saying that we must continue to value initiative and business skills, but it is also essential that we do not allow self-interest, the protection of sectional concerns, and the bowing to the wishes of the most powerful to predominate at this time. Such an approach would inevitably mean that those who have little, who are most vulnerable, who have least power, would find their incomes and social supports reduced, even as basic necessities, such as food and fuel, on which such households have to spend a high proportion of their income, rise in price. To put it another way, such an approach would mean that those who had gained least from the economic boom would be asked to pay most in the downturn. This would not be acceptable.
Now, more than ever, we need to reassert the importance of the values of social solidarity, fairness, and compassion. We need to see ourselves as citizens with a shared responsibility for the common good, not economic actors, valued for what we own, and not consumers, valued only for our spending power. In a time when everyone in Irish society will feel the effects of the downturn – and would prefer not to – those who are better off need to be aware that there are others who have a greater moral claim to be insulated from the impact of recession. Without this public awareness, the environment necessary for policy responses which may be difficult and unpopular, but which are just and in the interest of the common good, will not exist.
The Forthcoming Budget
An immediate test of our willingness to place solidarity and fairness to the fore as we address the problems the country faces, will be the Budget to be introduced to the introduced in the Dáil on 14 October. In the context of a budgetary shortfall that will run to billions this year and next, how is a balance between national income and expenditure to be achieved?
It is accepted that tax increases are inevitable. But where will those increases fall? There will be a temptation to focus on increasing indirect taxes. Yet depending on the items targeted, such taxes bear most heavily on those with low incomes, since they are not related to ability to pay. Any policy of increasing indirect taxes must be directed towards non-essential goods and services.
After more than a decade of cuts in income tax, both people and politicians may be inclined to see any reversal of this trend as unthinkable. But what ought to be unthinkable is a reduction in the real incomes of the people who are poorest and in the services provided for those who need care and support. Yet the latter is already happening, with some projects facing closure and others having to reduce services because of cutbacks in funding.
We need to remember that the reduction of the highest rate of income tax from 42 to 41 per cent is of very recent origin, that this move was not in response to any widespread clamour for such a decrease, and that no economic argument was made for the change. Yet this reduction cost the Exchequer €500 million. The re-introduction of a top rate of 42 per cent, certainly on the higher incomes, is an option to which the Government must give serious consideration. Furthermore, given the size of the rewards paid to the very top earners over the past decade, there is surely a case for considering a rate even a few points higher for this very privileged group.
As the Government searches for ways to address the problems of the public finances, there is a strong case for now targeting ‘tax expenditures’ – the mechanism through which individuals can reduce their tax liability. In terms of social justice, as well as potential yield, a particular focus should be the array of tax incentive schemes, which by definition are of greatest potential benefit to those who are already well-off. Over several years, questions have been raised about the economic and social value of these schemes and the manner in which some of the wealthiest individuals in the State have been able to use them to drastically reduce or even eliminate their tax liability.
Leadership by Example
Cutbacks in services and increases in taxes would be a little more palatable to the general public if those who make the decisions were seen to be taking their share of the pain. Our politicians must recognise the symbolic importance of their being willing to sacrifice some of the considerable financial benefits they enjoy, in a context where we are told all areas of public expenditure must make savings.
At this time, we need to ask: does the effective functioning of Government require that all TDs be paid €50,000 a year in untaxed, unvouched expenses at a total of about €30 million per annum? Is the payment of additional allowances to Chairpersons and Vice Chairpersons of Oireachtas Committees justified? Do we need the current number of Junior Ministers with the attendant costs of these positions?
Much of the economic crisis that now besets the country is the result of global forces over which we have no control. But if we are honest we have to acknowledge that some of our woes may be rightly labelled, ‘Made in Ireland’.
In a speech on 2 October 2008, the Taoiseach, Brian Cowan TD, said: ‘There is no doubt that this is a defining moment in our nation’s history.’ The question is how will this time be defined? What values will shape this period of our history – those that represent self-interest and sectional concerns, or those which reflect the common good and the protection of the weakest?
Over the next two years, at a minimum, sacrifices will have to be made and people’s lives will be affected by these. Both Irish society as a whole and the Irish Government must address the questions: ‘Which sacrifices?’ and ‘Whose lives?’ As we seek to resolve this economic crisis, are we committed to defending the interests and welfare of those in greatest need, and to generating revenue and making savings from those who can best afford it? Will those who benefited hugely from the Celtic Tiger be asked to give up some of their gains to ensure that the situation of people on low incomes and dependent on services is not made worse? Is our Government going to take the easy option and defer to those who can complain most loudly, or quietly use their political influence to protect their position, with the result that cutbacks will fall on those who have no voice and are unlikely to vote?
More broadly, part of the challenge of this ‘defining moment’ is to engage in serious debate about the overarching political and economic philosophies that should guide us through the current recession and into the future.
The ideology – pervasive for the last three decades – that government should have no role, or no more than a minimal one, in regulating the market is now giving way in the face of the global economic crisis. The wisdom of the maxim, ‘the market is a good servant but a very bad master’, is being acknowledged by an increasing number of people.
There is now a window of opportunity to re-assert that equality, fairness and sustainability have to be at the centre of our definition of development, and to debate in a more open way the balance required between business enterprise and State intervention, and between individual opportunity and collective responsibility, in achieving progress.
Posted in Economic Policy News