Last Thursday, Japanese and Irish business executives and scientists listened
in respectful silence as Brian Lenihan, the Irish minister for finance,
marked the 20th anniversary of the arrival of a pharmaceutical plant in west
Dublin.
Astellas, formerly Yamanouchi, opened in Mulhuddart in 1988, at a time when
the unemployment rate was 10.4% and overall unemployment stood at more than
230,000 - about 17% of the workforce. The fact that it is still operating in
the working-class end of Lenihan's Dublin West constituency 20 years on is a
milestone deemed worthy of celebration in today's uncertain economic climate.
Congratulating the firm on its longevity, Lenihan quipped: “You haven't come
of age, you've one year to go, of course.
“In Ireland you can only vote at 21, so you only have the right to protest and
scream comprehensively at the age of 21.”
Lenihan's ministerial colleague Mary Coughlan was pilloried during the Lisbon
treaty campaign for not knowing that Germany, France and Britain had
relinquished their second European Union commissioner in 2004. Lenihan's
gaffe was in a different league. It is 35 years since the franchise was
given to the republic's 18-year-olds.
Though his spokeswoman insisted later that the finance minister's comment
about 21-year-olds referred to their right to vote in the Dail, his gaffe
suggested a certain weariness on the part of the minister. He is only two
months into the finance portfolio, but what a two months.
Before he moved to Merrion Street, Lenihan was among those who had bought into
the notion that the Irish economy was headed for a “soft landing”.
Everybody, including Brian Cowen, his boss, had convinced us that was where
we were heading. Now we know different. So how did all the experts get it so
wrong, and does Lenihan have what it takes to put the economy to rights?
As Lenihan's constituency rival, Joan Burton has been watching the finance
minister's political ascent for almost 15 years. She was impressed by his
12-month stint in the justice department, where the Cambridge law graduate
introduced fresh ideas and put a distinctive stamp on the office.
However, after two months on Merrion Street, Lenihan has yet to emerge from
behind the mandarins' cloak of fiscal mystery, Burton believes. “His script
last week [in the nine-hour Dail debate on the economy] was pure Department
of Finance spin,” the Labour TD said. “I don't think there was any
initiative or flair in that speech. I saw nothing of his own vision or
approach.
“Essentially, he was being the finance mandarin, and finance strategy is
always to cut capital expenditure when revenue is tight.”
Dr Alan Ahearne, economics lecturer at the National University of Ireland,
Galway, puts little stress on who sits behind the finance minister's desk.
“I think we have had good policy makers, and the decisions don't depend on
one man,” he said. “There are going to be many people involved in the
decision making. But you can't make good policy without good analysis, and
that is vital over the next few [fiscal] quarters.”
Three years ago, Ahearne warned that an Irish property crash was impending,
while others were promising continuing buoyancy and growth. The economist
later poured scorn on the forecasts of a soft landing. Bertie Ahern, the
former taoiseach, promised one in the course of the last general election,
but he was not alone.
In an interview last December with Reuters, the financial news service, John
Hurley, the governor of the Central Bank, was still talking about a soft
landing for the economy and 3% growth in 2008, down from its October
forecast of 3.5%. That same intelligence probably fed into the Department of
Finance's budget day calculation that month of 3% growth in GDP.
“We were never going to have a soft landing,” said Ahearne. “This is a crash
in the housing market. Look at what is happening to price, to transactions
[volume], to building activity.”
Ireland can now be added to the list of classic modern property crashes, from
London and Boston through Scandinavia and Japan. The length of time we take
to ride it out, though, will depend on the banks' readiness to bankrupt
liquidity-challenged developers. Will they choose to flush the bad debts off
their books as soon as possible?
Analysts say serious inroads must be made into the overhang of unsold housing
stock - estimated to be at least 12 months' supply. There has to be a
decline in the value of the euro, and a fall in inflation, before we can
start supping skinny lattes with a clear conscience again.
In the meantime, the government is digging in, making retrenchment plans for
at least two years of little or no growth, rising welfare bills, and
stagnant stamp duty and CGT revenues. Poor forecasting means that the
remedial measures required are not in place. This is likely to increase the
pain before we get back to what government and the Central Bank like to call
“trend growth” of 4-4.5%.
A year ago, forward indicators such as planning permissions suggested the drag
on the economy from homebuilding was going to be significant in 2008, yet
many forecasters were still calling strong growth in the economy, which
Ahearne said defied economic logic and common sense.
Many private sector, rent-a-quote forecasters, he said, appeared to “make up
numbers on the way in on the bus” or simply followed the herd. Meanwhile,
there was a triumph of hope over realism in some state institutions, where a
fear of talking down the economy made them adjust their forecasts down
incrementally from quarter to quarter rather than produce a forecast “that
was consistent with rigorous analysis”.
Challenged on its December forecast last week, the Central Bank said: “We have
emphasised on a number of occasions that there were many downside risks and
vulnerabilities in our forecasts that could push growth lower.
“These risks related to the potential for interaction between protracted
global financial market turbulence, rising global energy and food prices and
the slowing of activity within the economy, which was already under way. In
recent months, almost all of these downside risks have materialised and this
has led to a greater than expected slowdown in growth and higher than
anticipated inflation.”
Dan McLaughlin, Bank of Ireland's chief economist, pointed out that everything
that could go wrong for the Irish economy had gone wrong: the credit crunch
has lasted a year, oil rose from $100 to $145 per barrel in the three months
to July, Irish equities have fallen 30% this year, the European Central Bank
(ECB) has raised rates despite slowing activity on the Continent, and
sterling and the dollar have remained weak.
As its share price crashed alarmingly last week, Bank of Ireland was again
cutting its economic growth forecast for 2008 - forecasting a flat year for
GDP, down from the 3% growth previously forecast - and predicting
unemployment would reach 6%.
Austin Hughes, the chief economist of IIB Bank, floated ideas such as
temporary income tax cuts, Vat reductions or even stamp duty cuts as a balm
on bruised consumer confidence. Ahearne is horrified at these notions, and
warns government to stay clear of economic advice offered through the media
for the coming two years.
“We should not have had tax cuts in the past few budgets - they added fuel to
the fire,” said Ahearne. “They increased disposable income and therefore we
had more consumer spending which was inflationary.
“It also allowed banks to give bigger loans, since they were doing that on the
basis of disposable income. When the economy is overheating, the last thing
you should be doing is tax cutting, but most economists were arguing for tax
cuts.”
Alan Cooke, chief executive of the Irish Auctioneers and Valuers Institute, is
among those who suggest that Irish banks are not helping the situation.
“Look at what has happened to property prices and compare it to what has
happened with equities as one of the main forms of investment,” he said.
“The banks are down 70% on the year, the others are down 40-50%, we
are down by 10% - I'd take that any day of the week.
“The only thing stopping much more activity in the market at this point is the
banks, because they don't have the money to lend.” They were no longer
lending to the buy-to-let market, he said, and they had increased margins on
interest rates by 0.25-0.35%, adding to the pressure on domestic buyers
already at the mercy of the ECB.
Richard Bruton's target in the economic blame game is much closer to home. The
Fine Gael finance spokesman accuses Lenihan of botching last week's surgery,
saying he is relying too much on capital spending cuts and has passed up the
chance to shut down or merge wasteful quangos. The government counters that
final decisions will be made in the autumn on the abolition or amalgamation
of existing state agencies.
Bruton blames Cowen for the more basic error of delivering four inflationary
budgets and trying to buy his way back into office in 2007 at the expense of
the economy.
In Cowen's last budget, in December 2007, his officials forecast growth of
¤1.5 billion in taxation while he increased spending by ¤5 billion. “When
the tax revenue collapsed, as it had to collapse, he plunged us into
appalling deficit,” Bruton said.
“Instead of being able to invest to bring forward capital projects to take up
the slack in the economy, he is having to slam on the brakes and slash ¤150m
off capital spending this year and ¤310m next year.”
During his final leaders' questions before the summer recess last week, Cowen
dropped ominous hints about the scale of the cutbacks still to come. “In the
context of the Estimates for 2009, further decisions may be required to make
sure that we have a sustainable public finance position going forward,” he
said.
“It is necessary for the government to do whatever is required to make sure we
work within the stability and growth pact principles [keeping borrowing
below ¤6 billion this year]. We have seen a deterioration of ¤3 billion in
our tax revenues this year ... we must work within the spending limits we
have set ourselves. We are not suggesting that this process is now finito,
that this is the end and that all members can sit back until next February.”
You've been warned.
