1 RESOLVING THE ECONOMIC CRISIS Paul Sweeney Economic Advisor, Irish Congress of Trade Unions AGSI Athlone 18 Oct 2010

2Outline Ireland has a good, (not sound) modern real economy But the Govt blew the boom, bigtime! Now - compounding the mistakes of the boom - deflation

3 The Tiger Phase – A Golden Era The Celtic Tiger phase of growth was always temporary – catch up. There was a real boom for 15 years to Growth lifted Ireland on to a modern plane. But seeds of destruction were sown from late 1990s – deregulation, privatisation, pro-cyclical tax-cutting, tax breaks.

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5 Wrong Policies Pursued l Interest rates, set by ECB were too low l Banks behaved badly – lending furiously l Financial Regulator was fast asleep l Govt. pursued strongly pro-cyclical policies –Cut taxes in Celtic Tiger Boom and –gave large tax subsidies to property investors –allowed Financial Regulator & banks’ to misbehave l Govt. boosted the Property Boom-Bust l Government blew the gains of the Boom

6 Labour market l Biggest fall in employment (and GNP) in OECD l Labour force participation rate falling rapidly (next) l Had it remained at 2007 level, rate of unemployment today would be c.21% l Youth unemployment has soared l Long term unemployment doubled l Emigration soaring l Private sector Hourly earnings rising very slightly l But with cuts in public sector and weak labour market, earnings down by 2% this year & no increase next year.

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8 Ireland – World’s Worst Performer l We cant blame Lehman Bros or US l Ireland’s collapse in GNP is worst in world l It is worse than Iceland on some numbers l Ireland’s GNP has fallen by one-fifth since 2007 when at €161bn. l GNP this €129bn will equal that of 2003 l Seven lost years of national income l Uncertainty - more to lose with bank subsidies? – give-in to bondholders? €?bns

9 Ireland – World’s Worst Performer cont- l Irish Govt policies caused the Domestic BOOM (2001/07) & bust (2008 to 2015?). l Bust could have been avoided l €58bn surpluses gone, now big deficits (-20% this year!!) l AND unparalleled subsidies for banks, while cutting welfare, health, education, pay, etc l When will we reach 2007 national income figure of €161bn again ? l 2018! If we achieve 3% growth pa, but GNP is still falling!

10 Source: CSO and Stability Report in Budget 2009.

11 The World is a Different Place l Governance system failed l Markets were so free that new rules were written by the key players for themselves l “Shareholder value” law for companies l Regulators failed, government failed, l Lack of coordination, eg no Financial Regulator in Eurozone

12 The World is a Different Place 2 l There are hard lessons to be learned :- l Government is back in market, as a main actor. l Bailouts far from complete. l Some banks, financials etc. should have been let fail. l Many businesses are failing, including some good firms. l Financial Regulators have finally woken up. l Governments are cooperating internationally on tighter regulation and market rule-making

13 Ireland Today l National Income has fallen by 20% from peak l Prices down but core wages hold in private s. l Unemployment up % and growing l Fiscal crisis, after binge of tax-cutting l Severe Cuts & tax rises not working l Package of wage and welfare cuts – Deflationary. l Lenihan - senior bondholders will not share any of the burden with Irish taxpayers!

14 The Wrong Solutions l Keep to 4 year period of Recovery l Front-Load the “Adjustment” (Cuts!) l Make it mainly cuts, not much taxes l Also cut investment further l Increase taxes on all earners, not high incs. l Do not burn Anglo+INBS bondholders l No real reform of corporate governance But Deflation has not worked and will not work

15 The Correct Solutions 1 l The 4 year Plan cannot be achieved (3%) l Do not Front-Load the “Adjustment” l Make it judicious cuts + taxes l Do not cut investment further, but boost it l Tax “broad shoulders” eg extend 2% income levy to corporate profits - €630m plus CGT, CAT etc l Burn Anglo+INBS bondholders by 90% + save €20bn to 24bn l Reform of corporate governance ie co law

16 The Correct Solutions 2 l Negotiate with bondholders of Anglo/INBS l Thus share burden + save billions l Difference between Sovereign & private debt l Lenders may baulk for a while l But we have €20bn cash and €24.1bn in NPRF i.e. to end 2011 – can avoid markets l Boost Solidarity Bond, auto-enrolment in pensions, PRSAs in state pension fund etc. for cash l Lenders will soon lend again after billions in debt reduction & when economy finally begins to grow again l We have endured 9 continuous quarters of negative GNP - Deflation as a policy has patently failed!

17 The Correct Solutions 3 l Front-Loading is Saturation Bombing – no green shoots for years after! l Economy is a dynamic organism -cant be cut to death to “make it” grow l Cuts vs Taxes debate should be over. –The Cuts Advocates have lost - it has failed to date. –But its adherents still are in office, in Finance, in Unis –Not so aboard, where “Stimulus” holds sway l Correct Answer is in between, but away from Austerity

18Conclusion l Deal with 3 crises as one - Jobs, fiscal and banking l Radically amend “Austerity Programme” l Less cuts & more focused tax-raising l Investment programme in infrastructure and in education & skills (€2bn from NPRF X3yrs) l New Public / Private paradigm l New Corporate Governance system l Social Solidarity + Rapid Recovery l Build on strengths' of the real economy – while dealing with fiscal and banking crisis

19Conclusion l Deflationary cuts will delay recovery –“the cure may even kill the patient” - Lex THERE IS AN ALTERNATIVE ends