Monday, February 22, 2010

Shifting Sand - economic mismanagement is catching up on this govt.

Recently I commented that the Govt. had managed to create a sense, at least, of stability but that it was in danger of seeing its story on the economic crisis and how best to handle it start to spin out of control with the likelihood that this would provide some new opportunities to challenge their economic prescriptions.

Well so much for stability. Some fairly boorish action in the Leinster house debates about o’Dea (he of Limerick regeneration project fame) demonstrated that the Govt. believes the old Brian Cowen approach of barracking down all challengers will keep on working. That will likely be a big mistake.

But what about the unravelling of the Govt. economic narrative which has been so carefully built up to centre around debt reduction and bond holder appeasement at all costs, even at the cost of a more thoughtful response. Any signs of that story line slipping?

Well, firstly, for me a reasonable fear was that Fianna Fail would perform the usual trick of holding on long enough so as to be able to sell themselves as having stabilised the economy and sown the seeds of recovery. Setting up the bond holders, an external force, as the main protagonists and describing the crisis as externally created would have allowed this possibility nicely.

However the best laid plans oft go awry. Patrick Honohan the newly appointed Central Bank Governor is proving himself to be independent of his appointer (and from what I can gather of him it is not unexpected) which is not helping the govt.

In a speech to the British Irish Parliamentary conference Honohan has been talking about the similarities between the Irish and British crises. For the govt. it represents another shift away from their version of events and further creates a tone of public discourse where alternative economic policies can be offered without immediately being dismissed simply because they are not from the govt. I think specifically of the €4 billion magic number for budget cuts last year. The govt's cuts agenda, their economic story, was the yardstick by which all others were measured. They were in control and its that level of control which allowed a successful steering through of the budget.

But that control continues to weaken. Straight of the bat Honohan highlights the key issue stating

“the crisis has served to expose strikingly similar pre-existing vulnerabilities in our economies – not shared by most others in Europe – which would sooner or later have led to trouble even if it had not been for the global meltdown”.
Well Governor Honohan please have a word with the Min. of Finance and an Taoiseach who will strongly disagree with that. You see Governor the crisis is solely a product of external agents and events. Well Honohan is having none of that and punctures that myth as well in no uncertain terms. As he himself says his speech is not about “questioning the largely-home-grown nature of the Irish credit bubble”

He specifically highlights the “wide-ranging imbalances created by a credit-fuelled property boom”, “growing dependence of the financial sector on wholesale market-funding, increasingly in the form of foreign borrowing” and the over reliance on transitory tax revenue to fund expenditures.

And what might have created such imbalances. He suggestion is that its directly as a consequence of Govt. tax policy:

Tax incentives for developers and homeowners have long been a feature of the Irish taxation system and must have contributed significantly to the oversupply of houses which now exists, especially in parts of the country where underlying demand is likely to remain weak for many years to come.

We’ve examined the impact of imbalances as a consequence of a credit fuelled property boom and poor tax policy before and its a costly mess that can be squarely laid at the feet of this govt. Honohan points out

"Even before the global crisis metastasized in September 2008, Irelands fiscal position was coming under pressure, not just because of an accelerated expansion of spending in the previous few years, but especially because of the sharp fall in tax revenues which began soon after the property prices started to turn down."

How poor the govt tax strategy of relying on windfall taxes is demonstrated by the collapse of the tax tale from 24 per cent of GDP in the first seven years of the new millennium to 20 per cent of a greatly reduced GDP by 2009. In his words there was an "excessive reliance on revenues related to the value of property transactions."

For Patrick Honohan, Governor of the Central Bank of the Irish state there are some clear culprits as to who is responsible for this situation.

And if the two Brians think that this is just a one off bad report then they had better not read the Davy report just published which highlights the wasted wealth of the boom years as reported by Taft

That and add in the Docklands report as highlighted by Mary Lou and it seems like some sand is beginning to shift under this govt.

We have waited a while for the mismanagement of the economy to catch up with the govt. Finally it seems the general discourse may be starting to focus on the real villans in this piece.

That should allow SF sufficient room to carve out its own niche by providing a progressive analysis rather than being forced to explain its economic policies on the govt. terms

No comments:

Post a Comment