The Government liars and the Financial Crisis
16 January 2009
In our article on the impact of the economic crisis on the Irish State (‘The Irish State and the Financial Crisis’) we said that it would be unable, unlike imperialist States, to mount any sort of stimulus plan in an attempt to mitigate the crisis. Just to confirm this assessment the Irish Government announced a ‘plan’ to address the crisis - ‘Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal’. Journalists had great fun deciding just exactly what it was, but in any case a coherent plan of any sort it was not.
‘The Irish Times’ Miriam Lord put it most amusingly: “Here’s that plan in a nutshell: we are where we are. We know where we want to be. And with the right vision, a fair wind, attic insulation and a few holy candles, we might get there eventually.” The press conference to launch it was, she said, “lead balloon time.”
This judgement is not wrong. What the Government came up with is not a plan and is barely even a vision of the future, at least not one remotely credible. That it was not seriously meant to chart a way through the current economic storm was admitted by Government ministers again and again when they stated that it was designed to allow the State to prosper when the crisis was over and world-wide economic growth had returned. Of course the problem is that we are not there yet; and nor is there the slightest guarantee that what the Government likes to think is normal will eventually return.
It would be wrong however to simply ridicule the non-existent plan. By its very helplessness and paper-thin substance it reveals the weakness of the Irish State and its economy and thus the society that rests on top of it. The pathetic proposals contained in the ‘plan’ reveal the true character of the State.
The Government boasted of the ‘fiscal support’ it is currently giving to the economy, the €8.2 billion capital expenditure already planned in the National Development Plan, which is meant to be the Irish equivalent of the stimulus packages introduced in other countries. In fact this is simply a recording of one element of planned government expenditure that has evoked a crisis of public finances which the Government is frantically trying to fix. It will be lucky to survive intact, very lucky. To portray it as a bold response to recession is to take the infamous brass neck of Fianna Fail to a whole new level.
The ‘plan’ promises to broaden the tax base but this proposal is not elaborated on, and is just a back door admission that the public finances have become far too dependent on a rising property market, so that the percentage of tax revenues gleaned from property rose from 4% of total revenue in 1995 to 16% in 2006. The plan thus heralds, but does not specify, the increase in taxes that will be imposed on the general population
Tax increases however do not, never do, apply to multinationals, and yet more money was promised in the ‘plan’ to attract foreign investment. The Government is to reintroduce tax laws which allow multinational firms to pay workers outside the State and thus to avoid two thirds of the tax payable locally. This provision of the tax laws used to exist but had been rescinded because of widespread abuse. Looks like it is about to be abused again.
The Government also announced a €500 million investment fund to attract new businesses to invest in the State. The fund will run for 10 years, which makes its potential impact relatively slight, and is meant to operate in partnership with US venture capital funds. It will entail yet more tax benefits for multinational investors with a tax of only 15% on the capital gains of individual funds, the lowest rate in Europe. Additional tax breaks on intellectual property are planned for the next budget to follow these measures and those introduced in the most recent budget last year.
Tax cuts for multinationals and the promise of tax increases for everyone else plus huge cuts in public expenditure are thus the substance behind the barren rhetoric of the plan, with its 100 pages of buzz words on innovation and the knowledge economy. Peter McLoone, general secretary of IMPACT, the largest public sector trade union, said that there was nothing in the plan which the union could take exception to! In reality the key message of the press conference to launch the plan was not about anything that was in the text but the preparation of the Government to use social partnership to help introduce swingeing cuts in public services that are the Government’s way out of its crisis of public finances. And McLoone knows this perfectly well.
This crisis is very real. The turnaround in the finances of the State in the last year has been dramatic with a catastrophic fall in State revenue, going below the tax take received in 2005. Each new forecast of its dimensions is rapidly overtaken by the yet more disastrous predictions of the next. Especially stunning was the forecast of the Economic and Social Research Institute (ESRI) in December, all the more so because it has been very optimistic in its forecasts up until now.
Far from a return to the 1980s, which Cowen has ridiculed, the current crisis is very rapidly leading to a much worse situation. Unemployment has risen at its fastest rate on record, with nearly 120,000 job losses forecast for 2009. The worst year in the 1980s was 1985, when 24,000 lost their job. The unemployment rate will increase to over 10% in 2009 while 50,000 will emigrate. The General Government Deficit is forecast to increase to over 10% while the economy is to contract by 4.6% in 2009 after a slump of 2.6% in 2008. Public borrowing will rise to nearly €20 billion and the debt to GDP ratio will more than double on its 2007 level. Only one year ago the ESRI was predicting a growth in GNP in 2008 of 2.3%.
It must be said that these forecasts by the ESRI are not overly pessimistic, in fact quite the reverse, for they assume better conditions in the world economy than currently exist, or are likely to be present for some time. Just one statistic illustrates how bad it has become: in December there were more than half a million workers made redundant in the US – the worst year for job losses since 1945. Dependence on the British market when the British government has allowed devaluation of sterling will also make it harder for Irish companies to export there and has led the Irish Government to issue complaints about British policy. The effects of sterling devaluation go way beyond traffic jams of shoppers trying to get into Newry.
Since the most immediate focus of the Government is saving its State and cutting its own deficit (after of course having first moved to save the bankers and property developers) it is instructive to look at how this crisis of public finances has arisen. It is not because of some sudden rapid increase in expenditure. Between 1998 and 2006 total expenditure as a proportion of GDP (Gross Domestic Product – a measure of the size of the economy) was stable between 31 and 32 per cent, rising by 1 percentage point in 2007, due mainly to one-off capital expenditure. That this figure has now risen dramatically is due mainly to shrinkage in the economy and the dependence of tax revenue on a booming property market. The reason for the latter is the policy of tax breaks for multinational and Irish capitalists and relatively modest taxes on direct incomes offset by high indirect taxes which hit the poorest hardest but which have only partially substituted for low taxation elsewhere. This policy of low corporate taxes, far from being repudiated or reduced, is, as we have seen, to be increased.
What chance is there of this strategy working, as it appeared to do during the Celtic Tiger boom?
It is firstly worth recalling that the Irish State has had a policy of seeking foreign investment as a main source of economic growth and development for some time. The idea that it has been an unqualified success ignores the fact that it failed miserably during the 1980s. It succeeded in the 1990s because of an economic recovery in world capitalism, a growth in foreign direct investment and a growth particularly in mobile ICT investment.
Today there is a huge recession and much more competition for mobile international investment. A survey last year of foreign companies based in the Irish State, which was exposed following a Freedom of Information request, revealed that almost half of these companies said they would not choose the country again if they were to decide now on where to locate their business. A majority, 61%, would locate in Eastern Europe instead and 21% would locate in India. The high cost of doing business - the State is the fourth highest place in the world to live and shop - and the poor infrastructure - a legacy of underdevelopment - were cited as among the reasons.
Greenfield foreign investment projects declined 22% in 2007 from its 2006 level which was itself a fall of 25% on the previous year. The dependence of the economy on this investment however remains extraordinary. It is staggering to learn that despite the so-called Celtic Tiger 90% of exports are by foreign, mainly American, firms.
Ireland’s own high-tech industry in puny in international terms, with no indigenous company having a turnover of over $100 million. Its biggest company, Iona Technologies, was sold to a US firm in 2007, which is what tends to happen to successful Irish owned businesses. Instead Irish capitalists prefer to continue their transparently parasitic ways by turning the profits they make in Irish speculation to dealings in foreign speculation. For example, Irish investment in European property was €13.9 billion in 2007, a further reason for anticipating a deep and long recession. The shrinkage of world wide financial activities will probably also hit Dublin’s International Financial Services Centre very hard. The engine of employment growth for a number of years has been the construction industry (employment in construction increased by 605,000 from 2000 to 2007), but this sector now stares into the prospect of more houses being demolished this year than will be built. Meanwhile employment in manufacturing and internationally traded services fell by 10,297 in the same period.
The latest ‘plan’ centred on creation of a ‘knowledge economy’ looks rather fanciful set inside this reality. Over the last fifteen years we have witnessed politician after politician praise themselves for their investment in education even though education was the first to get cut in the 1980s fiscal crisis and is first in the receiving end now. The existing performance of Irish education, which these politicians have boasted of, is less than stellar. In 2006 the Irish State had fewer computers per student than the EU-15 average and the EU Commission ranked the Irish State 19th out of the EU 27 in terms of broadband for schools. Broadband of course has been a victim of the Irish State’s worship of the market, the Irish telecoms company having been privatised and then hawked around afterwards from one private vulture to another. The State ranks 26th out of 28 OECD (developed economy) countries for which data is available. Yet we are fed this guff about a knowledge economy being created with a few hundred million euros over ten years. Even with regard to higher education the prospects for this ‘plan’ do not inspire confidence. The “massive public investment in research at third level may have had a disappointingly limited effect on future Irish prosperity’ notes a report by two academics , Declan Jordan and Eoin O’Leary from UCC, a couple of years ago.
The prospect of this dependence on US investment and concentration on research & development and on intellectual property is even more questionable when we realise that, despite the falling impact of outside investment, in some ways this policy has already been a success, just not a success for the Irish people. Thus it has been reported in the US that the combined net profits of US corporations in the Irish State doubled between 1999 and 2002 from $13.4 billion to $26.8 billion, rising to $48 billion in 2005. Such profits only amounted to $37.01 billion in the UK, $11.22 billion in Germany and $9.52 billion in France, all much larger economies. On revenues of $151.52 billion in 2005 this amounts to a net profit margin of over 31 per cent. Yet such large profits have not prevented a decline in employment and many companies saying they wouldn’t invest in Ireland again. The cut-throat character of such international investment can be appreciated when it is reported that Dell plans to move production from the Chinese coast to inland China because of rising costs!
The recent announcement by Dell that it plans to make 1,900 workers redundant from its Limerick plant is thus symbolic of the growing failure of a strategy the Government has just announced it will intensify. Along with Intel in 1989 the arrival of Dell in 1990 heralded the Celtic Tiger; its leaving, however protracted, signals its end. The experts who point to previous experiences of such companies shedding assembly jobs only to hire workers for more skilled posts afterwards ignores the fact that we are now living in a real and probably long-lasting downturn. The Dell jobs are going to Poland, to Lodz, which has average salaries one third the Irish level and a university that produces 20,000 graduates per year.
The policy of attracting R&D and intellectual property through low taxes, the core of the supposed knowledge economy, may therefore be ‘successful’ and provide no real benefit to the Irish people. Some US companies say quite a lot of such activity already goes on in the State. Two of the State’s biggest companies, with billions of revenue, are based in Dublin and are both owned by Microsoft. The only problem is they operate out of a Dublin law firm and don’t directly employ anyone! The only thing that may come therefore is the tax computation and the low tax bill.
The various threads of the Government’s response to the financial crisis are thus linked, The banks must ultimately be saved in a manner that most demonstrates the State’s willingness to serve big business, especially multinationals, even if this exposes risks to the financial position of the State itself. The strategy beyond this is simply to hope that yet more incentives to multinationals will reverse the process of disengagement by direct multinational investment. In the end only a return to ‘competitiveness’ will have any hope of achieving this and such an outcome ironically depends on a reduction in costs associated with a decline in economic activity which outside investment is supposed to prevent. In other words the business model of Ireland Inc, just like that of Ireland’s banks, is flawed. Hence the plunge towards ruin of the Irish State itself.
The only way to save the existing system
is for it to make someone else pay for the bank bail outs; pay for the
subsidies to US multinationals and fund the interest payments to the holders
of the State’s debt. This paymaster is the working class. But
how to impose this cost? The answer is obvious. It will be
imposed through social partnership. There is no secret in this; the
Government has repeated this mantra again and again over the past couple
of months. Against a background of bosses’ calls to impose the bill
on workers without this process, supported by their hired propagandists
in the economics departments of the universities, stockbrokers and banks,
the Government has prepared its victims for the sacrifice on the alter
of the national interest. But we should no more believe their lies
about a ‘national interest’ than we should believe their lies about their
bail out of the banks or their non-existent ‘plan’ to get out of the crisis.