Monday, 19 July 2010

Between the rocks

Slí Eile: Here we go again. Softening-up time. The summer schools, the rain, the Dáil holidays and…. exclusive inside news stories on what the Government might be thinking about. (strategic investment gosh not in your life) …..Somehow it reminds one of the summer of 2009 and the summer of 2008….Now, sir, would you like your leg amputated or your right arm? Good, lad, you have taken so much tough pain as a result of tough choices in the last 18 months that things are beginning to look up. The markets say so (really?). Now, the public finances are beginning to stabilise as the underlying indicators have stopped getting worse (well except for unemployment and emigration but who really cares about that ….).
Never before have statistics been so cruelly tortured to find inflection points and decelerations in the rate of decrease and positive signals from one Quarter’s data or one month’s data as if trends were linear and smooth (note that the statistical requirement arbitrarily used by some analysts to see two consecutive quarters of growth to announce a recovery has been left aside as GDP growth in Q1 of 2010 was enough to spin the story).
One of the aspects of being caught between a rocky hard place and a hard place is that the rocks have been arranged and the thinking arteries hardened so as to avoid any consideration of alternatives. Instead, we have the delusional recovery by a 1,000 cuts. But, the cuts agenda is running into trouble on three counts:
The underlying parameters (leaving aside Anglo which is a mighty big elephant in the fiscal parlour) are not shifting south rendering the 2014 SGP looking like the Emperor without a leaf.
Rising unemployment and contracting income are driving up some of the fiscal stabilisers such as eligibility for medical cards, unemployment welfare and other ‘automatic’ payments.
The politics of cutting again by some €3bn and then again by some equal amount in Election Year minus one look increasingly problematic.
Here’s the story:
1 Public sector pay bill (around 30% of total public spending) is pretty much pegged for the next three years unless there is some ‘unexpected deterioration’ in public finances.
2 Government is moving at snails pace to reform taxation especially in those areas where the rich gain the most (property, tax breaks and financial transactions). The promise of economies through changes in work practices doesn’t translate into lower public spending. Such changes in practices and greater flexibility might enable – over time – a better quality and quantity of public service (however measurable) for a given input of persons or money. It might even enable Government to – eventually – reduce spending by employing less staff in the key sectors (health, education and central/local government for a given outcome of public service). My bet is that:
* Numbers employed will grow in some areas and stagnate or fall a little in others
* The (nominal) pay bill will rise very slightly due to automatic increases (e.g. increments) as well a structural changes arising from the shedding of low-paid and low-skill jobs over time (just watch which vacancies are being filled).
* ‘quality’ improvements in service will be glacial
* Grass-root pressure will build up to revisit the terms of the nominal pay freeze especially as GDP starts to grow and prices erode real wages.
3 The Greens have – for now – taken ‘free fees’ and further changes to the staff-student schedule at primary and secondary level education off the agenda. That’s a lot of cash.
4 The banking tragedy (farce?) looks fearsome – with a roll over of debt bunched to maturity at end of September 2010 and with continuing pressures on the banks a fresh round of recapitalisations cannot be ruled out (thus pushing the measured General Government deficit to over 20% in 2010 and possibly 15% plus in 2011).
The counter-factual of ‘doing nothing’ – i.e. not following the deflationary line since 2009 is adduced as reason to stay the course and continue cutting more. Yet, nobody has shown, empirically, what would have happened if Government had adopted a different growth strategy and made different choices. Everything is predicated on static zero-sum analysis.
The choice of deflation (and it is a choice) leaves Government with some pretty stark new choices within its medium-range deflationary strategy:

- More cuts to an already crisis-ridden health system
- Amputations to significant public service programmes in local authorities and central government (you can guess which)
- Larger deflationary measures than those spoken of to date.
- Revisiting the Croke Park deal
- Further cuts in social welfare targeting this time older folk and children (so much for the fine sentiments behind the proposed Childrens’ Rights referendum)
- An IMF-EU rescue plan later on
- An early election

Take your pick.

Fancy being in the opposition benches? – supporting the broad parameters of the fiscal contraction and yet hedging bets on just how these cuts would be implemented and which taxes would be raised if one were in Government.
Some day, the case for a sane, investment strategy to grow our way out of this fiscal, banking and human skills utilisation hole will become inescapable.

1 comment:

Anonymous said...

Excellent post.

Re: the softening up process. I notice that the recent SBP front page was the first scurrilous attack on the public sector in quite a while.

The headline itself is a statment of idiocy that will take some surpassing.