The Citizen: Issue 2
Author: Tom O’Connor
The purpose of this article is to assess the Irish neo-liberal project since the 1980s and to describe what type of values and socio-economic policy mix the Irish state should now adopt in the wake of the Celtic Tiger, concomitant with the discrediting of the neo-liberal value system across the globe in recent times. This was driven in the main by the collapse of the international banking system. What true republicans can do to influence the necessary change in policies and values is of central importance to the article.
To succeed in informing a new policy paradigm for Irish society, it is first necessary to briefly assess the successes and failures of the Celtic Tiger. This will inform what needs to be done in assessing what policy parameters need to be changed so that the Irish state might set a correct course for balanced and sustainable economic and social development.
The next step will be to make some suggestions for policy changes to reflect the results of this re-evaluation. This will include a brief set of suggestions for new economic and social policies that are evidence-based and that might inform a truly democratic and republican response based on the rights of citizenship and informed by the republican values of liberty, equality, and fraternity.
This creates the obvious need to outline how these new policies and ideals might be achieved. To do this comprehensively is beyond the scope to the article. However, by way of generating debate, a short commentary on the challenge presented by the need for new policies is provided at the end. This will make strong reference to the various interest groups that now shape Irish economic and social policies along with other movements that we might deduce as being supportive or averse to the necessary changes in the various policies outlined. This will make some tentative suggestions about the first steps in the co-ordination and orchestration of a plan of action arising from this process, including some overall conclusions, which will be presented at the end of the article.
Justification for the Neo-liberal Project
Neo-liberal economic, political, and social values have dominated in Ireland since the very start of the 1980s. This reflected, to a large extent, the coming to dominance in the western world of the New Right. It also arose from the mismanagement of the Irish economy since the 1970s, when irresponsible governments used Keynesianism as an excuse for reckless state spending. This damaged the reputation in Ireland of what was mostly a reasonably sound economic paradigm, even though, like every ideology, it needs to be updated and revised in the light of changed economic and social circumstances, a new world order, and more sophisticated insights arising from research. However, at the start of the 1980s, nuanced arguments such as these were jettisoned, and, with the influence of dominant global economic actors, most notably Ronald Reagan in the US and Margaret Thatcher in the UK, neo-liberalism became the only economic game in town.
Interestingly, some important erstwhile social democrats bought into this philosophy because, with the debt to GDP ratio at 150% in the early 1980s, they felt they had no choice other than fiscal rectitude. Most notable in this regard were Garret Fitzgerald, who was Taoiseach from 1981 to 1987, and the Labour Party Minister for Health Barry Desmond. Subsequent defenders of tough economic decisions by Ray MacSharry in the Fianna Fáil government from 1987 and the original Bord Snip (dominated by the ultra right wing economist Colm McCarthy) justified fiscal retrenchment, cutbacks in health spending, low levels of welfare, and high tolerance of emigration by pleading that it was necessary to ‘get the country back on its feet’ at the time. The population bought into this, and by 1993, with 300,000 unemployed or 16% of the Labour Force, there was no sign whatsoever of anything resembling a revolution.
Some well-meaning people might be partially excused for this undying commitment to the neo-liberal project. However, it has subsequently emerged with the findings of the Hamilton (beef industry), McCracken, Moriarty, and Flood/Mahon tribunals that subsequent Fianna Fáil governments, which have been in power for almost the entire period since 1987, often with the PDs, were pursuing the neo-liberal project for many self-serving reasons, which were justified in the famous Desmond O’Malley maxim, ‘in the national interest’.
It suited the ‘golden circle’ of senior government ministers, the property industry, and the super rich that market values had triumphed. This allowed marketeers to be ‘justifiably’ rewarded with favourable planning decisions, export credit insurance, tax avoidance measures, tax amnesties, and, most of all, direct contact with several Fianna Fáil Taoisigh and ministers. Of course, the coffers of Fianna Fáil and those of Liam Lawlor, Bertie Ahern, and Charles Haughey, to name only a few, also benefited handsomely.
However, a more fundamental reason for the undying commitment to neo-liberalism was the strong belief in free market economics per se. What fuelled this commitment was the perceived success of the American economy, the largest in the world with the lowest unemployment and the most impressive long-term growth rates, and the belief that the US was the ‘land of opportunity’.
However, just as important in the Irish context was the influence of the economics profession itself. This included most academic economists since the 1980s; all of the stockbroker variety of economist; as well as international economists, whose views were mediated by agencies such as the Economist Intelligence Unit, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the World Bank.
A large proportion of the most successful academic economists, whose views have wittingly or unwittingly justified the now discredited neo-liberal project, received Master and Ph.D. degrees in the US. They were trained in ‘economic science’. However, this economic science was, in fact, an ideologically partisan neo-liberal training from the 1980s onwards. From personal conversations with many academic economists of this ilk, it is obvious that many do not recognise that their so called ‘objective’ assessments originate from an embedded neo-liberal worldview.
By way of example, a very high profile academic research economist – in conversation shortly after the failing of the banking system, unemployment hitting 10%, and, for many, the failure of the neo-liberal project – responded to my suggestions for Keynesian stimulation of the economy with the comment, ‘you can keep that’. When pressed for his view on the government directly financing Irish companies given the drying up of credit from the banks, the response was, ‘No, this is the banks’ job’. The point is obvious: the polarity of thinking is so embedded in neo-liberalism that what is essentially a worldview on the banks being responsible for aiding industry becomes in the mind of the neo-liberal trained economist a professional view based on professional training. In this case, as with most senior academic and research economists, he had received his Ph.D. in the US in recent years!
Neo-liberalism and Irish Economic Policy since the mid-1990s
To use economic parlance, both ‘push and pull factors’ pushed and pulled Irish governments into an undying commitment to neo-liberal economic policies. The low-tax regime that this produced over the Celtic Tiger period was seen to be the key ingredient in producing hugely robust growth rates and full employment. Social partnership was also acknowledged as being of critical importance in keeping wages low and the economy competitive, at least for much of the period.
The economic successes were, indeed, spectacular: GNP growth rates of an average of 7.5% over the Celtic Tiger period; the level of employment reaching a high of approximately 2.3 million in early 2008; and unemployment often less than 4% from 2004 to 2007 (essentially full employment). By 2007, the debt to GDP ratio was less than 33%, the lowest in the European Union, and the government was running surpluses on its current account, buoyed up by the massive scale of tax receipts.
However, the overall tax take was still very low, though the sheer volume of people working disguised this fact. The budgetary surpluses gave the impression that there was still enough tax being collected to administer the welfare state. That this was rather illusory is exposed by the fact that, despite large absolute increases in public spending, taxes, public social expenditure, and government spending as a proportion of GDP were second lowest in 22 OECD countries by 2005 (only the US was lower). By 2009, social protection spending was second lowest after Greece in the whole of the OECD. The fact that relative poverty remained close to 20% of the population over the period illustrates the inadequacy of social welfare payments, an inadequacy that was increased by other deprivation factors, such as shortages of social housing. Housing waiting lists stayed at between 45,000 and 53,000 from the late 1990s to 2009.
The continuing existence of large numbers on hospital trolleys and waiting lists for most medical procedures in the public health system meant that in 2003 over 16% of those on the dole purchased private health insurance, despite their weak financial position. The inadequacy of the public health system promoted the purchase of private health insurance by increasingly large numbers in a fully employed country, where the proportion of the population having private health insurance rose to 52% by 2009. Mental health services were appalling, and the failure to provide outpatient services for those with a mental health problem, alongside government policy of closing down old mental institutions, echoed the cynical use of community care to push mental health patients on to the streets during the Thatcher period in the UK in the late 1980s. Clearly, the welfare state in Ireland during the Celtic Tiger years left a lot to be desired.
Cracks and Collapse
Given the neo-liberal outlook of most economists, the majority remained as cheer leaders for the Celtic Tiger, with virtually none questioning the failure of the welfare state that accompanied it. Only a small number who didn’t toe the right-wing line on these matters surfaced, but they were decidedly thin on the ground. P. J. Drudy, Professor of Economics at TCD and author of a book on the failure of the housing system, Out of Reach (2005); Maev-Ann Wren, author of a seminal critique of the Irish health system, Unhealthy State (2003); Paul Sweeney of ICTU; Dr. Micheál Collins of UCD; and Fr. Sean Healy of CORI made up close to the total number of economists who questioned the neo-liberal project. Of course, they were portrayed as cranky ‘left-wing pinkos’ by the archright-wing, erstwhile Minister for Finance Charlie McCreevy.
For the most part, these economists criticised the failure of the neo-liberal project that was the Celtic Tiger to deliver anything close to adequate social development. However, there was very little critique of the economic rationale for the system in the first instance. Others, writing from a developmental perspective, added to this ‘social deficit’ critique, most notably Professor Peadar Kirby, who labelled the Celtic Tiger a ‘mirage’ in the context of its social-developmental failure.
However, as far back as the turn of the millennium, the popular economist David McWilliams predicted that the Celtic Tiger would ultimately collapse abysmally, which it has done, with an economic contraction of 7% in 2008 and worse predicted for 2009. Others argued that this happened ten years after his prediction, and he was bound to have gotten it right sooner or later! Nonetheless, the collapse of the main driver of the Celtic Tiger, the property market, though viewed as inevitable by many years before it happened, was ultimately predicted with astonishing accuracy by the Galway-based economist, now government economic adviser, Professor Alan Ahearne in 2007. During the early falls in the property market from late 2007, the chief executives of the country’s biggest banks and most stockbroker economists predicted a slow and gradual fall in prices for a relatively short period of time, which would be a slight ‘correction’ and would amount to a ‘soft-landing’.
Nationally, house prices have fallen by at least 25% in less than two years up to May 2009. The collapse of the property market in a country that depended on the domestic construction sector for 16% of employment – this collapse now being the main driver of continuing dramatic GNP contraction – was something that bankers, neo-liberal economists, government ministers, and many of the nouveaux riches in Ireland refused to believe would happen. It was a classic case of the emperor’s new clothes.
This failure to accept reality, or, more sinisterly, the failure to tell the truth, resulted in the heads of Ireland’s top banks telling the government in October 2008 that they were sufficiently capitalised to deal with the global financial crisis of toxic debt. By November, the government had to introduce the €400 billion bank guarantee scheme, and, by the following March, it was agreed that Bank of Ireland and Allied Irish Banks would be recapitalised by the government taking a 25% stake in each and ploughing in €7 billion to recapitalise them. By late April, the government had introduced the National Asset Management Agency (NAMA) to buy up the bad debts of the banks and act, in effect, as a so called ‘toxic bank’ itself.
Arising from these developments, the credibility of the neo-liberal project is now in tatters. However, this doesn’t mean that, to paraphrase Gerry Adams, the project has ‘gone way’. It still dominates in the Western world. Internationally, the awarding of bonuses of hundreds of millions and up to one billion dollars per annum to Wall Street fund managers was bound to reward greed so much that paper assets would be created to claim the rewards, which is exactly what happened. This left the governments of the US and the rest of the world bailing out banks at tax payers’ expense long after much of the proceeds had been salted away by financial speculators.
The behaviour of Anglo Irish and other Irish banks in their reckless lending practices and the concealment of loans by Irish Life & Permanent to Anglo Irish Bank illustrate that the quintessential apotheosis of the free market, the banks and their large profiteering clients, cannot be trusted. Worse than that, they cannot be trusted to determine the economic and social life of the people of Ireland, or indeed anywhere. While Irish speculators were making hundreds of millions and banks were taking inordinate risks in lending to them, they were hugely inflating the price of houses for Irish citizens. At the end of the Celtic Tiger, the average house price nationally was €330,000, even though 50% of those in employment earned less than €30,000 per annum! So, not alone was property speculation unsustainable in the medium term for bankers and developers, it was always going to be unsustainable for large numbers of house purchasers who otherwise faced housing waiting lists and rents that were even higher than mortgage payments. This was facilitated by a government that had so completely bought into this project, for all the reasons outlined, that they built only 5,000 social housing units a year over most of the Celtic Tiger period, thereby causing waiting lists to soar.
However, it would be a mistake to relegate the neo-liberal failure to the now popular stratagem of blaming the bankers for the severe recession in Ireland, while eschewing the deeper structural problems that have created the situation. Unfortunately, this has been a feature of the spin being put on the situation by the Labour Party and one that has obviously found favour in the public mood, judging by the opinion poll ratings of Eamon Gilmore in recent months.
The critical point that is being played down in the new ‘bash-the-bankers’ era is that the main failures of government policy in pursuing its neo-liberal agenda, which are the key drivers of the current recession, are:
- Over-reliance on construction and the ploughing of €13 billion of taxpayers’ money into tax avoidance measures from 1999 to 2005 by the Irish government.
- The accompanying failure to address an adequate retraining policy, which would have provided greater avenues for occupational differentiation and which would have hedged against the over-reliance on one sector of employment.
- The failure to collect enough taxation to prevent exchequer deficits rising in any situation other than a booming full employment economy.
- The withdrawal of government regulation of the economy, particularly in the banking system.
- Related to this has been the failure of government to foster a role for itself in enterprise creation; the selling off of state assets; and the belief that a banking system operating on unfettered free-market principles will unfailingly provide investment capital to drive business development opportunities and job creation in Ireland.
These failures will now be discussed, with a view to offering new directions.
Construction, Retraining, and Enterprise
The over-reliance on construction is now a key driver in the fact that unemployment is over 400,000 (10.3%) and heading for half a million. Down from a peak of almost 90,000 new housing units in 2005, only about 20,000 will be built in Ireland in 2009. This has added at least 100,000 people directly onto the dole queues.
The problem, however, is that many of these newly unemployed have a poor stock of education and training. In 2005, the National Economic and Social Council (NESC) showed that 50% of the Irish working population did not have a third level qualification and 25% did not complete the Leaving Certificate. Tens of thousands now unemployed after the end of the construction boom have neither a trade nor a Leaving Certificate that would allow them to progress to third level automatically.
The biggest issue is the nature of the training system. There simply aren’t enough training courses of sufficient duration and intensiveness to quickly retrain large numbers of people in Ireland. In addition, worker compensation for retraining is only the equivalent of the dole, and for many there is an almost inevitable descent into long-term unemployment and work in the black economy. The introduction by the government of a one per cent income levy on incomes of over €15,500 in the budget of April 2009 will add to this problem.
In the budget, 25,000 new training places were introduced, most of which are of less than six weeks’ duration. This will be very ineffective. A sea change in government thinking on active retraining is needed. They must encourage workers, particularly men, to retrain. The current FÁS retraining allowance of €204 is not a sufficient incentive to most. Many who are discouraged in this way will join the black economy. This now stands at 8%, but could rise dramatically without retraining incentives. This will deprive the government of valuable tax revenue and further worsen the public finances.
My estimate is that for a cost of €350 million in increased training payments, the government could retrain 50,000 people per year, with an enhanced training allowance of €330 per week. This would be intensive retraining, which would result in employment and would be particularly favourable to career changes for those who already have a high level of technical competence.
The government would do well the take on board the ICTU proposal on ‘flexicurity’. This is a system which operates in Denmark in particular, and in Germany to a lesser extent. In return for labour market flexibility in terms of being prepared to retrain, move jobs, and to some extent have less job security, workers are intensively retrained after becoming unemployed. This is done by giving what would be by Irish standards a generous retraining allowance.
Newly trained workers could fill the many areas where there is still growth and labour-market demand. However, by directly financing new indigenous businesses, which would be suitably assessed for viability, the government can create sustainable and growing employment in areas such as information and communications technology; high standard food ingredients; biomedical device manufacturing; internationally traded health services; and more. The sustainability would be provided by setting up globally competitive Irish companies in these areas. At the time of writing, President Obama is in the process of altering tax incentives that American companies receive to locate in Ireland, precisely for the same reason: to keep investment at home.
In addition, jobs can be created in badly needed areas of public infrastructure: hundreds of schools and childcare facilities should be built; affordable housing should also be built, as 53,000 are still on housing waiting lists; affordable childcare facilities should be built and staffed; there is a shortage of health and social care workers due to the embargo, which should be rescinded; and there are many other areas earmarked under the National Development Plan where matched state investment in capital spending and newly trained personnel would prove an excellent investment. Already, the American economy is showing, according to President Obama, ‘fresh shoots of growth’ in response to the huge economic stimulus package that was introduced in the US in the past nine months and an expansion of the money supply there.
All these options would inject a strong short-term stimulus into the economy, which would increase government tax receipts and contribute to growth and employment creation. Just as important, using this period to train and retrain personnel to fill areas of labour and skills shortages can eliminate structural unemployment and put the economy in good shape for an economic upturn.
Newly trained personnel in key areas of skills shortage would also be valuable in attracting investment internationally and domestically in these areas. This does work in practice: Denmark, which had an unemployment rate of 12.5% in 1994, used this type of strategy to cut unemployment to 5% over ten years. The Danish system provides an efficient and effective system to allow the economy respond to economic shocks, skills shortages, and unemployment. This gives them the benefit of not over-relying on any single major area of the economy to create jobs.
State-owned Companies, Taxation, and Regulation
In addition to providing scarce investment by way of long-term loans to high-knowledge, viable, privately owned industry, the government should reverse its privatisation policies. In fact, it needs to actively start the process of setting up new competitively run, lean state-enterprises. This is working well in Sweden – to quote the Swedish government: ‘The Swedish state is an important company owner in Sweden. The Swedish Government Offices administer fifty-five companies, of which forty-two are wholly owned and thirteen partly owned. These companies represent substantial values and are large employers. Furthermore, they are ultimately the common property of all Swedish taxpayers. The state, therefore, has a considerable responsibility to be an active and professional owner.’
In 2006, total turnover for the state-owned companies amounted to €34 billion, with a net profit of €5.3 billion. The value of the state-owned companies was in the region of €77 billion in June 2007. The government should now plough at least €2 billion into financing new private Irish companies and setting up new state-owned companies. To do this, it will need to borrow more. Borrowing up to 70% of GDP for this purpose is justified, as unemployment is projected to hit five-hundred thousand by 2010. The way back will be too long if this course of action is not taken.
To improve the government’s revenue and exchequer deficit in order to cap borrowing at a maximum of 70%, it should introduce a 48% tax on income in excess of €100,000, a policy proposed in the summer of 2008 and latterly proposed by ICTU and Sinn Féin. Given new data supplied to the author by the Revenue Commissioners in January 2009, I estimate this could give the exchequer up to €1 billion. Those earning less than €40,000 a year should be exempted from the 1% income levy and the 2% increase in the health levy. A wealth tax of 1% would net a further €400 million. A tax of at least €1,000 a year on second and subsequent properties should also be introduced.
Finally, the state should demand increased investment liquidity by way of regulation of Allied Irish Banks and Bank of Ireland in return for its investment of €7 billion in these banks. Indeed, it should increase its shareholding and regulation of them, bringing them increasingly close to nationalisation in the short to medium term. This is the only way the state can prudently make sure that scarce state borrowing for recapitalisation, which will ultimately be paid by the taxpayer, can be repaid. The government should also use the National Assets Management Agency to buy up hitherto privately owned and lucrative land banks from cash-strapped property developers at hugely reduced prices. These lands could then be used for social housing and the locating of state enterprises and other publicly provided utilities.
New Directions: Opportunities, Threats, and Moving Forward
The failure of the neo-liberal project in Ireland is evidenced by the collapse in support for the FF/PD/Green coalition in the autumn of 2008 and spring of 2009. Fianna Fáil support, according to both Red C and MRBI opinion polls, is now hovering around the mid-twenties in terms of percentage of first preference votes. This signifies widespread dissatisfaction and an appetite for change. Simultaneously, these opinion polls show that an overwhelming majority of Irish people strongly reject the favourable treatment of bankers and property developers by Fianna Fáil led governments.
Findings from various pieces of research in the last year also show that large sections of the Irish electorate may be moving away from the individualistic neo-liberal project. The Think Tank for Action on Social Change (TASC) reported that there is now an appetite within the Irish electorate to pay higher taxes for superior public services. Research by this author has found that over 70% of the electorate in the Cork-Kerry region of the country would pay a 6% increase in social insurance contributions if a universally free health and social care system was provided for all in an efficient manner that would also involve free geriatric care, all provided universally, irrespective of the ability to pay. There is strong support for a universal social insurance model for health and social care provision.
Irish trade unions have also reacted angrily. Both ICTU and SIPTU have called for a 48% top marginal tax on income in excess of €100,000. The opposition to cutbacks in education and health by the ASTI, TUI, INTO, IMPACT, CPSU, and INO unions has now reached almost fever pitch. The imposition of the pension levy on public servants earning modest incomes has also upped the ante.
What is interesting, however, is the failure of the established political parties to move to the left in the current situation. The Labour Party has called for harsh treatment of bankers, made tentative suggestions on retraining, and criticised the shambles of the Irish health system over which the PD leader Mary Harney has presided. However, it has not questioned social partnership, which is the conduit through which neo-liberal policies have made so many inroads. Indeed, at the time of the threatened one-day stoppage by ICTU in April, the Labour Party leader, Eamon Gilmore, told the media that he was strongly unsupportive of such action.
Fine Gael has proposed what looks like an even tougher stance on cutbacks. Most significantly, Enda Kenny has suggested that the public finances can be rescued without increasing taxation! This is dangerous populism. It serves to confuse an electorate that does not understand the complexities of economics and also appeals to their selfish nature, much like the PD-driven policies and those of Margaret Thatcher and John Major in the UK in the 1980s. Their proposal of universal social insurance is a vote getter and a measure that is at variance with their overall ideological position, which is clearly right wing.
The only party that seems to be in a position to reap the electoral harvest of a disaffected Irish electorate is Sinn Féin. The policies of Sinn Féin, as announced in their April document on the economy and job creation, are essentially a mixture of Keynesian social democracy and mildly left-wing policies. They are no more than policies that are present in many European countries, especially Denmark and Sweden. Yet, Sinn Féin continues to suffer from three impediments: the ‘red scare’ fear that they are strongly Marxist; the fear of the middle classes of a party that had strong links with the IRA; and a fear that their economic policies are not worked out and not costed. In addition, there is a fear that these policies would frighten international investors. There is also a failure to attract voters who believe that small parties will not have the numbers to form a government and, so, it is futile to vote for them.
On balance, Sinn Féin is the party that right now reflects truly republican values. Their policies are about strategically taxing capital, large incomes, and wealth in order to create a strong welfare state. They are also in favour of government stimulation of the economy in the short term, which is Keynesian. There is nothing in their proposals that international investors or, indeed, fair-minded Irish citizens should be afraid of. Those with large amounts of income and the owners of multiple residences and housing investments in Ireland will, nonetheless, be averse to such policies. However, if Sinn Féin can gain a critical mass of seats at the next election and force a genuine movement to the left by the Labour Party, the Green Party, and a combination of left-wing independents, then we might be on the cusp of the emergence of class politics in Ireland for the first time in many years.
The threat to this project comes not only from the two right-wing parties but also business lobby groups such as IBEC, SFA, ISME, and others. These groupings and successive governments have used negative spin doctoring to frighten the electorate away from voting for redistributive polices. This was done through sloganeering in the media that these policies, requiring higher taxation would essentially slay the goose that laid the golden eggs of employment and income increases that was the Celtic Tiger.
People now know that this goose has been slain by the neo-liberals themselves and their economic policies. Large numbers in the Irish electorate now endure the worst of all possible worlds: a poor welfare state with high unemployment. In both cases, the government is unwilling to do anything about it. The main focus of government is to cut back spending enough to woo the good offices of international credit rating agencies such as Standard and Poor. The electorate, like the government, is badly wounded. On balance, there are opportunities for the propagation of republican and socialist ideals at this stage. This will require more nuanced sophistication by republican groupings on how they sell their policies and a huge media performance. It will also require the building up of community coalitions, which have been bubbling under the surface in recent years and have been led by radical community workers as well as political and social activists. There are now strong grounds for hope.
Tom O’Connor is a Lecturer in Economics and Public Policy, Cork Institute of Technology