Address by David Begg to Sisters of Charity Conference Dublin Castle on 30 June 09

30 Jun 2009

Mary Aikenhead's exhortation to her followers 'To give to the poor what the rich can buy with money' assumes a renewed relevance in these times. In a modern economy it implies a willingness to provide for social transfers and public services with revenue raised through the tax system.

Ireland has what might be described as a mixed economy of welfare. This means that a significant proportion of public services, although financed by the state, are delivered by non state bodies. Although public spending has grown rapidly in recent years it is proportionately much less in terms of GDP than all but three other OECD countries. Of course that is not the impression created by public discourse but it is true all the same. Much of the increased public spending of recent years was intended to catch up on deficits left by cutbacks in the 1980s and 1990s. It appears that the process is about to go into reverse again with the forthcoming publication of the report of the review body on public spending some of the findings of which are currently being leaked. Therefore, social solidarity is very much at hazard.

How bad is the economic situation? Does it justify unwinding such progress in health and education as has been achieved during the expansionary phase?

The answer to the first question is very bad indeed. Judged by the macro economic forecasts the country is nearly banjaxed! The latest of these forecasts we published by the IMF last week. Its projections are that:

• There will be a cumulative loss of 13.5 per cent of GDP by 2010;
• Unemployment will rise to 12 per cent in 2009 and reach 15.5 per cent in 2010;
• Our exporting capability has been undermined by a 20 per cent depreciation in sterling relative to the euro;
• Banks will lose €35 billion equivalent to 20 per cent of GDP;
• NAMA will have to spend €80-90 billion on bad debts of the banks;
• Our debt to GDP ratio will rise from 20 per cent to 80 per cent.

The National Social & Economic Council has argued that Ireland is in the grip of five separate sub-crises viz:

• An economic crisis consequent upon the collapse in world trade and Ireland's high dependency on trade;
• A banking crisis caused by irresponsible behaviour;
• A fiscal crisis caused by the dependence on property transaction taxes which have evaporated
• and
• A reputational crisis revealed in a system of crony capitalism where poor governance and the banker-developer nexus means that the external perception of Ireland is toxic.

The truth is that we constructed an economic development model based on low taxes, financial mediation, an expanded construction sector and foreign inward investment which may not be sustainable in its present form.

The official policy response to this many faceted crisis is a combination of bailing out the banks, avoiding nationalisation, reducing wages, cutting public services and hoping that the stimulus employed by other countries will eventually lift us out of recession. There are good reasons for doubting the efficacy of this formula. For a start has any country ever deflated its way out of a recession? In effect current approaches have locked us into a deflationary spiral in which the received wisdom is to deepen the cuts.

But perhaps the stimulus policies of other countries will be a rising tide to lift our boats too? Perhaps, but somehow I doubt it.

In an article in The Guardian newspaper on 10 April, 2009, Eric Hobsbawn compared the efforts of Governments to resolve the crisis as 'being like a blind man in a maze tapping the wall with different sticks to see if any of them reveal a way out'.

There is some truth in this I think. Europe seems to be waiting on America; America is waiting on China and China........

Let's consider China. Globalisation has produced structural imbalances in the world economy;

Asia produces, American consumes;
Asia loans, America borrows;
Asia exports, America imports;
Asia saves......invests in America....America uses the money to lend to people at low interest rates who in turn consume Asian exports. This was fine until the global financial system imploded! And the financial system is the brain of the market economy. So where does that leave the system of global imbalances?

Chinese policy is to peg its currency against the US dollar, allowing a microscopic rise in the vale of the renminbi over time. To change that policy, and allow a massive fall of the dollar against the renminbi, would be a massive act of self-sacrifice by China and a massive signal that it intends to move way from an export-led strategy towards developing its home market.

Many academic discussions of the imbalances tend to assume that the US, or the IMF, would in some way dictate to China the course of rebalancing. It is now clear that the dictating will be done in the other direction. China has already unleashed the world's biggest state spending programme in response to the crisis, pitching 15 per cent of its GDP into a stimulus package in November 2008. But creating a mass consumer market in China to buy the goods that were once exported to the US and Europe would involve turning Chinese workers from the low-paid wage slaves of the world into the consumer spenders of the world. That would mean redistributing wealth in China away from the new elite to the urban poor.

A 25 per cent fall of the dollar, envisaged in most academic studies of the global imbalances, would wipe out a quarter of China's foreign exchange reserves and turn the profits on all the capital invested by Asian savers into America into losses. But if the dollar is not allowed to fall against other major currencies then China's workers have to become the new big spenders of the world, and a major redistribution of wealth is on the cards that will shatter the social harmony pursued by the Hu Jin Tao administration.

The second contradiction is the sheer scale of the national debts being accumulated by the Anglo-Saxon model countries: $10 trillion in the US; £1 trillion in the UK. Twice in post-war history, the US used aggressive devaluation of the dollar to transfer the cost of its national debt to other countries: in 1971, with the end of Bretton Woods; and the 1985 Plaza Accord, when Germany and Japan were persuaded to let their currencies rise against the value of the dollar. Any attempt to do this for a third time, unilaterally, will provoke an economic clash with China; it is more likely that Chinese, Middle East and Russian capital would demand new access and ownership rights in return for any such rebalancing.

In summary then, Ireland is depending on other countries' actions generating a pick up in global trade. That in turn depends on some unwinding in the current imbalances between surplus producing and consuming countries. On the available evidence that is not going to happen any time soon. So when I hear of Green Shoots I tend to reach for the salt cellar.

Having outlined this broad context we can return to the second question. Does the economic crisis justify unwinding such progress as has been made in health, education and social transfers in recent years?

Let us first remind ourselves that public spending in Ireland by OECD standards is low.

We know also from what has been put into the public domain that Government intends to cut 4 to 5 billion euros of public expenditure in Budget 2010. What dose this imply in the context of the exhortation to 'Give to the poor what the rich can buy with money'?

In practice I suppose it means that, if you have money to pay for health care or education, you are okay. But if you are on social welfare or lose your job you are in big trouble.

The basis of all good advocacy is not to deny the facts. The facts of this case are that our country will lose about one eight of its wealth over the next year or so. It will also have to cope with fifteen and a half per cent of its workforce not contributing tax revenue and drawing social welfare assistant.

Nevertheless, that will leave us about where we were in 2003 with a GDP of about €150 billion. Its bad but it need not be catastrophic. By international standards we are still a rich country.

What I suggest we need to do is to re-learn the meaning of social solidarity; to figure out how to share what we have so that, however long this recession takes, nobody gets left behind. Perhaps if we could do that we might even come out of this crisis with a more sustainable future ahead of us.

That is why Congress has, for the last year, been advocating for a National Social Solidarity Pact wherein the burden of economic adjustment is borne by those most able to carry it. With every month that passes the case for it becomes more compelling.

The key elements of a Social Solidarity Pact are not hard to imagine. It seems to me that it needs to include:

 

1. Measures to keep people in jobs similar to the approaches being adopted in Denmark, Spain, Netherlands and Germany. To expect Government to unequivocally commit €1 billion to this objective is not a big ask given the amounts pumped in to the banking system;

2. Extending Government borrowing over a longer timeframe to avoid the damage that will be caused by trying to repair the public finances over too short a period;

3. Resolving the banking crisis in a way that restores certainty, which Congress believes can only happen through nationalisation. We must cap executive pay an benefits, overhaul corporate governance and provide legal protection for whistleblowers;

4. Ensuring no family loses its home because of the recession. Banks should use mediation in the event of a default and nobody should face legal action for two years after repayments stop;

5. Protecting those pension schemes threatened with insolvency and, ultimately, developing a new National Pension System;

6. Enacting the employment protection legislation already agreed and addressing non-compliance with the pay agreement;

7. Restructuring the tax system to ensure those who earn the most pay the most. Income from all sources - wealth and wages - must be taxed the same way. Closing all tax shelters that don't deliver national benefits;

8. Changing the Pension Levy to address the impact on low to middle income earners and commit to revisiting the issue in the context of a new National Pension System;

9. Protecting vulnerable people by safeguarding social welfare payments;

10. Developing the concept of a National Recovery Bond. This could provide money to build schools and might be supported by the Irish Diaspora.

I regret to say that the Government's response has been disappointing, displaying a poverty of ambition which does not augur well for achieving the type of bold initiative we think the situation demands.

Nevertheless, we must press on with our campaign because if the life of Mary Aikenhead teaches us anything it is that we should never abandon something we believe in because of adversity.