Life & Culture
Premium Irish Circle
Working in Ireland
Irish Name Register
Advice & Resources
Music & Songs
History & Archaeology
Heritage & Culture
News & Politics
Enter your e-mail address to receive our weekly e-Newsletter:
Ireland Calling with John Spain
Yes, It’s an Irish Recession
October 1, 2008
Ireland Calling by John Spain
LAST week the figures for the Irish economy for the second quarter of this year became available. They confirmed what everyone here could already feel in their bones. Ireland is in recession.
The economists don’t actually say a country is in recession until two quarters in succession show a contraction in the economy, or a negative growth rate as they call it. The first quarter in Ireland was negative, and now the official figures for the second quarter (to the end of June) which have just been published are also negative, confirming a slippage of around 1% in the national economy in the first half of the year.
And with the way things are going in the global economy, that is likely to get a good deal worse before it gets any better.
Although growth has slowed sharply or almost stopped across Europe, Ireland is the first country in the Eurozone to actually go into recession. A dubious distinction for us, we who used to be the fastest growing economy in Europe and among the fastest in the entire world.
How the mighty have fallen. The once powerful Celtic Tiger is not only dead, it has turned into dust and is blowing away on the cold breeze of an approaching winter that is going to be particularly miserable.
Why has it happened to us? Why is our economy the first in Europe to go into reverse?
Well, the simple answer is that the bigger the risks taken, the bigger the potential gains or the potential losses if things go wrong. And we in Ireland took the risk by making the Irish economy the most open in Europe, a strategy that paid off handsomely when the global economy was booming. But it means also that we are now feeling the downturn much faster than other countries.
We are feeling the pain because we are more dependent on exports and on economic activity generated by the many foreign companies who set up here because of our low tax rate. Now that global demand is falling and many of these foreign companies are retracting, we are feeling the downturn faster and more severely than most.
That is only half the bad story, however. The other half is that so much of our phenomenal growth rate in recent years was directly due to the property boom here, a boom that had to end sometime as construction reached and passed saturation level in the market.
Unfortunately for us that saturation point, followed by a price collapse and massive job losses in building, coincided with the global credit crunch. The two factors have combined to make the about-turn from growth to recession here much sharper than elsewhere, where property growth was strong but not as excessive as in Ireland.
With so much construction activity here grinding to a halt, the effect has spilled out across the economy, with consumer spending down. That affects business in general and activity across the economy and is a major factor in why we are now in recession.
And, of course, all that affects the level of tax revenue taken in by the government here. In a fast declining economy the tax take declines fast as well.
This puts the Irish government in an extremely difficult position, with Taoiseach (Prime Minister) Brian Cowen now arguably facing an even more difficult task than President George Bush or British Prime Minister Gordon Brown.
The tax take seems to be in free fall here. The tax take shortfall estimate for the year has increased from *3 billion a couple of months ago to *5 billion a couple of weeks ago to *7 billion this weekend.
The problem for the government is that tax revenue is contracting even faster than the economy in general. The reason for this is that so much of the tax revenue was coming directly from the construction sector. With that now in collapse, the river of taxation money from building and house sales has dried up.
Looking back now, it seems remarkably stupid that the government expanded state spending so much and so fast during the boom, when paying for it depended on the property boom going on forever.
The trouble with state spending, whether it’s on new services or more state workers like nurses or teachers, is that it’s very difficult to turn off once it’s been turned on. People get used to a higher degree of services, and they get very angry if these services are rolled back again. And of course the workers directly involved can be very difficult to get rid of because state workers are members of very powerful unions.
To try to cope with the situation, the government is now finalizing plans for drastic cutbacks in state spending, details of which will be revealed in the upcoming early budget on October 14. And even with drastic cutbacks, the government will still have to engage in enormous borrowing (around *8 billion) to balance the books for this year. Plus, the outlook for next year for the Irish economy and for tax revenues is even worse.
Already some of the bitter medicine that is being prepared for us is starting to leak out, two weeks before the budget the papers are predicting will be a “bloodbath” involving at least *1.5 billion worth of cuts in public spending.
Last weekend there was a stormy six-hour cabinet meeting, with ministers desperately paring back their budgets. The word after the meeting as the visibly shell shocked ministers left was that “nothing was safe” from the cutbacks.
Among many different programs facing the axe, for example, are the free medical care for the over-70s, plus the child benefits that are paid without a means test to every family in the country. In the future all payments like this could be means tested, cutting most middle-income families out of the benefits loop.
The ministers will be back in the government offices for another lengthy crisis session next weekend. The budget, when it emerges in two weeks, is likely to be the toughest one since 1983 — the last year the country was officially in recession.
The latest insider information is that they are aiming to cut state spending by 2.5% on last year’s *70 billion figure, reversing years of continuous spending increases for government departments.
That sounds bad enough. But you have to remember that inflation has been running at over 4% recently, so the real level of cutbacks in state spending — and therefore in state services — is going to be over 6%, and a cut that size will have a severe impact on almost everyone here because we all depend on these services in one way or another.
One thing seems certain — there is going to be a serious weeding out of state agencies and quangos, dozens of which were created during the boom years when political correctness became the rage and all kinds of new rights we never knew we had before had to be protected.
Equality this and consumer that and immigration the other ... there are so many of these bodies all producing reams of papers and reports that cost the taxpayer a fortune. With any luck, most of them will get the chop.
Other moves that seem inevitable are the return of college fees for the middle-class, and severe cuts in overtime in sections of the state services — last year the bill for Garda (police) overtime was around *100 million, although the Gardai are by no means the only state workers who have been raking in the extra money.
There will also be a reduction of around 1,000 jobs in the health services, mainly among administration staff of whom there are far too many.
These are some of the items that have been leaked from the government discussions, and they may or may not be accurate. What is correct is that there will be severe cuts across ALL government departments, and everyone is going to feel the pain.
As if all this was not enough, the Irish stock market has been in turmoil. On Monday shares in the main Irish banks had their worst day for decades, and that was before the news came through that Congress had chucked out the $700 billion bailout plan.
Shares in Anglo Irish Bank, which were already down to about one-third of the price they were a year ago, fell 46% in a single day (on Monday). Shares in Allied Irish Bank, Ireland’s biggest bank, which were also about one third what they were a year ago, fell by almost 17% by the close of business on Monday.
Such carnage in a single day is unprecedented in financial shares here. This catastrophic collapse in one day set alarm bells ringing in government offices.
They burned the midnight oil, and this morning, Tuesday, shocked everyone by announcing an Irish version of the American bailout.
The Irish plan provides a guarantee of *400 billion of bank liabilities, with all deposits, loans and debts covered by the state.
To put that in context, *400 billion is around 300% of our national income. The $700 billion proposed in the U.S. is less than 10% of American national income.
So the Irish bailout is gigantic. And we will be looking at what all that means for Ireland in this column next week.
Share this story:
Add to del.icio.us
Email a friend
© IrishAbroad.com 2009
Terms of Service
Add To My Site
| Bookmark us! (CTRL-D)
Use the code snippet below to link back to this page:
<a href="http://www.irishabroad.com/news/irish-voice/spain/Articles/irish-recession011008.aspx">Yes, It’s an Irish Recession</a>