Some may ask why the Irish economy which up to three years ago was the pride and envy of many is somewhat overtaken by recession and has inadvertently dipped into negative territory. Some of the causes can be briefly discussed in this article where opportunity is taken to compare and contrast the Irish sudden misfortune to the mildly disconcerting dip into negative territory of our local economy, which moved from a high of 3.6 per cent GDP growth in 2007 to a lower rate of 1.6 per cent in 2008 .This year it is expected to contract to about 0.5 per cent. By sheer contrast, the Irish economy is expected to shrink at a faster rate reaching 8 per cent this year. This is no comparison to our drop in national growth from a high of 3.6 per cent in 2007 to 0.5 per cent shrinkage of around 3.1 per cent. Sadly the Irish misfortune is exacerbated by the sharpest rise in job losses.This translates in a record unemployment of 12.6 per cent coupled with price deflation hitting the 4 per cent mark. Surely there is some similarity with the sudden drop in the Irish experience to our unfortunate shrinkage registered this year (although ours is not so severe). This came out more evident when one reads the latest report of the Central Bank. The report minced no words to clearly observe that the pace of economic activity in 2008 has slackened particularly in the last quarter. Naturally, the effect of the recession resulting in the sudden collapse of the Irish bullish economy was definitely more profound than the mild correction suffered by Malta.
The report also highlighted the negative effect of a higher government deficit arising from a record low of 1.7 per cent in the 2007 (the year preceding the March 2008 election) which run amok to an unexpected high of 3.3 per cent in 2008. Perhaps as we shall see later on, this did not pose a catastrophic effect as that measured by the acute recession suffered by the Irish economy. Invariably as a result of the reduced growth we are now facing a higher national debt reaching 63 per cent of GDP which is in excess of the 60 per cent threshold allowed by the Maastricht criteria. As in the case with the Celtic economy we also saw a steep jump albeit to a lesser extent in general inflation. The official view is that the sudden hike in expenditure was mainly devoted to a one-off (not repeatable) €50 million payment to drydocks workers which was targeted for total privatisation. The report continues to observe that the pace of economic activity slowed down as both investment and exports contracted substantially. As a result, our annual growth rate fell to 1.6 per cent in 2008 from 3.6 per cent in 2007, with growth contracting in the final quarter. Employment continued to rise in the first three quarters of the year, but in last quarter labour market conditions, too, started to weaken. Thus, after falling to a low of 5.9 per cent, according to the Labour Force Survey, there were general indications of a rising trend in unemployment in the final quarter.
As noted in the Governor’s statement, one can infer that inflation trends in Malta did mirror those of Ireland as both economies slowed down. In Malta our hike in inflation was mainly attributable to the food and energy components of the overall index. Let us now turn to the cold winds that battered the Irish ship of state. As remarked above the so called Celtic Tiger was the envy of many E.U members how in a short span of 15 years it turned its agrarian based economy to a high value added one based on modern manufacturing and financial services. Its GDP growth has in the recent years equalled and exceeded that of its neighbour country, the United Kingdom.
Now that the apple cart has been upset we notice the bailing out of three Irish national banks.
Certainly, it is a misfortune that we in Malta have gladly avoided this situation due to clever and prudent banking regulation, even though as expected the profitability of our banks has dropped significantly mainly reflecting the poor performance of their investments. Back to the downturn of the Irish economy, this has left a dismal effect on an Irish government now wanting to restore international confidence in its debt-laden economy. Only recently, Irish Finance Minister Brian Lenihan announced an emergency budget that included the creation of a so-called bad bank to buy ‘toxic’ loans from Irish lenders. This is coupled by austere measures spiced with higher taxes and lower government spending to try to bring the deficit in line. If successful, this would cut €3.25 billion from Ireland’s budget deficit. Clearly the Irish malady pans out as the worst performer in the 16-nation euro zone partly the fault of a huge property bubble that has finally burst with dire consequences.
The glorious days of the Celtic Tiger era attributed most of its magic to an expansion of bank credit, low cost taxes and excellent financial services regulation. The patient is now in intensive care while its deficit had gaped to a record €3.7 billion in the first three months of this year .This may balloon to reach €24 billion this year unless immediate remedial action is taken. The first radical measure is the creation of a National Asset Management Agency to buy up to “a maximum” of €80 billion to €90 billion in impaired assets, mostly real estate loans, meandering in the bad loan books of Irish banks. Amid much political maneuvering, Irish politicians proposed difficult austerity programs which expect a quick deficit reduction to materialise from higher income taxes, although there will also be moderate cuts in spending. This begs the question of whether Ireland is by such austerity measures sacrificing its ace card in of lower taxes across the board. The government decided to leave the 12.5 per cent rate unchanged but the rates of Capital Gains Tax and Capital Acquisitions Tax are being increased to 25 per cent with immediate effect. It is in sheer irony that Irish ministers have accepted a cut in salaries and pensions whilst the opposite has occurred in Malta.
This fiscal tightening in Ireland is in contrast to the financial stimulus that is fervently requested from the local government by export firms particularly by members of the Chamber of Commerce. This stimulus expects our finance minister to boost demand in his next budget by increasing spending and lowering taxes to encourage economic revival.
But how can savings be achieved? It is not by coincidence that our public sector employment is not the best example of competitiveness compared with the rate reached in the private sector. The latest headcount in public service reveals a total exceeding 41,914 out of a working population in private sector of just 101,919. This certainly seems a high overhead cost for the size of the island’s population and needs a serious attempt to scale up the productivity of certain ministries. One practical idea that has been touted many times by armchair critics is to train the extra workers and then place them on loan to the private sector. After union consultation, certain jobs in the public sector could be outsourced to private sector companies, while state agencies that had outlived their usefulness could be wound up.
Just by coincidence, one reads that one of Ireland’s most senior bankers called for thousands of job cuts in the public service to generate €3 billion in savings. This might sound controversial for a similar move in Malta when unemployment is rising but I am sure that if a proper job audit is carried out in the public sector there could be a better redeployment of resources cocooned in state agencies. Such resources can be profitably redeployed in the productive sectors forming part of a stimulus package. With training, there can be more infrastructural embellishment, road signage, foot paths, extended healthcare schemes, possibly the creation of new beaches and sprucing up the tourist product in general.
The Central Bank governor himself reiterated that it is important to recognise that public funds should only be used to support activities that promise to be viable in the medium to long term.
If only the Celtic Tiger heeds these golden words, it would herald its recovery in earnest.
Partner at PKF – an audit and business advisory firm