Facing Financial Woe – Together.

The time has come to stop squabbling about past mistakes and focus on repairing the Irish economy, argues Sarah Slevin.

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Improbable as it may sound, there has been much discussion of cross-party agreement on economic matters over the past few weeks. This would help recovery, because attempts to reach a consensus on budgetary savings show that the national interest takes precedence over capitalising on short-term popularity growth. This presents us in a positive, united manner to the international markets.

This view was also expressed by former Swedish finance minister Bo Lundgren on ‘Morning Ireland’ recently. He believes that broad agreement on fiscal measures was key to Sweden’s success. As we know, the Scandinavians had a banking crisis not dissimilar to ours in the early 90s. Another measure that was key to their recovery? Rectification of public finances.

Sweden managed to reduce their unemployment rate from 13% at the height of their crisis to 4% in 2003. This was quite an achievement for a country that experienced a loss in GDP of 5% over 3 years. It’s also interesting to note the Swedish response to their banking crisis. After a blanket guarantee, the two main institutions were nationalised, with a ‘good’ and ‘bad’ bank created out of each. While Ireland’s solution differs in some minor areas, this congruity in action gives strength to the pro-bailout faction.

However, I believe the time has passed for conducting post-mortems on our handling of the banking turmoil. Further analysis serves no purpose, except as an attempt to gain cheap political points. And what’s more, statements saying that €27 billion could have been saved by not bailing out Anglo Irish make no economic sense whatsoever.”-And what’s more, statements saying that €27 billion could have been saved by not bailing out Anglo Irish make no economic sense whatsoever.”-Our focus should now turn to saving roughly €4 billion in the upcoming budget. As proven by the Swedes, rescuing public finances is imperative to keeping the International Monetary Fund at bay. Failure to make the savings is not an option, as it would indicate a loss of control, and result in a loss of sovereignty.

The difficulty for the government is combining maximum revenue with minimum pain. Unfortunately though, keeping everybody happy is just not possible with a €4 billion hole in the country’s pocket. Already announced by Brian Lenihan is a €1 billion reduction in capital spending. However, this is coming from a capital budget of €5.5 billion, so a further dip into this particular pot could be necessary.

Another widely discussed option is the introduction of a property tax on residential dwellings.

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According to the Commission on Taxation, this could prove lucrative, with an estimated income of over €1 billion. A property tax such as this would be quite substantial, but would hopefully cover a large portion of the deficit.

The issue of water charges appeared many years prior to the recession. This has the added advantage of reducing water consumption, and could hardly be deemed unreasonable by opposition parties. Nonetheless, it would provide a less reliable income than a fixed tax alternative. It would also involve installing water meters in every house in the country, costing both time and money.

Other options as regards taxation include increases in both standard and higher income tax rates, and in the rate of VAT. None of these seem particularly palatable, and none will stimulate the economy as required.

In many ways, spending cuts are preferable to increases in taxation. It goes without saying that all government departments are going to see a further drop in their spending power. While this may have trade unions frothing at the mouth, maybe it’s about time they started accepting the unsavoury scenario we find ourselves in.

In a recession such as this, debate often centres on how best to implement recovery. Should we focus on creating jobs, or is it necessary to revive the economy as a whole? This question is one of economic philosophy. My personal belief is that jobs cannot be created from a stagnated economy. Pouring funds into unsustainable jobs will actually prevent growth, and not allow any long-term revival.

Brian Lenihan said recently that “anger and abuse cannot function as policies for running the country any longer.” Whatever your political persuasion, it is hard to disagree with him. The time for recrimination has passed, and becoming proactive is the only way forward. Let’s hope that our political leaders see it as such. With the right budgetary framework, we may just become a Sweden rather than an Iceland.

Originally appeared in the November 2010 edition of Motley

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