Bertie Ahern: The Man Who Blew the Boom: Power & Money (40 page)

In a chapter entitled ‘Interpreting the recent Irish growth experience’, John Bradley, John FitzGerald, Patrick Honohan and Ide Kearney probed the factors that had led to the sudden economic blossoming, making the obvious point that understanding the causes of the success was an essential first step to forecasting its future. It is also, of course, an essential first step in deciding how to manage that future.

Interestingly, the authors considered the existing literature on the link, if any, between the harsh cutbacks introduced by Haughey in 1987, with the support of Alan Dukes and Fine Gael, and the sustained period of economic growth that stretched from that year to the date of the review. The popular view was that the 1987 cutbacks had led to renewed confidence in Ireland’s future and to a concomitant increase in private-sector investment and activity. However, the authors noted that the studies that had been carried out had come to an alternative view, namely that it had just so happened that the cuts had occurred at a time when international interest rates fell, when Britain introduced tax cuts and when there was unexpectedly strong global economic growth. Irish policy-makers, the authors said, had been ‘lucky’.

In the chapter on the origins of, or explanations for, the Celtic Tiger, the authors noted the effect on individual and institutional attitudes of the pessimism that had developed during the 1980s. Because of the level of despair, everything was up for questioning. A greater spirit of self-reliance began to manifest itself among younger people, many of whom, even if they chose to emigrate, had a stronger determination than heretofore that they would return. Reforms were introduced in the semi-state and state sectors because the need for them was so evident. But the most dramatic change, according to the authors, came in the attitude of the leadership of the trade union movement, which convinced its membership of the need to focus less on local pay and conditions and more on the competitiveness and long-term sustainability of the economy.

These were the considered views of some of Ireland’s most respected economists, published by the institute set up by one of Ahern’s stated heroes, Seán Lemass, to encourage a higher standard of performance in Irish society. These were also the ideas that drove the partnership process with which Ahern was so closely involved. He had reason, therefore, to be more aware of the importance of these factors to the long-term health of the Irish economy than most senior figures in Irish politics.

Chapter
13  

PARTNERSHIP

T
he dire economic situation, as well as fears within the trade union movement that it would be sidelined, as was the case in Thatcher’s Britain, was a contributing factor to the first partnership agreement, the Programme for National Recovery of 1987. The return of Charles Haughey and Fianna Fáil to power was also a factor. Alan Dukes, Minister for Finance in the 1980s’ Fine Gael-Labour coalition headed by Garret FitzGerald, said he detected a view at the time that the labour movement preferred Fianna Fáil to the Labour Party, despite its formal links to the latter. Haughey was sympathetic to a desire for a deal that had emerged among the social partners and was willing to give it a go. Ahern was the man he appointed to steer the issue to a conclusion.

A report by the
NESC
, ‘A Strategy for Development, 1986–90’, set out what the social partners might agree in the year before Haughey’s return to power. The council involved employer, trade union and civil service representatives and was a forum in which they could come together to discuss the nation’s woes without having to commit themselves to any particular policy. The economist Jim O’Leary, who was working for the
NESC
at the time, is credited by some with coming up with the formula that led to the document. When Haughey was returned to power and appointed Ahern as Minister for Labour, the partnership approach was looked on favourably and was soon implemented.

A key aspect of the 1970s and 1980s, according to Blair Horan, general secretary of the Civil and Public Service Union, was that wage increases were contributing significantly to inflation and that the abnormally high income tax rates being imposed by the Government to redress the crisis in the public finances were feeding into the demand for wage hikes. This is a significant point worth bearing in mind when considering what happened during the Ahern years. According to Horan,

the 1987 settlement was that we would go for low pay increases and the Government would reduce the tax take. It was a trade off. The abnormally high [income tax] rates that were the result of the 1970s were lowered.

The pay deal aspect of the agreement was a modest 2½ per cent annual increase over three years. The deal included general objectives aimed at the public good, such as maintaining social welfare levels, narrowing the Government deficit and reducing the ratio of the national debt to
GNP
(almost 130 per cent by 1987). The principal objective of the plan was to enhance Ireland’s international competitiveness.

It was not envisaged initially that the Government would play a crucial role in the partnership arrangement; rather, it was thought that the structure would be a matter for the employers and the trade unions. However, the state became centrally involved, and over time the process became more complicated, with a fourth pillar, the voluntary sector, eventually being incorporated. There were three-year deals covering pay in 1990, 1994 and 1997. Then came Partnership 2000 (1997–2000), the Programme for Prosperity and Fairness (2000–3), Sustaining Progress (2003–5) and Towards 2016 (2007). During this period the ability of the structure to agree three-year pay deals that were adhered to came under great strain and arguably collapsed.

As has been seen, the external environment into which Ireland was exporting improved considerably at about the time Ray MacSharry began imposing his cutbacks and the partnership process began to deliver wage moderation, industrial peace and medium-term consensual plans for the management of the economy. Improved wage competitiveness
vis-à-vis
our competitors, especially Britain, boosted economic activity. The profitability of companies began to recover and turnovers grew, although the investment in new employment was not sufficient to create significant net job growth.

When Partnership 2000 was being negotiated in 1997 John Bruton was Taoiseach. He and his Government oversaw the acceptance of the new deal, even though the trade union movement found it more difficult than heretofore to get it past its members. The success of the process was creating a new challenge.

The economy was booming, and the media were reporting ever-greater company profits and windfall gains for the owners of capital. There was also frequent coverage of the growing daily fee rates being charged by professionals. Some of the latter were equal to or above the monthly average industrial wage. The relentless increase in the price of housing was putting pressure on the average worker. Some banks were beginning to shift from using multiples of a person’s salary as a measure for mortgage purposes to affordability based on the person’s take-home pay. Because of this, every tax cut became a boost to house prices. The significant tax cuts introduced by McCreevy in his first budget were a direct spur to an already-strong property market.

Horan, who studied for a degree in economics during the 1990s and took an objective as well as a professional interest in the Government’s policies, was prompted to write to Ahern as early as April 1998. ‘Dear Taoiseach,’ he wrote,

I am writing to express the serious concern of my executive council at the soaring house prices in Dublin, and also increasingly in provincial cities. This is such a serious problem and one that will affect the model for economic success developed under social partnership that I would like to set out our views on the matter.

His union represented young people on modest incomes, and they were now facing a situation where inflation in the price of housing was in the 30 per cent bracket, while the partnership agreements that their union had settled for involved 2 to 3 per cent increases in nominal wages per annum. Demographics, Horan said, indicated that house prices were about to become a very serious issue in the wage-bargaining arena.

I have no doubt whatsoever that with the advent of the euro next year, a continuation of the economic model we have developed under social partnership is of even greater importance. The consequences for our economy if this problem is not successfully addressed will be very severe indeed.

Horan advocated Government intervention. The Government, in the wake of a report by the economist Peter Bacon, did intervene to try to suppress price growth but then reversed its stance and in the end opted to let the market, through supply, deal with the issue. The main point about this scenario is that price inflation was feeding into wage demand—the opposite of the situation in the 1970s and 1980s. Likewise, the various tax reliefs that were available to higher earners created an impulse in union circles to try and combat the growing gap between the income level of the most well off and the average worker.

In 2000 the country’s largest union,
SIPTU
, announced that it was seeking increases from profitable companies that were in excess of what had been agreed in the local bargaining clause of the existing agreement.

The Programme for Prosperity and Fairness included a new structure, the National Implementation Body, that was there to oversee the agreement and intervene where it appeared to be flouted. Sustaining Progress saw another such mechanism introduced, again illustrating the pressures that economic growth and rising expectations were putting on the model. Such developments also demonstrated the capacity of the structure to bring new bodies into being. As time passed, ‘the institutions of social partnership expanded, and little organisations were set up to keep everyone happy,’ according to Brigid Laffan, a former
NESC
member.

By the early years of the new century Ireland was being confronted with skills and labour shortages. Much to most people’s amazement, unemployment had dropped to 4 per cent—
de facto
full employment. Many companies were making satisfactory profits and were confident about future growth, and acquiesced in pay deals that were well in excess of what had been agreed in Sustaining Progress. Many companies felt it was in their interest to ensure that they kept good staff and secured suitable new employees, and were willing to pay to do so. Housing and other costs were continuing to rise, and they were again putting pressure on wages. Many in the highly unionised public sector felt that they were falling behind their counterparts in the private sector. A model that at the outset had been predicated on working together for mutual benefit was being transformed by the changed circumstances it had helped to bring about. Employers, unions and people generally were looking less to the maintenance of the common good and more to getting what they could from an increasingly rich cake. ‘It became a monster,’ said Laffan. ‘It became who gets what. And everyone got something!’

The dip in economic growth that came in the wake of the attacks on the United States in 2001 and the bursting of the dot-com bubble in 2002 served to lift some of the pressures on wage demands. Likewise, the flood of new immigrants after the enlargement of the
EU
in 2004 served to ease the pressure on wages.

In the public sector, meanwhile, the benchmarking system was established in 2002. In return for pay increases the system was supposed to provide public-sector reform, but it failed to do so. In response to criticisms in this regard, the leaders of public-sector trade unions countered that the Ahern Governments never looked for reform. They said it was not fair in such circumstances to blame the public-sector unions for not leading the charge.

According to Horan, the spending splurge that occurred half way through Ahern’s first Government made it difficult for the unions not to seek more than they might otherwise have sought. Tax reductions from McCreevy’s first budget onwards were greater than the norms before that, when they had cost approximately €400 million per budget. In the 2000 budget Ahern noted that, while the unions had sought a package of about €600 million, the Government had delivered €1.2 billion. According to Horan, ‘no more than wage negotiations adjusting to a higher rate of inflation, the next trade union tax demands responded to the higher norm set by the Government itself.’

No substantial reform of the public sector was attempted during the Ahern years, despite the resources that were available and the pay rises that were allocated. On the other hand, it is perhaps because of the fact that resources were available, and because a populist Taoiseach who disliked making decisions that might upset voters was in power, that no reform was attempted.

The history of the social partnership phenomenon was reviewed in
Saving the Future
(2007) by Tim Hastings, Brian Sheehan and Pádraig Yeates, in which many of the key participants are interviewed. It makes it clear that it was the depth of the crisis in the 1980s that led to the seriousness of purpose that in turn produced social partnership. When the process began to produce fruit the seriousness of purpose collapsed.