Bertie Ahern: The Man Who Blew the Boom: Power & Money (41 page)

Another feature worth noting about the social partnership process is the effect it had on the Department of Finance. Partnership was run from the Department of the Taoiseach. It involved huge multi-year commitments affecting the national finances, and part of the role of the Department of Finance in scrutinising expenditure plans and arguing against what it believed could not be afforded was thereby diluted. Power shifted to Ahern’s department. Likewise, the Programmes for Government he negotiated with the
PD
s involved tax-cutting and expenditure commitments that the Department of Finance was presented with as a
fait accompli
. After Ahern’s departure from politics, the performance of the Department of Finance during his period as Taoiseach was the subject of an independent study that identified these two factors and said that the department’s repeated warnings about the dangers of the budgetary policies pursued during the Ahern years were ignored. It criticised the department for not shouting louder as the years passed.

Perhaps the most important aspect of the partnership model is the way in which the core agreement concerning moderate wage demands and reduced income tax morphed into a central philosophy of the Ahern Governments: low taxes bolster economic growth. What started out as a deal ended up as a principle. Implementing that principle during an unprecedented economic boom turned out to be a disaster.

Chapter
14  

COMPETITION

S
ome economists question the proposition that countries compete against each other in the same way that companies involved in the same sector might. Countries trade with each other, and so innovations and cost reductions in any one country benefit them all, they argue. However, the argument is not seen as being applicable to Ireland, owing to its nature as a small and very open trading economy highly dependent on foreign investment. Modern global industries such as biotechnology, software and aerospace tend to converge or cluster in particular places around the world, and therefore countries are indeed involved in an intense competition to have them choose to operate within their borders. Ireland’s achievement in wooing Intel in the late 1990s was seen as a cornerstone of the country’s subsequent success in boosting its electronics sector. Ireland’s gain constituted a loss for countries such as Wales and Scotland that had also sought to woo the semi-conductor fabrication project. The increasing globalisation of the world’s economy during the Ahern years made this issue of competitiveness all the more important.

As part of the first partnership agreement, the Programme for Prosperity and Fairness, a council was set up to monitor Ireland’s competitiveness. As Ahern himself put it in his foreword to its annual report in 2000, the economy’s ability to compete in international markets was a key component of the prosperity that the society was then experiencing, and ‘it is vital that we maintain and develop the competitiveness of the economy.’ The chairperson of the council was Brian Patterson, a senior business figure who was later the first chairperson of the Financial Regulatory Authority. Other members included people from the private sector, the public sector, the trade union movement and the employers’ group,
IBEC
.

Measuring competitiveness is a complicated and inexact process because it involves so many variables as well as decisions about the relative importance of the factors selected. When those studying the matter thought about Ireland there was even a consideration that such factors as the national personality—if there is such a thing—and the Irish ability to form relationships might be important elements in particular business sectors. Such matters, of course, cannot be measured. On the other hand, exchange rates and the cost of making a phone call to the United States are easily measurable.

In his foreword to the report Ahern referred to the National Development Plan and its intention to invest heavily in infrastructure in the period 2000–6, while Patterson referred to the need for speed in reacting to competitive challenges as they emerged. The development plan needed to alleviate the bottlenecks that were being created by the combination of rapid growth and historically under-resourced infrastructure. These were the problems of success.

Ireland’s unemployment rate was falling below 5 per cent, and there was even positive change in what was the main repository of deprivation: long-term unemployment. Given this falling off in those not at work and the continued growth of the economy, Ireland was experiencing skills and labour shortages, which in turn were contributing to growing inflationary pressures. The shortage of labour was also affecting the infrastructural investment projects outlined in the development plan. The distribution of the increased prosperity that Ireland was experiencing was particularly unequal, though the extent to which the Government, and the bulk of society, considered this to be a serious problem did not seem significant. Michael McDowell, whose views were influential within the
PD
s, even argued that income differential was a good thing, saying that it had positive benefits for the economy. As the new century began, Ireland’s richest 20 per cent earned six times as much as the poorest 20 per cent. This put Ireland at 20 per cent below the
EU
average and was twice the ratio of the best-performing country, Finland. McDowell’s argument was contested by many economic analysts, who argued that there was a correlation between high inequality and poorly functioning economies.

In its earlier period the Competitiveness Council ranked Ireland’s performance annually, monitoring whether the changes in a range of indicators were positive or negative. In its report of 2000 it found that Ireland had improved its ranking in 24 indicators (for example marginal tax rate for a single person, interest rates and percentage of small and medium-sized businesses that exported), worsened in 29 (telecom line-rental charges, compensation per employee, unit labour costs, research and development expenditure) and remained constant in 14. According to the report, ‘due to the strong improvement in employment growth and the reduction of the number of unemployed, Ireland’s position in terms of compensation per employee and unit labour costs is among the worst performing indicators.’

In his foreword Ahern said that the Government greatly appreciated the work of the council and that the relevant ministers should give careful consideration to its recommendations. But against the backdrop of the situation described in the report and that of the expansion in Government expenditure, over which Charlie McCreevy was presiding, it is hard to take Ahern’s statement seriously.

One of the effects of these expansionary budgets at a time of strong economic growth was the boosting of inflation and the domestic economy at the expense of Ireland’s international competitiveness. For Horan the crucial issue was that the policy dampened the exporting sector, which, as he pointed out, was predominantly based on manufacturing as against services during this period. It did so by boosting domestic activity such as consumerism and the property sector. (The increase in prices caused by the latter had a stifling effect on the competitiveness of the exporting sector.) This analysis in turn led Horan to a particularly stark view that is not widely voiced.

The expansion of the domestic economy in the period after 1997 was not sustainable. Up to this point unemployment had remained quite high and we probably needed to develop indigenous exports more in order to get it down. [After the expansionary budgets] unemployment dropped to 4 or 5 per cent, but probably a lot of it was [because of] an overheating economy, fuelled by debt. It was probably all a bubble. We have probably had a bubble for the last ten years [since 2000].

This view fed into the stance Horan took within the Irish Congress of Trade Unions in the wake of the economy’s later collapse, when the
ICTU
was arguing that the Government should put more money into the economy to protect jobs that, in Horan’s analysis, had been produced by unsustainable economic conditions in the first place. We will look at matters concerning the euro later, but it is worth having a brief look at the matter in the context of competitiveness.

Fig. 1: Growth in employment, 1997–2010

Source: Central Statistics Office.

As part of the preparation for the new currency, those countries that wanted to participate had to fulfil certain criteria relating to the size of their public debt relative to their economy, their inflation rates and so on. Ireland maintained low inflation rates in the years before qualifying for membership, but the McCreevy budgets in the second half of Ahern’s first Government contributed to a level of inflation that caused alarm in Europe. By way of the currency project, Ireland was now locked into a low-interest environment and so would have to find other ways to stop asset price bubbles and other undesirable phenomena. But Ahern and McCreevy had ignored this, and the expansionary budgets boosted an already-strong economy, encouraging the ‘domestic’ side of the economy: housing, retail and so on. This occurred at the expense of the manufacturing and exporting part of the economy.

By the time the Competitiveness Council produced its report in 2001 the world that Ireland was operating in had changed considerably. Ireland’s dramatic loss of competitiveness had occurred at a very bad time. Patterson, in a press statement in October of that year, put the matter succinctly.

The dramatic change in global economic conditions, the heightened uncertainty following the terrorist attacks in the
US
on September 11th and the fact that Irish wage rates are now growing at the fastest rate in the
OECD
are all serving to undermine Ireland’s competitive position.

Wage rates were growing at twice the rate of productivity. (Wage increases that lag behind productivity do not put pressure on competitiveness.) Taxation and insurance had risen, as had electricity prices. There were continuing problems with telecommunications and in particular with broadband access and telecommunications costs. ‘We have started to take our competitiveness for granted, and this can have very serious consequences in a scenario where global demand is slack, particularly since we no longer have domestic control of exchange rates and interest rates,’ Patterson said.

Ireland’s nominal wage costs were rising at about three times the
EU
average. (A nominal wage increase is when your pay goes from €100 a week to €105 a week. A real wage increase is when you take inflation into account. If inflation was at 5 per cent the real wage increase would be nil.) The
EU
believed that Ireland’s average wage level had been 3.6 per cent above the euro-zone average in 2001 and would increase to 13 per cent above that average in 2003, that is, 13 per cent above the average rates in the richest countries in the world if the trend continued. Irish productivity was falling, not rising. In its report of November 2002 the Competitiveness Council warned about rising costs, increasing wages, an inflation rate higher than acceptable and inadequate investment in infrastructure. In a review of projected increases in unit labour costs in sixteen countries it had found that Ireland came second-highest in 2002 and 2003.

It is interesting to look at where the inflation was centred. ‘Competitiveness: Costs and Inflation’, a report in 2003 by Forfás, the state body charged with fostering indigenous industry, concluded that approximately 73 per cent of inflation in the period 2000–2 originated in the services sector. The biggest engine of inflation was the non-traded services sector. Professionals such as lawyers, accountants, doctors, surgeons, dentists, architects, bankers and insurance providers were taking advantage of the weak competitive environment in which they operated to increase their share of the pie. Many opted to invest their increased level of wealth in property and, when the economy eventually collapsed, were left with debts to the banks that wiped out all they had gained.