Ireland: The shining light dims, the Celtic tiger chokes

An influx of multinational corporations, taking advantage of exceptionally low corporate tax rates of around 10% (compared to 35% in the UK, 40% in France and 60% in Germany), and huge transfer payments from the EU of around 4% of GNP, led to a boom in industry.

Unemployment tumbled from 16% in 1993 to 5.5% in 1999, public debt as a proportion of GDP fell from 91% in 1993 to 39% in 1999 and emigration, the bane of Ireland, halted and even some immigration began.

After a pause following the bursting of the hi-tech bubble from 2003-04, growth resumed its strong upward path, and a construction and infrastructure boom developed, reaching 12% of GDP, compared to a peak of 6% in the US and 4.5% in the UK.

But that was then. The bursting of the US property bubble in August 2007 and subsequent credit crunch has hit the Irish hard. Today the Economist tells a rather different story. In July the government cut its forecast for 2008 economic growth to just 0.5% from 2.8% at the time of the 2008 budget.

The virtual evaporation of economic growth this year is expected to cause tax revenues to fall short of budget targets by C= 5bn during 2008. (In the first six months of 2008 three areas, VAT, capital gains tax and stamp duties, accounted for 82% of total tax shortfall.) This statistic indicates both the steep decline in housing markets and slower consumer spending.

The steep decline in tax receipts this year will cause the government’s overall budget deficit to swell to 3.3% of GDP compared to an anticipated 0.9%, breaching the 3% limit imposed by the European Growth and Stability Pact, which stipulated that deficits should be below 3% of GDP over the economic cycle. The current shortfall in tax revenue means that government borrowing to meet existing commitments would exceed that limit. Inevitably, therefore, those commitments will be trashed.

Building and construction has collapsed, subtracting 4% from GDP growth alone. Activity in the building sector fell by one-fifth in the first three months of the year. The main component in the reduced output was a 38% drop in residential house building, which was only marginally offset by a 9% increase in non-residential construction. Industrial production also registered a decline of 0.9% between the first quarter of 2007 and 2008. Industry including construction makes up almost one-third of GDP.

Last year the construction industry generated about C= 37bn, close to one-quarter of all wealth created in the Republic in 2007. The estimate of the number of new houses to be built this year is about 46,000 – about half the record 88,000 homes built in 2006. In comparison NHBC figures show that there were 186,505 new homes completed by NHBC registered builders in the UK in 2007, 1% higher than in 2006 (184,959).

In 2006 Ireland completed half the number of homes built in the UK, but with a population 15 times smaller. Growth in mortgage lending is now below 10% – the lowest since 1989. The expectation is that property values will fall 25-45% from their peak.

The destruction of jobs and incomes in the construction sector and the erosion of confidence it has engendered is now affecting consumer spending, which is on the slide. Retail sales volumes in August 2008 were 5.2% lower than a year earlier, the biggest annual fall since 1987.

There has been a massive drop in the value of the four Irish-listed quoted banks. AIB, BOI, Anglo Irish and Irish Life and Permanent have shed two-thirds of their value since their share prices peaked 18 months ago. Despite this the banks have continued to report strong profits, although international investors believe the Irish economic downturn and property slump will hit them hard, pushing up bad debts.

The picture in industry is not so bleak. While there was a 3.3% drop in output in the manufacturing sector in the second quarter of this year, on an annual basis production in the manufacturing sector was up 6.6% to the end of June, mainly spurred by increased output in the chemicals sector. Irish exports are broadly flat, reflecting the impact of slower growth in Ireland’s major foreign customers and the damaging rise in the value of the euro against sterling and the dollar.

The difficult situation for workers is compounded by the rise in the cost of living to 4.7% in May over a year earlier, mainly driven upwards by the surge in global raw materials prices, particularly for energy and food. Accelerating job losses in industry and services has seen the unemployment rate rise to 6.1% in August, its highest rate in a decade, (although still below the EU average of 7%).

The government, alarmed by the rapid deterioration, has made an unprecedented move to bring forward the budget by seven weeks (to 14 October). Public finances have deteriorated sharply from a surplus in 2006 to defecit now. The public finance deficit tripled in the first eight months of 2008.

In July Brian Lenihan, the Fianna Fáil Minister for Finance, ruled out any large scale borrowing to deal with the shortfall in tax revenue. He planned to save C= 440m this year and a further C= 1bn next year, mainly from cutting the public service payroll bill by 3%, laying-off 5,000 public servants, part-time and temporary workers. The proposals contained in the proposed budget will not come into effect until the start of 2009.

In September the government will restart negotiations with the unions and business representatives on a new three-year national wage deal, the employers’ body IBEC is pushing for a 12-month pay freeze, and an inability to pay clause. The talks broke down in August. They want their so-called “social partners”, especially the Irish Congress of Trade Unions (ICTU), to deliver a tightening of belts for their members. It is the beginning of massive cuts and austerity measures. They aim to break the linkage of pay increases to inflation and deliver wage cuts.

It is worth remembering that the current leader of ICTU, David Begg, pioneered the introduction of the so-called social partnership process in 1987 with the Programme for National Recovery when industrial peace was traded for promises which were rarely kept.

Sacrifices were to be made by workers in wage restraint and productivity increases so that they would be rewarded in better times – at some time in the future. For over 20 years, they utter the same formula: bread today and jam tomorrow. Nowadays it appears that jam is still too expensive and the slice of bread too large.

Working people face the pressures of rising energy and food costs, house repossessions, unemployment and the threatened privatisation of the parts of the health service (at a time when over 50% of them fork out for private health insurance).

Yet, those who benefited most from the 10-year boom will not bear the burden. For example, the proposed co-location of private hospitals on public grounds will make a profit for the investors because they will be shielded by tax breaks and tax shelters. The construction industry is demanding the state provide incentives for buying their massively over-valued houses: all such incentives to be paid for by the tax-payer. Of course this will be branded as a major concession, permitting the least well off in society to buy a home.

And the response of the trade union leadership is nothing but a pip-squeak. Yes, there are some declarations that there will be no easy deals, no compromises etc. There will be the usual shadow-boxing by the parties involved. Public condemnations will issue forth. But practice reveals that principles are quickly ditched. Public sector pay and pensions have been under constant attack without a whimper of protest: special pay claims were jettisoned with the total connivance of ICTU.

Following the failure of breakthrough at national level, some unions have lodged pay claims but they intend to take no action whatsoever to achieve them. They will refuse to mobilise direct action, strikes or sit-ins. They will avoid confrontation at all costs. Under pressure from the working class, some one-day stoppages may be tolerated to let off a bit of steam and offer some leverage to the highly paid trade union bureaucrats in the talks process. The union bosses, the brokers of industrial peace, will undoubtedly show considerable flexibility in arriving at solutions in the behind-the-scene sessions to secure a rotten compromise.

The Labour Party is only too eager to surrender the political independence of the working class via a desired coalition arrangement with Fine Gael, the conservative opposition party. Labour are currently hankering for a few ministerial crumbs from the table if they come to power. There will be some huffing and puffing about the partnership deal process, nothing more and nothing less.

All this suggests that workers must act for themselves. Twenty years of social partnership has paralysed workers’ activism. Many have no experience whatsoever of fighting for a pay claim.

There is a need to build from the grassroots, reaching out to the rank and file in the trade unions and broadening out the struggle to embrace the unemployed, agency workers, students and community groups to oppose cuts in health, education, welfare and local services.

Tue 02, December 2008 @ 17:51