We are living in dangerous times; this recession is going to be a very deep one. There will be many serious casualties along the way. There may also be fatalities; if we are not careful Ireland Inc. may be one of them.
That Ireland is in crisis is undeniable. We are a small country. We presently have about 1.2 million workers and 350,000 unemployed. By the end of this year we might only have 1 million at work and half million on the dole. Of the million at work, a third will be employed in the public sector. In simple terms that means there could be more people being paid by the public purse, than there are people working in the private sector.
That’s a completely unsustainable ratio. The tax burden on the private sector will be too high. The country wouldn’t be able to afford to pay the bill for the public sector and the unemployed. Something will have to give.
Ireland needs to borrow an extra €23 billion this year; that’s €23 thousand million euro. And that’s on top of the €51 billion we’d borrowed at the end of 2008. Estimates suggest by 2012 Ireland will need to have borrowed €111 thousand million (€111 billion). That works out at more than a hundred thousand euro per worker.
It wouldn’t be so bad if that money was being borrowed to finance capital projects like power stations, railways, hospitals, roads, schools and so on. That would make sense; it would be like taking out a mortgage to buy a house. Unfortunately, that’s not why we’re borrowing so much money. We’re doing it to fund day to day costs like public sector wages and unemployment benefits. That’s like a family constantly buying all their groceries and clothes with borrowed money. They’d be living above their means; they wouldn’t be able to do it for very long.
Unfortunately Ireland Inc. is in the same boat; it’s borrowing to keep itself afloat. It won’t be able to do that for ever. Eventually it will have to pay the loans back. How is it going to do that? The nation’s current income is insufficient to meet its current outgoings; so where is the money going to come from to pay back the debts?
The answer is nobody knows. The Government has its head in the sand; it’s just keeping its fingers crossed, hoping things will improve. The reality is, unless something fundamental changes, the situation is unlikely to get any better.
The problem for Ireland is simple; we don’t export enough. The way a country generates income is to sell its goods and services to other countries. Unfortunately we don’t sell enough Irish products and services overseas to generate sufficient income to sustain our lifestyle. Unless we do something to correct this problem, we really have no financial future. If we keep spending above our means, we will eventually go bust. It has happened to other countries; there is no reason why it won’t happen to us too.
If Ireland goes bust, then the management of our economy will be taken out of our hands and be in the control of the EU or the IMF. They will then take a ruthless approach to balancing the books by drastically decreasing government spending (including welfare expenditure) and significantly increasing taxes. It wouldn’t be pleasant; we really should do everything we can to prevent it.
The first thing we have to do is reduce government spending; that means cutting out all waste and unnecessary expenditure. It means reducing the public sector wage bill either by job losses or wage reduction. It also means cutting welfare costs; that’s right benefits will have to be reduced. That might sound drastic; it is, but it’s also essential.
The next thing we have to do is make the country competitive; that means reducing the minimum wage, pruning back high salaries, cutting back on perks, working longer hours, taking less holidays and getting rid of all restrictive practices. Again that may seem harsh; but unless we can compete with Eastern Europe, the Far East, India and China, there really is no future for us.
If everybody in Ireland took a 30% reduction in their income, then prices would drop and the reality would be we’d all be no worse off. Food would be cheaper, clothes would be cheaper, eating out would be cheaper. Although we would have less income, everything we buy would cost less. We wouldn’t be able to take as many foreign holidays though, but that’s a good thing because holidaying overseas means we remove money from the Irish economy. Staying in Ireland for your holiday is much because we keep the money circulating here. Servicing mortgages and debts would be an issue if we had less income, but given the very low level of interest rates it wouldn’t be so much of a problem.
The real benefit is Ireland would become a lower cost economy. We’d be more attractive to tourists, and would attract more foreign companies to invest here. We’d also be able to sell more of our agricultural and food products overseas; we might even be able rebuild our manufacturing sector and export furniture, cut glass, electronics and so on.
Western governments’ preferred policy is to borrow huge sums of money in a bid to re-flate the world economy. I’m not sure that‘s the right thing to be doing. I certainly don’t think it would be right for Ireland. I’m convinced the only way we can survive as a nation is to sell our way out of the problem we’re in. To do that we have to make ourselves competitive again; and the only way we can do that is cut our costs. It means every single one of use will have to make sacrifices; our living standards will have to fall. In the short term it will be painful; but in the long term it will be worth it.
If we don’t bite the bullet now and cut our cloth accordingly, the alternative will be infinitely worse.
Copyright © David Jones, 2009
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