Paul Tansey RIP could have written Colm McCarthy’s straight forward debunking of the bullsh0net that comes out of the radio whinge ins. Misleading people is a shame. There are many sellers of the snake oil of the easy solution.

The Irish Times – Saturday, February 11, 2012
Ireland’s squeezed middle


OPINION: IRELAND IS now four years into the deepest economic downturn
in modern times. The Government cannot finance itself without reliance
on official lenders, the EU and the International Monetary Fund (IMF).

The rest of the economy is effectively in the same boat: the debts of
the household and business sectors to the bust banking system are also
being financed in emergency fashion through the European Central Bank.

Both public and private expenditures have been squeezed. Since there
is no likelihood reliance on non-market financial support can be
brought to an end any time soon, it follows that neither public nor
private spending has been squeezed enough.

Indeed, had non-market external finance not been available to both the
government and the banks, the squeezing could not have been deferred
and living standards would have crash-landed in October 2010.

The public, willing consumers of spoon-fed Celtic Tiger rhetoric for a
decade, has shown no appreciation that things could have been much
worse. Purveyors of the daily diet of complaint (“austerity has
failed”) promise, but never articulate, a coherent alternative.

The volume of consumer spending has declined by about 13 per cent from
the bubble peak in the final quarter of 2007 under the combined
pressures of government expenditure cuts, tax increases, job losses
and pay cuts. This reduction brings living standards back to roughly
the mid-bubble level of 2005, at which point living standards in
Ireland were higher than in most European countries and higher than
they had been before.

There should be no nostalgia for the few brief years of unsustainable
and credit-fuelled excess as the bubble went into extra-time. The
correction in living standards has not been enough to restore
financial viability, so there will be further reductions before the
bottom is reached.

Some households have experienced severe financial hardship and
shuddering adjustments to living standards, while others have been
more fortunate. The fortunate tend not to contact radio phone-in
programmes or the constituency clinics of Dáil deputies. There is a
permanent risk that media coverage gets monopolised not just by those
in genuine distress but also by those with a political shopping-list.

The groups which have been hit hardest are easy to identify. If you
worked on a building site a few years back, there is a high
probability you are either in trouble or in Australia. If you are
still in Ireland and borrowed on a variable rate mortgage, your
monthly repayments are now higher than they were when you took the
mortgage out. Many could tick all the boxes: out of work, in mortgage
arrears and in negative equity. If your partner is also out of work,
this is indeed the perfect storm.

The silent winners are, however, quite numerous. Social welfare rates
of payment have been cut and scheme rules tightened, but not across
the board. State and public service pensioners have been spared the
cutbacks. Even high-income pensioners have had free medical cards
restored. But pensioners reliant on funded occupational schemes are
not so lucky: most schemes are underfunded and benefits are under
threat – a situation exacerbated by a government levy on funded

The winners are those far-sighted enough to choose careers with
employers who do not pre-fund for retirement, which means the public

If you borrowed to buy a home in mid-bubble but were lucky enough to
opt for a tracker mortgage, your monthly repayments are now lower (in
some cases, considerably lower) than the deal you struck initially.
You are likely to be in negative equity of course, but the lower
repayments are a big help.

Most of those who borrowed at the top of the bubble are on trackers,
with interest rates as low as 2 per cent. The good news is the weak
economy in Europe should keep tracker rates low for at least another
year or two, so there have been winners as well as losers in the
mortgage lottery.

Total employment in construction alone is down more than 160,000 in
the last four years, with large falls also in industry and in most
areas of private sector services. But employment has actually risen
slightly in the combined sectors of public administration, education
and health, the areas of activity dominated by the public service.

For workers outside these areas, the risk of job loss has been high,
while redundancy for government employees has been ruled out by the
Croke Park agreement. Even with pay cuts, public service employees are
winners in the job security stakes.

This year the budget gap is expected to be under 9 per cent of gross
domestic product (GDP) – the value of all goods and services produced
within a country – a small improvement on last year’s outcome, but
quite unsustainable.

Neither official lenders, in the shape of the EU and the IMF, nor the
sovereign credit markets will finance continuing deficits for Ireland.
One of the few predictions that can be made with confidence is the
budget deficit will be zero in four or five years from now. In any
plausible scenario for economic performance, this means more spending
cuts and more tax increases.

The “Ireland’s Squeezed Middle” series carried in The Irish Times over
the last week divides the community implicitly into three groups. The
middle: squeezed to excess, it would appear; the poor: presumably to
be spared squeezing; and the rich: promising squeeze material, but
rather less numerous than a few years back.

If the bottom 20 per cent are to be spared, and the top 10 per cent
unlikely to deliver 8 or 10 per cent of GDP on their own, it follows
the 70 per cent who self-select themselves into the middle class are
due for further reductions in living standards.

The only scenario in which this might be avoided is a sudden return to
rapid and sustained economic growth. In an uncompetitive economy
burdened with public and private debt, this does not look likely.

The best hope is that austerity is accompanied by the reforms that
will build a platform for recovery once the budget deficit has been
Colm McCarthy lectures in economics at University College Dublin. He
chaired the government-appointed group which prepared the “An Bord
Snip Nua” cost-cutting report