ANALYSIS:Unusually the need for strict fiscal policy goes unquestioned at a subdued conference
THE HIGHLIGHT of the annual economics discussion fest in the Park Hotel in Kenmare is usually the Saturday evening session, and this year was no exception. It was titled The Paul Tansey Symposiumand chaired by Olivia O'Leary in tribute to her late husband, Paul Tansey, former Economics Editor of The Irish Times.
The guest speaker was Minister for Education Batt O’Keeffe, who reaffirmed the Government’s commitment to a tough budget.
After a period where Ministers were allowed freedom to question proposed cuts, it seems that the agreement on the revised programme for government has given the Cabinet a new resolve to face down the dissidents and take the medicine.
Unusually for Kenmare, no one questioned the need for a strict fiscal policy; no one disputed the need for early action. However, it is equally clear that there is a gulf between this “informed” view and the man in the street. There is a communications mountain to be climbed if the vested interests are to be overcome. The Minister invited the economists to help carry the rucksack.
Colm McCarthy reviewed the disastrous experience of the 1980s when the fiscal crisis was allowed to drag on for a decade.
Echoing Joe Durkan’s presentation the previous evening, he threw cold water on the notion that the earlier fiscal crisis was resolved by spending cuts.
Like Prof John FitzGerald, he believes that this time there is no alternative to early action. In the 1980s we got lucky and tax revenue rebounded; this time we will need both a revenue rebound and severe spending cuts.
As McCarthy put it, there is a bubble in public spending as well as in credit provision, and the economy will not be rebalanced unless this is acknowledged.
There was much looking back, and apologies were the order of the day. John FitzGerald apologised for not having forecast the credit crisis; Pat Farrell of the IBF apologised on behalf of the banks.
Jim O’Leary showed that not alone had the IMF, the OECD and the EU not criticised Irish fiscal policy, their overall tone was positive, with Ireland frequently seen as a “poster child”.
There was general acceptance of the need for regulatory reform following John FitzGerald’s conclusion that the Financial Regulator should have prevented the collapse in the domestic financial system.
From the industry side, Pat Farrell accepted that robust regulation was needed, but warned that the approach needs to be tailored to serve the needs of both the retail banks and the IFSC, which could be damaged by a one-size-fits-all regime.
Pat Ryan, a former senior executive at AIB, gave an extensive and thought-provoking presentation entitled Towards a Banking System Fit for Ireland's Purpose. He provided a rationale for the upward move in interest rates that is likely to occur after Christmas.
Based on a blended cost of funds, the break-even lending rate for mortgages is between 4 and 4.5 per cent, which means that banks are making losses on many mortgage products.
It makes little sense to rescue banks but then to pile up problems for the future by keeping them in a loss-making situation.
Ryan also noted that the cost of funds to the banks is boosted by the Irish credit spread, which is now about 1.3 per cent higher than it might be. This point was reinforced by Colm McCarthy, who noted that we have the highest spreads in the euro zone, implying that the markets still have reservations about us. The best way to ease the pressure for higher mortgage rates is to get the credit spread down, and Ryan advised everyone to reflect on this.
Morgan Kelly of UCD gave the most provocative and entertaining presentation of the conference. Describing Nama as “cash for trash”, he said the banks are too big to save and held that even if the Nama assumptions were correct, the Irish banks, particularly Bank of Ireland, would “continue as worse than zombies”, ie they would be “simply dead”.
However, the true situation is worse still because the present value of the assets being transferred to Nama is approximately zero, instead of the €54 billion the Government proposes to pay. A heated discussion ensued with the participants maintaining their positions, thereby preventing any real light being shed on the differing assumptions. Nama remains highly controversial.
On the topic of economic recovery, there were different schools of thought.
The more optimistic, like John FitzGerald of the ESRI, saw a rapid recovery. Others, such as Joe Durkan, were considerably more pessimistic.
As regards tax revenue, Jim O’Leary foresaw a sharp rebound, but Colm McCarthy warned that while some taxes will recover, others like Capital Gains Tax and Corporation Tax will be depressed for a long time. He wondered whether the ESRI model captured this, a reasonable question given the dramatic changes that have occurred.
The overall tone of the conference was subdued, and references to “going forward” and “green shoots” were notable by their absence.
