Cowen's leadership put to the test as Irish 'dead cat' bounces


October 2, 2009, 11:41 AM

You may be familiar with the term "dead cat bounce," beloved of stock market traders. They use it to describe the phenomenon of a share price that falls to the floor, then recovers somewhat for a while, before falling back to the floor again and staying there.

It's a dead cat bounce. Like when you throw a dead cat out a window to the street far below. It bounces when it hits the ground. But that doesn't mean it's alive again.

Well, there's a very dead cat in the air in Ireland at the moment. And it's fostering a feeling of well being and business-as-usual.

It's giving people the misplaced hope that maybe this crisis is not so bad after all, that we will be able to get through it without really feeling any pain.

In the last week or two the leaders of the Irish banks have been making positive statements about their future, following a modest recovery in bank shares. This only happened because the National Asset Management Agency (NAMA) is about to take their mountain of bad debts away at a reasonable price.

The truth is that without NAMA our banks are bust. And even with NAMA, the government is still going to have to dig deep into taxpayers' pockets to recapitalize them again, after recapitalizing them the first time just months ago.

And it's not just the bankers who are pushing the positive spin. The politicians are at it as well, although at least they have an excuse because they have to get the Lisbon referendum passed this Friday.

All the spin in the world won't alter the truth, however. The truth is we face an enormous economic problem, and the way out of the mess involves severe and unavoidable pain for everyone.

The state is spending over €60 billion a year but only getting in €40 billion in revenue. The collapse of our property bubble and the consequent deep recession in the economy has shrunk tax revenue -- but the state is still spending like it did during the boom.

That's because cutting state services is very difficult. But it simply can't go on.

So new taxes or savage cuts in state spending are necessary to stop the country going bust like the banks. Taxes went up in the last budget and in the emergency budget.

A few weeks ago the politicians were saying that next time the emphasis would have to be on cuts. They even put a figure on it -- *€4 billion to be cut in the year ahead, and the same again the year after and a few billion in the years after that.

That level of cuts is hard to comprehend. It's impossible to do without impacting very heavily on the state services that everyone now takes for granted -- schools, hospitals, welfare, transport and so on.

And above all, it will have painful consequences for state workers and their high levels of pay and pensions which now account for over a third of all state spending.

To help identify where the cuts are to be made, the government set up Bord Snip and its report was made a couple of months ago. Its chairman Colm McCarthy revealed that we were now borrowing €400 million a week to maintain the day to day running of the state and maintain services. He identified a list of cuts that could be made across all areas of state spending.

Shortly after that the Taxation Commission reported on what we needed to do to reform our tax system. Over recent years our tax system has become complex and cumbersome, with exceptions and exclusions that make it inefficient and let too many rich people off the hook.

We badly need a simpler and fairer system. And we also need a system that will bring in more revenue.

The independent Commission on Taxation has been working away on this for some years, and it is fortuitous that its report came when it did recently. One of the main proposals was for a property tax, something which any sane person knows we should have, even if no one wants to pay it.

The government reacted to both these reports in somber tones, saying it was going to be tough but there was no alternative. The government is still saying that €4 billion has to be cut in the next budget, a figure agreed with the European Union which is supporting us through this crisis.

But in the past week or two the mood music coming from Taoiseach (Prime Minister) Brian Cowen and individual ministers has changed key. It's now more upbeat.

It started with Cowen saying that he was looking at the changes recommended in the Taxation Commission report as a long term project. Something to be achieved over a number of years, he said.

And it's the same with the McCarthy report on the cutbacks in spending. Several ministers have said they oppose some of the proposed cuts, and the Tanaiste (Deputy Prime Minister) Mary Coughlan even said that there are many things wrong with the Bord Snip proposals.

So little by little, the momentum for change that had built up has dissipated. The sense of urgency about making cuts to start us on the long road to balancing the state's books has gone. There is a lot of talk, but no action.

It's months since the McCarthy report appeared and NOTHING has been done. And meanwhile, with every week that passes, we're another €400 million in the red.