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.
The national mood has not been helped by the culture that pervades at senior levels in politics, the civil service and state run organizations here. It's a culture of high salaries and lavish expenses.
The line “Because We're Worth It” could have been invented for these guys. Their attitude is that nothing but the best is good enough for Irish officials, and because it's taxpayers' money it's a bottomless pit. So they spend and spend.
There has been a huge dispute in the past couple of weeks over Rody Molloy, the former head of the national training organization FAS, and the lavish expenses regime he presided over in a body that is supposed to be helping unemployed people get jobs. The shocking details are on Irish media Web sites.
Also there are the details of the scandalous spending of the present chairman of the Dail (Parliament) when he was a minister. Some of the limo and five-star hotel stuff he got up to is unbelievable.
But the truth is that these two were by no means alone. During the boom delusions of grandeur were common among senior people on the state payroll.
And many of them still have not changed their behavior. The dead cat bounce atmosphere at the moment is encouraging them to continue their lavish spending.
Meanwhile, the same attitude prevails at lower levels in the state sector. The powerful state sector unions are preparing to fight any attempt to cut the pay levels and pensions of their members.
Their pay is now 25 percent higher than the average private worker, the guy whose taxes pays them in the first place. And their state-guaranteed, index-linked pensions are the envy of private workers, many of whom have seen their pensions wiped out by the stock market crash.
Yet the state workers are unwilling to share the pain. What they have, they intend to hold.
They are trying to claim that the recent pension levy taken out of their earnings was a pay cut. It wasn't. It was simply an attempt to get them to pay a fraction of the real cost of their pensions, which would cost millions if a private sector worker wanted to buy a similar pension on the open market.
State workers in Ireland at all levels earn far more than their counterparts in Britain, for example, and no one knows why. Certainly no one would claim that services here are better than in the U.K.
We drifted into this situation in the good times when the national pay deals gave huge increases to everyone. That is now being reversed in private industry and private services here, where workers are taking deep pay cuts to keep their jobs.
But there is no sign of any give among the state workers. This is why we have one of the highest cost economies in Europe, and as a result are losing jobs so fast it makes your head spin.
Power plant workers are paid so much that electricity costs here are way above the European average, for example. Why? Because they have an effective state monopoly.
We have to change all this for two reasons. First, if we don't change, Ireland will go bust and the IMF will be in here on a slash mission to balance the books.
And second, if we don't change, private sector workers will continue to lose jobs and the pot of revenue to pay for state services will be even smaller.
It's a huge test of leadership for Cowen. It appeared that he was up for the challenge a couple of months ago.
But now all the signals indicate a failure of will, a lack of courage. As soon as Lisbon is out of the way on Friday he needs to take action. He should have done it after the Bord Snip report was released a couple of months back.
There is no reason to wait for the budget. Every day that passes is another day lost, gazing at the dead cat floating in mid-air.
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