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The structural failure of Irish economic development and employment policy

Tom O’Connor*

Abstract

This article takes the Irish recession since 2008 and the need to introduce radically new employment polices as its ultimate goal. However, in arriving at these in the last section of the article, there is a need to first trace the historical development of economic development and employment policy. This is necessary to test whether current responses to unemployment, which are typically neo-liberal and serve specific ideologies and sectional interests in Irish society, have been continuous since independence; and to identify where breaks may have occurred and where continuities remain. Running through this, critical questions relate to whose interests have been served by dominant economic policy from independence to the present day. In learning lessons from this process, we can then come to conclusions as to what policy prescriptions are needed to reduce unemployment and put Ireland on a more state responsive, fairer and sustainable economic development and employment policy path from 2010 onwards.

Introduction: the current problemToC

By mid-2008 Ireland started to experience a dramatic reversal of fortune after the Celtic Tiger period of 1996 to 2007. The economy contracted by 11.3 per cent of GNP in 2009 (CSO, 2010a) and will contract by 0.5 per cent in 2010 (ESRI, 2010). At the time of writing (April 2010), live register unemployment stands at 433,000 and the ESRI (ibid.) project no fall in 2010, and at best a very small reduction in 2011. This has been accompanied by net emigration of 60,000 over the last twelve months and further net migration of 40,000 to April 2011 is projected (ibid.). The spectre of ten years of high unemployment after growth picks up in 2011 at the earliest is also a very real possibility, a feature which characterised the end of the previous recession in the 1980s.

Irish society during and after the Celtic Tiger continued to be characterised by fundamental structural problems in the welfare state, including its inability to provide sustainable employment, despite its newly found and now lost economic prosperity. The evidence clearly points to Ireland having developed into a liberal welfare state: Ireland has a total tax revenue of 30 per cent of GDP, second lowest only to the USA out of 21 OECD countries; its level of public social expenditure is the lowest of the 21 countries, marginally lower than that of the USA at 15.9 per cent; Ireland’s public spend on education is second lowest only to Slovakia at 4.14 per cent of GDP; its overall level of government spending at 33.7 per cent of GDP is also the lowest, less than the USA which stands at 34.3 per cent of GDP (O’Connor, 2010).

These statistics have given rise to many negative social outcomes alongside the perceived glowing success of the Celtic Tiger. However, the belief prior to Ireland’s recession in 2009, that economic success has been almost totally positive for Irish society and an economic model for other countries, has been referred to as a ‘mirage’ by Kirby (2005). The structural failures in becoming a ‘competition state’ rather than a ‘developmental state’ have also been highlighted, which, in addition to diminishing social development outcomes, have reduced the state’s willingness and even capacity to provide sustainable employment in a globalised world of changing labour markets (NESC, 2005; Ó Riain and O’Connell, 2000). Many of the negative social outcomes that have resulted are attendant on the liberal pursuit of public policy. This is evident as follows: income inequalities have remained stubbornly persistent over the past 20 years (Nolan and Mâitre, 2007); enormous wealth was created, but relative poverty at the height of Ireland’s boom persisted at 20 per cent of the population; homelessness grew and became endemic (McVerry, 2006); numbers on housing waiting lists reached 53,000 (Department of Environment, Heritage and Local Government, 2008); hundreds of people every week continue to wait for a hospital bed (INO, 2008) and as a result of state cutbacks, the pupil teacher ratio in primary schools is set to rise (Department of Finance, 2009).

The numbers of people on what were essentially workfare programmes during the 1990s often exceeded the numbers unemployed (NESC, 2005). Despite a reduction during the Celtic Tiger, many leaving schemes returned to the welfare queues or started other schemes. The Celtic Tiger was of ten years duration and at one point unemployment dipped below 4 per cent. However, this was hugely reliant on an unsustainable construction industry, and its collapse, along with the global economic crisis since mid-2008, saw live register unemployment rise from 171,800 in November 2007 to 435,000 by March 2010 (CSO, 2010b). When the increase is disaggregated, nearly two thirds of it has been related to the collapse of the construction industry and the consequent loss in construction jobs or closely related employment.

Structural failures within employment and economic development policies are brought into sharp focus here, after only a ten year period of low unemployment, these cracks have opened up to show a huge fissure. The state has failed to equip the workforce with new stocks of education and training to harness new, better paid and more sustainable employment opportunities, particularly in ‘high knowledge’ areas. This has always been a structural failure within Irish policies of economic development and was highlighted by NESC (2005) which at that time estimated that in 2010, out of 1.96 million employed in the Irish workforce, 27 per cent will have less than upper secondary education, 39 per cent will have secondary education only, and 35 per cent will have third level education. At the moment, the government’s failure in this area is starkly highlighted. Over 80 per cent of students complete the Leaving Certificate and a large proportion go on to third level or PLC courses, however the greater proportion of the Irish workforce is aged over 35, and little or nothing has been done to re-equip them to respond to unemployment and never has been. These structural failures, arising from state incompetence and strongly influenced by neo-liberalism, have been present since the foundation of the state and have not gone away. This article traces this lineage historically and points to solutions in the final section.

Sketching continuities and raising questionsToC

Arising from the above, we must ask whether these observations signify continuity or change in overall Irish economic development (and its impact on unemployment) over time. Economic development, employment creation and social development are the outcome of policies pursued by successive Irish governments. Yet these policies were never neutral and serving only the national interest. The policies pursued were shaped by the interests of specific social classes, economic elites and ideologies since independence (Peillon, 1982). This was/is in turn related to the development of these economic forces historically which have tended to serve specific class and economic interests. These ultimately skewed social policies in areas of economic development and employment creation in specific directions which have not always been in the economic interests of all groups in society and in many cases may not have been in the economic interests of the majority.

The solution to the current unemployment problem from a neo-liberal perspective is for the state to wait for global economic conditions to improve, enhance the country’s competitiveness, cut state spending and wait for the markets to improve (ESRI, 2010). This is unsound economics. Continuous cutbacks further deflate the domestic economy. This creates further unemployment. This further reduces taxation and widens the exchequer deficit. This calls for further cutbacks and the same downward cycle of depressed economic conditions, with the same effects of falling taxation etc.

It is obvious that this cycle must be broken by the stimulation of aggregate demand through the key variable of investment (Keynes,1936; Sidelsky, 2009), given the inability and unwillingness of the banks to lend. Ireland has always suffered from dependant economic development and has been at the mercy of multi-national corporations (MNCs). This has worsened in recent years with the pace of economic globalisation, the rise of China and other low cost Asian countries where MNCs can site their businesses and the increased speed at which MNCs can set up elsewhere. Stimulating investment in high knowledge and other industries with high economic potential can have two positive effects: it can have the obvious effect of injecting money back into the circular flow of income, creating jobs, consumption and feed into growth; it can also set up hundreds of Irish companies who will be embedded in the national economy, will not repatriate profits, and given the state shareholding in them will not look to the expediency of leaving the country. This reduces the exposure of the Irish economy to global economic shocks of MNC subsidiaries in Ireland closing down and leaving the country with little warning. So, this stimulus has the added benefit of starting to mainstream a blueprint to correct for fifty years of structural weakness in the Irish economy. The economic investment of state funding to buy 50,000 houses at historically low prices, for example, would put working families in a stronger position to make a positive contribution to the economy. It would reduce rents, which causes income to be taken out of the circular flow of income, and would allow people have greater spending power. The building of schools and other social infrastructure increases the economic capacity of the country and would also act to generate employment. The multiplication of income flows throughout the system pumps the economy and increases economic confidence.

In order to understand the complexity of economic and social forces that shaped Irish economic development policies and to trace the continuity and/or change in emphasis over time, we need to examine the economic development of Ireland since independence. The lessons learned from this will set the focus for examining state responses to Irish unemployment in recent years. In addition the alternative policy agenda discussed above is explored in greater detail in the final section of this article.

Independence

The members of the Cumann na nGael party which came to power at the time of independence in 1922 held a strong social class identification with the landed and newly professionalised Irish middle classes. This is evident in Jacobsen’s (1994: 50) reflection on the pro-treaty (Cumann na nGael) side during the Irish civil war: ‘large farmers, professionals, and commercial classes supported the pro-treaty forces while anti-treaty Republican forces were largely filled with small farmers and labourers’. As a result, it is apparent that the once undifferentiated tenant farmer class split into two opposing camps at the time of the treaty. The sub-stratum that accepted the treaty were the more well-heeled landed and professional class while the small holders and labourers who opposed the treaty would subsequently predominate in the ranks of Fianna Fáil from 1926 onwards.

This government displayed a keen preoccupation with fiscal rectitude. The administrative system of the new Irish state was almost totally inherited from Great Britain giving rise to the famous adage that independence, from the point of view of social administration involved no more than ‘painting the letter boxes green’. The latter epitomises the deeply conservative regime that was put in place. It did not have a vision for an expansionary welfare state and had no vision of any substantial economic development project (Kennedy et al., 1988). Instead it focused on keeping taxes low while promoting live animal exports to Great Britain. The abject failure of the new Irish state to embrace the wider population and work in the collective interest may also have been owed to the specific class origins of the new ruling class and their desire to reward certain sectional interests in Irish society. Crotty (1986) for example argues that the overriding desire of the new government, who were drawn predominantly from the elite farming class mentioned earlier, was to keep taxes low. In particular this resulted in its decision not to tax land. Once taxes were kept low, welfare spending had to be kept low as borrowing was an anathema for the new Irish government which was anxious to prove its competence in economic matters. Spending priorities which might have been gleaned from strongly focused economic and employment development policies were non-existent simply because there were no such policies! (Mjoset, 1992). This lack of vision meant that any attempt to utilise the developed agricultural economy to spin out industrial development projects in other areas, a key feature of the Danish economic development project, was almost totally absent in Ireland (ibid.).

In Denmark and also for example, in Japan, land had succeeded in kick starting economic activity. However, in Ireland where land was not taxed, it was bought as a speculative asset for the purpose of wealth creation by people not necessarily interested in using it efficiently. This resulted for Crotty (1986) in the ‘paradox of property’ where land prices rose alongside zero taxes, fuelling speculative demand, which resulted in non-intensive farming. This in turn was a significant cause of un-development. This ‘paradox of property’ and the resulting un-development was directly related to the colonial experience in Ireland which created a thin strata of landed and relatively well off farmers who subsequently speculated in their own economic interests. This was further exacerbated by this class possessing feelings of cultural inferiority towards the new Irish state and a perverse admiration for their previous colonisers, a common feature of previously colonised people highlighted by Memmi (1990). A strong indication of this lack of faith in Irish people and the country itself is given by the new Irish landed class investing their agricultural profits in the London money market (Crotty, 1986).

This colonial legacy resulting in the original ‘low tax/low spend’ Irish welfare state has also been highlighted by Considine and Dukelow (2009: 26) who writing on the residual nature of the early Irish state, and in particular the decision to cut old age pensions along with income taxes, state:

These changes were also influenced by the state of the economy and the power of the key economic actors. The Irish economy was in a poor state after independence, hampered by the effects of colonisation and a subsequent civil war which meant that there was little industrial infrastructure and few resources with which to develop it. Furthermore, agricultural interests and actors lay at the heart of class politics and represented a more influential force in comparison to the labour movement and the working classes.

The economic interests of this strong landed class were strongly favoured and nurtured by the new Irish middle class who populated government ranks at independence and who were also vastly over represented in the ranks of the Catholic religious. However, there were also strong religious grounds for the withdrawal of the state. The Catholic Church feared the threat of socialism and saw any strong state interference by way of tax and spend on industrial projects or public services as something approaching a left wing social order: ‘the Catholic Church, a source of solace and identity in plainer colonial days, guarded the gates against Bolshevik demons and bawdy authors, while emigrants poured out’ (Jacobsen, 1994: 51).

1930s and 1940s: continuing failure

During the time of de Valera’s governments in the 1930s and 1940s, Fianna Fáil, which did little to boost the performance of the state in either economic or social terms, still succeeded in gaining a reputation for being the principal party representing those with less economic resources in Irish society, be these labourers, small farmers or those even worse off. This symbolic victory was even inserted in Article 45 of the new Irish Constitution, Bunreacht na hÉireann (1937: 150): ‘the State pledges itself to safeguard with especial care the economic interests of the weaker sections of the community, and, where necessary, to contribute to the support the infirm, the widow, the orphan, and the aged’. However, this commitment to the less well off was more apparent than real as: ‘it is difficult to discern the influence of these worthy statements on government policy in the remaining years of de Valera’s Ireland’ (Breen et al., 1990: 30). Nonetheless, Fianna Fáil succeeded in winning the symbolic war in an era where many of the popular media and spin doctors present today were clearly absent.

Despite Fianna Fáil’s rhetoric and almost duplicitous cross class appeal, de Valera’s economic policies were a failure. The de Valera government pursued policies of economic self-sufficiency based on import substitution. Foreign imports were made more expensive to curb demand, by the introduction of tariffs on foreign imports. However, inefficient and uncompetitive native industry together with low levels of industrial investment resulted in economic stagnation and forced emigration. This was the failure of ‘Economic Nationalism’ (Neary, 1984). During the 1950s, there was a huge haemorrhage of people of working age emigrating such was the lack of employment opportunities. As can be seen from Table 1 below, this reached a massive 409,000 net migrants during the 1950s alone. Such was the failure of economic development and employment creation, the figure from the 1920s up to the 1950s was 607,000 people. Yet, as Sexton (1986: 31) observes:

the scale of the emigration which occurred, large as it was, did not prevent unemployment from rising substantially. The numbers on the unemployment register increased to nearly 95,000 in 1957. There were demonstrations on the streets and the degree of discontent was sufficient to enable one of the unemployed to gain election to the Dáil. Indeed, we had reached such depths of despondency at that stage that some were speculating about the eventual disappearance of the Irish as a race.
Table 1. Net emigration from Ireland, 1920–2003

1920s

136,000

1930s

101,000

1940s

250,000

1950s

409,000

1960s

135,000

1970s

(104,000)

1980s

208,000

1990s

(37,400 )

2000-2003

(129,900)

Source: Sweeney 1998, based on NESC (1990), and CSO Population and Migration Estimates (various years).

Despite the scale of the problem, neither Fianna Fáil nor the Fine Gael led 1948 coalition government radically altered the non-interventionist and residual state up to the time of modernisation in the late 1950s. The 1948 coalition government did attempt to open the economy to free trade by setting up the Industrial Development Authority (IDA) in 1949, along with Coras Tráchtála and other agencies to promote Irish industry, and had started to put forward Keynesian ideas in addition to seeking Marshall Plan funds (Jacobsen, 1994). However, the conservative Department of Finance under Mc Elligot worked to stymie these efforts calling the setting up of the IDA a ‘crackpot socialist scheme’ (Lee, 1989) and through the 1950s Finance conducted a deflationary crusade of economic downturns.

The industrialisation of Irish society

It was evident by the late 1950s that the economic policies that had been pursued since independence had been an abject failure:

Industry was incapable of expanding to provide the opportunities for employment within Ireland. Insulated by high tariffs from competition with foreign firms, domestic manufacturing was inefficient and geared almost entirely to the small home market. A generally low level of linkages among firms, another consequence of protectionist policies, and a distinct reluctance by private investors to provide capital, offered little potential for industrial expansion without effective and extensive State intervention (Breen et al, 1990: 36).

Following de Valera’s replacement with Seán Lemass as leader of Fianna Fáil and Taoiseach of a new government in 1958, an outward looking state policy of attracting foreign direct investment (FDI) to set up industries in Ireland was put in place. This involved a strong focus on export led growth through the attraction of foreign owned MNCs with generous state grants and tax incentives. These ideas utilised the then popular Keynesian ideology and converts to that cause included Seán Lemass and the Secretary of the Department of Finance, Dr. T.K. Whitaker. Capital to fund the economic incentives to MNCs came from the IMF and World Bank and funds were also borrowed internationally, deriving originally from the proceeds of oil revenues from the Arab world often referred to as ‘petrodollars’. Export profit tax relief was offered as an incentive which was later changed to a low 10 per cent profit tax in the 1970s. Grants were given to MNCs per employee and large capital investment grants were also made available. The idea was to short circuit the poor performance of indigenous industry through the use of FDI. The stimulation of the economy through government and MNC investment and the resultant increase in employment and economic activity would ultimately result in economic ‘take off’, a phrase introduced to economic development parlance by the World Bank economist Walt Rostow, representing an economic theory which was dominant in the modernisation school of economics at the time, and which then was being applied to dozens of newly independent ex-colonial countries throughout the globe.

Economic development policies were institutionalised firstly in the Department of Finance’s blueprint document entitled Economic Development and carried forward in subsequent plans. However economic development was to have primacy over social development and at the outset a low tax model was sought. This ‘low taxation could be achieved by “deferring further improvements in the social services” until the momentum of economic expansion was sufficiently established to carry the costs’ (Economic Development, 1958: 54 in Breen et al., 1990: 40). These policies resulted in rapid economic success though the debt incurred would affect Ireland’s economy for many years thereafter.

In the first ten years of economic planning GNP grew by 50 per cent and the size of the civil service administration by 25 per cent. Public expenditure, which had stood at 30.4 per cent of GNP in 1958 had risen by 1968 to 40.4 per cent. The rise in public social expenditure was even more rapid: having stood at 13.3 per cent of 1958 GNP, it was equivalent to 18.0 per cent of the country’s GNP by 1968. Tax revenue increased as well, over those years from 22 to 28 per cent of GNP. The depressed conditions of the base year-1958-render these changes particularly dramatic (ibid.: 44-45).

Capital inducements to MNCs fuelled government debt financing. Election competition in the 1970s became characterised by selling promises involving unplanned and often unnecessary state expenditure. Fianna Fáil swept to power in 1977 with promises of abolishing wealth tax, domestic rates and a ‘loadsamoney’ budget (O’Toole, 1993). In addition the oil shocks meant that by the early 1980s a decade long economic depression had begun in Ireland. This was hugely compounded by massive government debt for the reasons mentioned, which stood at almost 150 per cent of GNP. Payment of the debt necessitated large increases in personal taxation throughout the 1970s, as evidenced by a top marginal tax rate of 58% accompanied by very narrow tax bands. This caused huge economic hardship for ‘pay as you earn’ (PAYE) workers who at the time paid almost 90 per cent of all taxes which culminated in the huge tax marches across the country by 1979.

However, the supreme irony was that while workers on modest incomes paid relatively hefty levels of personal taxation, those from the propertied and farmer classes paid very little. Thus, it would seem that the structural inequality of the Irish state in favour of specific elite classes, as discussed throughout, was not altered by the ‘rising tide lifts all boats’ expansionary economic development policies pursued by Lemass and subsequent governments throughout the 1970s and 80s. As noted by Breen et al (1990: 92):

The tax advantage … conferred by property ownership is most starkly highlighted when the tax rate of large proprietors (who average £197 in weekly income) is compared with that of unskilled manual workers (who averaged a weekly £63 income): in 1980 they shared a common tax rate of 16 per cent. Higher professionals and skilled manual workers paid more of their income as tax, but the difference between their rate and that of low income categories was not substantial (23 and 20 per cent, respectively).

The 1980s

The figures cited at the end of the preceding section show that taxation on those with the highest level of economic resources in Ireland was miniscule, and this is consistent with earlier observations on the deliberate policies implemented by all governments in Ireland since independence aimed firmly at keeping taxes low. Overall government taxation as a percentage of GDP was exceptionally low (22.5 per cent) just prior to the industrialisation of Irish society in 1955. Moreover, tax on goods and services, essentially regressive indirect taxation, on its own collected the highest proportion of total tax revenue (52.4 per cent). Corporate income taxes were low in 1955 and even with rapid industrialisation thereafter their share fell dramatically up to 1985 (from 7.5 to 3.2 per cent). Similarly property taxes fell substantially over the period (19.2 to 4 per cent) validating Crotty’s argument about the supreme tax advantage of those holding property (see Table 3 below).

During a time of rapid state investment in terms of grants to foreign industries billions of pounds were spent by the IDA on grants to industries, mostly foreign companies. In the period 1971-1979 alone, over £1.5 billion was allocated in this way (Telesis, 1982). Overall taxation levels in Ireland, and in particular PAYE taxation rose to pay this huge debt financed government strategy which saw the overall government debt to rise to 133 per cent of GDP in the early 1980s.

There is a critical point to make here: overall taxation levels were never really meant to rise, as pointed out by Whitaker in Economic Development. The welfare state which included employment and training policies would not be countenanced if it resulted in increased taxation. However, taxation levels did rise significantly but not to expand the welfare state or re-train more people for jobs (O’Connell, 2000; O’Connor, 1997) or make third level education more available (Lynch, 1999), but was used simply to pay government debt caused by unchecked spending on grant aiding industries and the offer of tax advantages. Consequently, when the 1980s depression arrived, the government was essentially broke. It had neglected indigenous industry in favour of MNCs, many of whom left the country having been given significant capital grants and £8,400 per job up to 1980 (Telesis, 1982). In short, higher taxation was never a deliberate policy of the Irish state and when it did happen it was not aimed at dealing with the structural failures in Irish employment policy which displayed a dramatic rise in unemployment in the 1980s as can be observed in Table 2 below.

Table 2. Unemployment in Ireland (Live Register) 1980 - 1993

1980

1987

1990

1993

Long-Term Unemployed

32,180

111,000

100,266

132,102

Unemployed

92,253

249,762

223,251

297,958

Source: Ronayne (1994)

Elements of this structural failure included a poor ability to up-skill people for marketable jobs, underpinned by the poor reputation of ANCO, the state training authority of the time, very little state support for indigenous industries, and the creation of poverty and unemployment traps for families with low paid earners (Callan, 1987) caused by high taxation. The end result was a return to mass emigration which reached 200,000 in the 1980s. It must also be borne in mind that the significant rise in overall taxation to 39 per cent of GDP in 1985 disguised the fact that PAYE workers through personal taxation paid the lion’s share: in 1985 the combined total of personal income taxes and taxes on goods and services accounted for over 75 per cent of the total tax take (see Table 3) while taxes on property and profits had sunk to dramatically low levels.

Table 3. The structure of taxation in Ireland 1955-1985

% total tax revenue

1955

1965

1975

1985

Personal income

16.4

16.7

25.2

31.3

Corporate income

7.4

9.1

4.8

3.2

Employer social security

2.4

3.3

8.2

9.4

Employee social security

2.2

3.2

5.6

5.2

Property

19.2

15.1

9.7

4.0

Goods and services

52.4

52.6

46.5

44.4

Total

100

100

100

100

Total tax as % of GDP

22.5

26.0

31.5

38.9

Source: O’Connell and Rottman (1992: 227)

Government policy during the first half of the 1980s was influenced by the monetarist ideology popular at the time in the UK under the leadership of Margaret Thatcher. Monetarist policy prescriptions are based on the classic, expectations-augmented Philips Curve in economics. This contends that it is often necessary to tolerate high levels of unemployment in order to restore low competitive pay conditions which will reduce inflation and, in the long run, correct for past mistakes by increasing the money supply and inflation by uncontrolled state spending. Fiscal rectitude is an obvious necessity in the policy mix that results. Higher taxation was viewed as an unfortunate negative side effect of wasteful and undesirable poorly managed Keynesian policies during the 1960s and 1970s. As such, once fiscal rectitude became successful, the unintended consequences of higher taxation, which was never planned in the Irish context, could be remedied. The emphasis from then on would be on reduced taxation to restore a significant inducement to business to invest and to restore competitiveness through lower wage demands as a result of lower employee taxation.

In these circumstances, active re-training policies with re-training allowances which offered reasonable financial compensation to the unemployed worker as practiced in Scandinavian countries (Kennedy, 1993) was not considered an option. This was the case, simply because it would have required a more progressive and expansive taxation system. The recognition that the Scandinavian model offered strong opportunities for the development of indigenous industries and active re-training entitlements to re-skill workers was completely off the agenda.

The overall picture that emerges is that Ireland never had a progressive or redistributive tax system; taxes on personal income, in the main PAYE income, rose dramatically during the 1970s and 1980s to pay for electoral competition (Mair, 1987) and for reckless and unsustainable grants and tax incentives to transnational capital. At the same time, the tax take from corporate income halved to less than 4 per cent in the 1980s. Indirect taxation, a tool so favoured in neo-liberal policy ranged from 44 to 50 per cent of all tax collected, regressively collecting more in taxation from the less well off. These regressive taxes continued during the Celtic Tiger as detailed below, and the sheltering of taxes in property alongside tens of billions of state tax relief reached a crescendo by 2005. The inequity of the Irish tax system has been historically continuous, right to the present day.

The neo-liberal and supply side revolution from 1987, and the Celtic TigerToC

From 1987, with Fianna Fáil back in power, fiscal retrenchment and reducing the overall tax burden would be the order of the day. This was based on supply side economic thinking which was embedded subsequently in the influential Culliton Report of 1992. Taxes would be cut and welfare would have to take the pain of reduced state spending which dropped from 44 to 34 per cent of GDP from 1994 to 2004. Transfers from the EU National Development Plans (1993-99 and 2000-2006) were prioritised to improve the country’s competitive position by spending heavily on transport, communication and other infrastructural improvements to give a competitive edge in reducing the costs of production. Reductions in personal taxation was the central feature however, which was rationalised in terms of reduced costs to employers, and the competitive effect it would have on goods and services, particularly for export. Overall tax revenue dropped from 34 per cent in 1990 to 29.7 per cent in 2004. By 1995, government spending had fallen dramatically to 41.1 per cent of GDP which was 12 per cent less than the EU15 average of 53 per cent (Eurostat, 2005).

For the bystander, the Celtic Tiger economy spawned the huge rise in economic growth, living standards and employment creation, which may give the impression that Ireland has been a wealthy country for many years. However, as recently as 1989, Ireland’s per capita GDP was only 70 per cent of the EU average (Tansey, 1989). In 1993, registered unemployment was still 20 per cent of the labour force (Kennedy, 1993) and unemployment remained a persistent problem as late as the mid-1990s. Much like Sweden and Spain, but far later in the day, the Irish government adopted a corporatist, or ‘social partnership’ approach. The partnership approach and the pay restraint it guaranteed was quintessentially representative of supply side economic policies, which dovetailed with the use of EU funding (O’Connor, 1997; see also Moran, this issue). The main policies pursued were the maintenance of a competitive or low pay environment; a continuing reduction in levels of overall taxation, and income tax in particular; a reliance on FDI in manufacturing and high knowledge services; social welfare reform; improvement in roads and transport systems; likewise in telecommunications; and a commitment to overall infrastructural improvements, including social infrastructure (ibid.). These policies proved remarkably successful on the economic front: Ireland became a blueprint economic miracle held up to other countries as a model to emulate (Kirby, 2005). This was based on the rapid level of economic development achieved since the mid-1990s. Ireland’s average GDP growth from 1990 to 2004 was a stunning 6.37 per cent per annum. In 2003, Ireland’s GDP per capita stood at 133 per cent of the EU25 average. There was also a staggering increase in employment. From 1993 to 2004, employment levels jumped from approximately 1.18 to 1.84 million, an increase of over 650,000 at work in slightly over ten years (O’Connell and Russell, 2007).

Economic commentators, many involved in one way or another as cheerleaders for this economic miracle, wrote near celebratory books. These varied from commentators from the union side (Sweeney, 1998), to a neo-liberal minister in a book jointly written with a representative of the IDA (Mac Sharry and White, 2000), and a further book by the union side (Sweeney, 2008). At all times, however, this approach was supply side economics writ large, and moved increasingly to a celebration and pursuit of neo-liberal economic aims, ideals and policies, which included a drive to privatisation (Sweeney, 2004). The more obviously savage edges of this philosophy were concealed in the ‘symbolic construction of community’ (Cohen, 1986) which social partnership represented, and is possibly why people continued to accept the inevitability of the poorer welfare state delivery to which it has been accustomed. Instead of the confrontational imposition of neo-liberal restructuring that has characterised this policy shift in countries like Britain, Irish governments used wage and policy concentration as a ‘vehicle for imposing a neoliberal political agenda’ (Kirby, 2005: 7) with the result that ‘this transition has been almost seamless’ (ibid.: 8).

The power of the economics profession has also been a significant reason for the consensus and acquiescence mentioned here. Economists in Ireland, in the main, work from a free market ideological position. Lee (1990) highlighted the increasing number and growing deference to the prescribed wisdom of economists in Ireland since the 1970s from a time in the 1960s when there were only a couple of dozen trained economists in the whole country. In contrast, opposition groups working with those who are unemployed, who are in insecure jobs, working for low wages or living in poverty, or other of the ‘affective pressure groups’ (Maguire, 1977) are at a huge disadvantage in public discourse unless they can match the in-depth statistical knowledge and rational economic reasoning of trained economists. For most economists in Ireland, unfettered capitalism is the only game in town and ‘in spite of their claim to be neutral and scientific, economists are deeply committed to the free market system’ (Allen 2003: 59).

The continuity between past and present in the neo-liberal project is striking. Since independence, apart from the temporary ten year period from the late 1970s to the late 1980s, income taxes were kept low. Most of the shortcomings of past industrial policy continued in terms of a failure to develop a strong and varied indigenous industrial sector; poor levels of ongoing re-training for work; a reliance on workfare programmes such as community employment schemes which averaged 40,000 participants a year during the 1990s; an over reliance on low cost assembly industries which were increasingly re-locating to lower cost countries; an over reliance on FDI which was becoming harder to attract in an increasingly globalised world; a failure to embrace the need for the government itself to create and invest in high knowledge industries which could maintain higher productivity, greater value added and reasonably good wages. All these factors were masked by the construction industry boom which contributed to the mirage of what we now know was the Celtic Tiger. A further structural problem which characterised the Celtic Tiger economy was the growth in low wage jobs. The miracle of full employment during this period concealed the fact that approximately half the working population were earning less than €30,000 per annum (see Table 4).

Table 4. Wage ranges of total income tax payers, 2008

Range of Gross Income €

Schedule D

PAYE

Total

0 - 10,000

34058

361519

395577

10,001 - 20,000

43208

341752

384960

20,001 - 30,000

39933

353481

393414

30,001 - 40,000

29308

296725

326033

40,001 - 50,000

20036

218426

238462

50,001 - 70,000

24422

262084

286506

70,001 - 90,000

12491

131069

143560

90,001 - 100,000

3840

37955

41795

100,001 - 150,000

10142

80219

90361

150,001 - 200,000

4410

18622

23032

200,001 - 500,000

7610

13746

21356

500,001 - 1,000,000

1856

1184

3040

Over 1,000,000

685

316

1001

Overall Total

231,999

2,117,098

2,349,097

Source: Revenue Commissioners (2008)

Post Celtic Tiger Ireland: how can structural failure inform solutions to unemployment?ToC

When the Celtic Tiger bubble burst, the structural failings mentioned above along with others in the banking system which lay hidden, came to the fore with a vengeance and resulted in unemployment more than doubling in two years. For the most part, since independence, Ireland has been a poor example of a strong state in terms of welfare and also in terms of its ability to direct sustainable economic development policies. The past failures in this regard, which were masked by the Celtic Tiger have now become totally transparent with the current unemployment and economic crises. The state is displaying itself as being both incompetent and indifferent to solving these problems. It continues to leave dole queues swell and emigration rise alarmingly. So what alternative course of action could it take?

Firstly, the sit and wait for economic recovery policy of the ESRI (2009) and that of government, is not going to reduce unemployment in the short term. During the late 1980s and 1990s, after eight years of supply side policies aimed at increasing competitiveness and not directly intervening in the labour market through economic stimulation, unemployment remained high despite robust economic growth. The mirage of the construction boom which reduced unemployment and which added greatly to the Celtic Tiger is clearly not going to return to solve Ireland’s unemployment problem again. Any return to economic growth would not in itself have any significant effect on reducing unemployment. The correction in the public finances and the solution to unemployment can be solved together. They require the same solutions. It was unemployment which caused nearly three quarters of the exchequer deficit, which net of Anglo re-capitalisation amounted to €20.6 billion at the end of 2009.

Table 5. Unemployment, tax revenue and public finances

Date

Unemployment

Tax take

Exchequer Deficit

31 Dec 2007

198,000

€47.8 billion

€1.6 billion

May- June 2008

201,800

Down €1.45 billion

€5.65 billion

31 Dec 2008

352,000

€41.6 billion

€12.7 billion

31 Dec 2009

436,956

€33 billion

€24.6 billion (Inc paid Anglo €4 billion)

Two Years 08+ 09

238,956

€14.8 billion

€20.6 (minus Anglo)

Source: Department of Finance, 2009; CSO Live Register (various years)

At the moment the government is focusing on cutbacks which is of little use given the deficit was principally created by unemployment and tax revenue falls. The government’s ignoring of the unemployment problem is perverse unless it is part of a deliberate policy to implement a structural correction in the economy which means that it wants wages to fall and cutbacks to continue with the justification being the recession. As such, lack of economic stimulus on the part of the government will mean unemployment will remain high in 2010 and 2011 and it is likely that it will fall at a very slow pace in the years thereafter.

Stimulating the economy

A short to medium term stimulation of the economy can prevent a prolonged depression in economic growth and in employment creation and can bring down embedded unemployment, arrest the decline in tax revenues and instead increase them. If used correctly, it can also begin to address structural weaknesses in the economy, the labour market, and in the human resource capacity of Irish citizens. These benefits form part of the justification and objectives for the stimulus packages that have been rolled out across the economically developed world in the past two years. In February of 2010, Reuters reported that ‘Obama economic stimulus halted economic free fall’ (Colvin, 2010). The report highlights how the US President Obama’s $787 billion stimulus package prevented an economic depression and resulted in the preservation and creation of 2 million American jobs. This plan included state grants of thousands of dollars to those interested in setting up new businesses. Similarly, the stimulus plan of the Australian government highlights the benefits of increasing the human resource capacity of the workforce by grants of $950 to every adult wishing to undergo further education and training and a further $900 of a tax break to workers in order to stimulate spending (Government of Australia, 2009).

The EU has been pumping €200 billion into the wider EU economy and encouraging Member States to match these with their own stimulus packages: ‘The plan aims to protect workers, households and entrepreneurs who risk being hit as the financial crisis spreads into the broader economy. It proposes more support for these vulnerable groups, including investment to boost job skills and help people stay in jobs or find new ones’ (European Commission, 2008). The European Commission recognises the need to finance upskilling and to protect and create new industries across the EU: ‘By jumpstarting the economy with investment in infrastructure, green technology, energy efficiency and innovation, the package aims to accelerate the transition to a knowledge-based, low-carbon society. It encourages more partnerships between government and business’ (ibid.).

The Chinese government is currently in the process of investing $486 billion into the country’s infrastructure and overall welfare spending (Barboza, 2008). In the first case, the main focus is on creating employment and pumping money into the system; in the latter case, increasing the human resources of the working population in terms of higher skills and education in high knowledge areas is the main focus. All these benefits would accrue also if stimulus packages were introduced in Ireland. There would be a strong added benefit of creating a strongly vibrant, internationally competitive indigenous industrial sector, with suitable economies of scale, arising from the stimulus package outlined below. This would address one of the main structural weaknesses in the Irish economy outlined by NESC (2005). Re-training allowances of €330 per week, for example, would start to address the fact that over 50 per cent of the Irish workforce possess the Leaving Certificate or less and don’t have strongly marketable levels of education or training.

Mindful of the strong economic rationale for these economic stimuli internationally, I suggest three stimulus packages costing €5.23 billion between them. These would increase employment and reduce unemployment almost immediately and would further reduce unemployment in the years to come.

Package one

Stimulus package one involves the government injecting money directly into viable new high knowledge industries as put forward by the Enterprise Strategy Group report Ahead of the Curve (2004). These are in bio-medical devices, sustainable energy, food ingredients and high quality food products, telematics and information and communications technology. There are currently 250 research clusters that have spent almost €3 billion in government funding for research under programmes funded by the Department of Education and Science and very few are being mainstreamed. The best of these should be mainstreamed and be vetted in advance. These need to start very big to compete with foreign competitors and should be looking to employ several hundred people. As such, each should receive tens of millions in state investment through quadrupling the budget of Enterprise Ireland and the setting up of a state development bank. These indigenous exporting companies would not repatriate profits and there would be very little leakage of resources out of the economy.

This package would make productive use of the fact that under the Irish government’s Strategy for Science, Technology and Innovation (SSTI) has spent €2.6 billion as of 2006 and total spending is planned to be up to €8.3 billion by 2010 (Department of Enterprise, Trade and Employment, 2006). This includes the budget of Science Foundation Ireland and others and the deliverables of hundreds of extra graduates with PhD and Master’s qualifications. There are hundreds of Strategic Research Clusters set up across the country spending over €1 billion per year (Forfás and Irish Council for Science, Technology and Innovation, 2005). Yet, only a small number of the clusters are ‘spun out’ as companies and those that are employ less than 10 people. An economic stimulus in this area would provide mainstream large capital investment per viable company of tens of millions, allowing companies to compete internationally and employ hundreds of people. A retraining allowance of €330 per week would be granted in two forms: 6-9 month intensive re-training for those with high skills to be converted into new skills areas matching those being grant aided; longer training courses up to 18 months of intensive re-training for those with low to medium skills.

Table 6. Package one

Input

Action

State investment of €2.3 billion

State Development Bank; Enterprise Ireland

Vetting panel of business experts; leading intellectuals and financiers

Investment in successful companies of typically €10 million within 3 months

Investment in indigenous companies

Companies must be indigenous and preference given to ventures prioritised under the Ahead of the Curve (2004) report.

Structured grant/loan mix

State ownership of 50% of ordinary shares until loan is redeemed in ten years.

Retraining of skilled workers

Skilled workers to be re-trained within 6-9 months to match new business needs with retraining allowance of €330 per week

Pathway retraining programme for those with low skills of 12-18 months duration with allowance of €330 per week

Package two

The second arm of the stimulus package involves investment in social, health and educational infrastructure which has clear economic and social benefits. School building programmes would result in the employment of thousands of people in the construction and renovation process. However, it would also have a longer term economic benefit in ultimately improving the experience of school for children and benefiting them in their education. This in turn increases the human resource capacity of the potential workforce. Similar gains could be achieved in the other areas outlined in Table 7.

Table 7. Package two

Input

Action

Schools Building Programme

Investment of €800 million in building and renovating primary and secondary schools

Mental Health Facilities

Fully implementing community mental health services as set out in A Vision for Change (Mental Health Commission, 2006) at cost of €750 million

Public Care Facilities for Older People

Building and staffing of new publicly provided care facilities €750 million

Package three

The third stimulus package would take advantage of the current low cost of houses. The government would initially provide over €5 billion to purchase 50,000 houses toward meeting current social housing needs. 35,000 of these houses would be sold as affordable housing. Given that government is injecting an extra €9 billion at least into the two big banks, with the government now becoming the biggest shareholder, one quid pro quo would be the granting by these banks of 35,000 mortgages to those on the housing waiting lists. When the saving of rent allowance and re-couping of the cost of 35,000 mortgage proceeds by banks is taken into consideration, the net cost to the state is about €1.5 billion.

The benefit of this package is that it would release at least €300 per family per month into the economy, given rent reductions on low cost mortgages. It would also be instrumental in removing poverty and unemployment traps which would free many people to re-enter employment. At the moment, approximately 50 per cent of the workforce earns less than €30,000 and many of these are on the housing waiting lists which have now doubled to 100,000 in the past 18 months. A high proportion of these are claiming rent allowance from the state which is costing nearly €270 million a year. As a result, many are in unemployment traps where the addition of their social welfare, secondary benefits and rent allowance is very close to the net income they would receive from work. However, if a family in this situation was given a low cost mortgage of €700 per month, and with the option of paying interest only, if they were unemployed, then the cost of losing what was previously rent allowance would disappear. A low cost/interest only mortgage where the family would own their own home would greatly incentivise them in regard to the labour market. It would give the family more stability and confidence also and would greatly incentivise their participation in the labour market which would work in tandem with the overall stimulation of the economy and re-training allowances which are more attractive at €330 per week. The remaining 15,000 houses would be used as social housing distributed to people not in a position to afford a mortgage for the aforementioned affordable houses.

Table 8. Package three

Input

Action

Government purchase of 50,000 houses

Gross cost of €5 billion

Provision of 50,000 social and affordable housing

35,000 sold to those on the waiting list and 15,000 allocated as social housing on differential rent

Banks deliver mortgages to 35,000

Government receives €3.5 billion in mortgage payments from banks and saves €270 million on rent allowance.

Net cost to government €1.23 billion

35,000 receive low cost mortgages

Mortgages given to 35,000 people at €700 per month and interest only if unemployed.

15,000 allocated to social housing

Paid normally as differential rent

ConclusionToC

This article has pointed out that the structural problems facing Irish economic and social development have never really been dealt with. This has been shown to be the case historically. These failures have become glaringly obvious in the current period after the Celtic Tiger. The solutions to unemployment highlighted above focus on correcting the problems on the economic front which would impact positively on other social challenges such as poverty, emigration, housing and health problems. However, these other issues require further recommendations in their own right which are outside the scope of this article. The Developmental Welfare State (NESC, 2005) report does point the way in these directions to a large extent. The challenge however is to disseminate academic knowledge such as that discussed above to the people affected by the indifferent policy makers. This requires radical action and social movements mobilising and empowering unemployed and other victims of state indifference in unions, communities and other sites (O’Connor, 2007).

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