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Tuesday, 16th April 2024
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Editorial Back  
Needed - a short sharp shock
One of the fundamental drivers of the success of the financial services industry in Ireland over the past fifteen years has been the success of the Irish economy itself. No other industry is so intimately dependent on the wellbeing of the economy - the fact that the individual credit rating of a financial institution cannot exceed that of its host domicile is just one of the explanations for this. This month, as we look back to 1987 to mark the publication’s fifteenth anniversary, it is ironic that we find a number of exact parallels between the economic circumstances of the time and today. In June 1987, a new Government had just been elected - and it faced a Budgetary situation that required immediate and drastic corrective action.
Just as the Irish economy stood at a crossroads at the time Finance began, so it does now. Just as it was then, it is in the hands of the newly elected Government to determine whether the Irish economy will continue to provide the fertile ground it has for the financial services industry over the past fifteen years. It was within months of the coming to power of a new Government that, in the summer of 1987, the steps were taken to correct the nation’s Exchequer malaise that led to the Celtic Tiger getting under way. Our third edition, in August 1987, had the title ‘Ireland’s new Economic Climate’ on its cover, which described at great length, the actions that the then Government was taking.
At the time, the public finances were in an even more parlous state than they are today, bad and all as they are now. The policy actions taken then - an across the board cut in public expenditure - (with no differential, preferential treatment for any sector) was what was needed from a fiscal policy point of view, and politically was also the easiest (because no sectoral special interests got preference). The actions taken during the summer of 1987 kickstarted the ‘Celtic tiger’. The public finances are now again in a parlous state because of the twin evils of faltering revenue and burgeoning current expenditure. The imminent Benchmarking review, of course, promises to add fuel to the fire at just the very worst time conceivable. The public sector pay bill is running out of control. The reason is the lagged response to the pressures put on public sector pay managers (ultimately the Government) by public sector unions in the years from 1998 onwards with increasing stridency, as the economy heated up ever more, unemployment fell to unprecedented levels, and inflation began to lift off.
The strong pressures for higher pay now remaining in the system are a legacy of the Celtic tiger years, before the downturn in the economy, which has seen thousands of job losses in the unsheltered (private) sector of the economy. For benchmarking to be fair and true it should reflect the realities of 2002-2003, not 1998-2000, as it now exists in the private sector. Furthermore salaries in the public sector should in fairness be adjusted to reflect the differential job security of positions in the private versus public sectors. This is especially so nowadays because the ‘job for life’ in the private sector is no longer the norm. The benchmarking challenge however should not prove insuperable to politicians of the experience and skill in coexisting with the social partners that Ireland now has. The key economic ministers will intimately recall what happened back in 1987; furthermore they have the benefit of hindsight now, as to what happens when the appropriate fiscal medicine is applied. This new Government has been given a clear mandate, and they are at the outset of their new term. The nation, and the financial services industry, depends on them.
Back in 1987, the Government faced a more challenging obstacle - they could not know what would happen if they cut expenditure in that way. There were not a few prominent economists at the time who feared the outcome - based on Keynesian thinking that a severe cut in public expenditure would be deflationary and might lead to a depression. Today we know, from the experience of that time, that a cut in expenditure of the scale as then would have the opposite effect, as it did then, of boosting confidence, which in turn would boost tax revenues. Now, the time for action is immediate - with regard to the preparation of a Budget for 2003 that will apply the needed medicine, in one short sharp shock.

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