Remember the government had a plan in 2008? Remember that? Here are my thoughts on that at the time
WITH THE onset of the recession, much talk has emerged of a return to the 1980s. We might do well to remember the injunction written in bold on the face of the mythical Hitchhiker’s Guide to the Galaxy, which was “don’t panic”. This is advice the Government might well take to heart.
The Government is facing unprecedented challenges economically – not only is a full-blown recession now crystallised, but the banking system sees its capital eroded daily and a pensions crisis looms in both the public and private sector. However dire, these are soluble problems given leadership and clarity.
It is in this context that we must judge the plan announced on Thursday for economic recovery. If it is not to suffer the same negative reaction as the bank plan, we would expect to see clarity and simplicity. Neither are obvious, with a document running to more than 100 pages replete with analyses and aspirations but lacking, to my mind at least, a clear focus.
The context for this document was the third quarter of 2008 national accounts and the ESRI report published yesterday. Both confirmed what was already suspected – the economy did not experience a soft landing but has instead crashed in spectacular fashion. This confirmation was foreshadowed by truly disastrous retail sales figures and recent rises in unemployment.
The ESRI is not known for its hyperbole, and this makes its latest report sobering reading. It predicts that in 2009 the economy will shrink across the board, with unemployment rates again in double digits, against a backdrop of a marked deterioration in public finances. In that context, immediate decisive action would reasonably be expected but this has not happened.
The recovery plan announced by Brian Cowen has three major elements: restoring the public finances; dealing with the immediate consequences of the recession’s victims; and positioning Ireland for the future.
All of these issues, however, are discussed and analysed in the document, with paths forward identified and options noted. In many respects, it reads more like one from an external body such as the OECD or an election manifesto rather than from the office of the leader of the country.
There is a sense throughout that someone should do something, with little specifics on what the Government will do in the immediate future. And where there are specifics, there is some evidence of lack of internal consistency.
For example, the single largest immediate problem facing the economy is the mismatch between expenditure and revenue. On the revenue side, we have a narrow tax base, with preponderant taxes being raised on consumption and earned income. Despite this, the plan merely encourages the Commission on Taxation to consider a speedy conclusion to its work on examining a wider tax base.
Indeed, the document later goes on to explicitly rule out much movement in relative tax incidence. A key feature of the problem we face is our high cost-base, in part due to high direct and consumption taxes – but again this is merely noted with no specifics given for how it is to be addressed.
For young unemployed people, encouragement will be given to them to take up unused places in institutes of technology but there is no analysis of the likely impact of this on the already unacceptably high dropout rates in the very programmes identified.
To reinvigorate the International Financial Services Centre (IFSC), it will be vigorously promoted to sovereign wealth funds and specialist services, but there is no specificity on why these would want to move to the IFSC, what the comparative advantage is of the IFSC in these areas and, crucially, no indication of the Government implementing the 2007 PricewaterhouseCoopers report on financial services education.
There are many other examples. Overall the document reads not so much as a blueprint but as an aspiration, one that moreover appears at times to lack internal consistency and logic.
Two elements of the document show its weakness very clearly.
First, the document repeatedly makes reference to increases in Science Foundation Ireland (SFI) and related funding, all predicated on moving towards a knowledge economy. However, all available research indicates that fundamental research skills and fundamental skills in the basics of educational attainment (the three Rs) are more important in determining long-term economic success than are targeted initiatives such as SFI – no matter how useful they may be as “add-ons”.
In this regard, the most glaring omission from the document is in regard to tackling the deficit in mathematics skills in Ireland. Report after report has indicated that this area is the single greatest constraint on positioning Ireland for the future high-skills, high-value-added economy.
Mathematics are mentioned twice in a 102-page report, in the same paragraph, where the problem is merely nodded towards. Against a background of overcrowded classrooms, a lack of specific mathematics teachers in the primary level and increasing difficulty in third level in finding students with the minimal level of mathematics to take IT and science subjects, the level of aspiration is high and detail low.
Second, a further key building block of the document is the creation of a venture capital funding mechanism to direct investment towards high-tech start-ups. Throughout the report, attention is drawn to the underdeveloped nature of the Irish venture capital sector, despite the reasonably favourable tax and related infrastructure for it that already exists.
The proposals are in essence threefold: to create a set of five funds totalling approximately EUR 500 million with the National Pension Reserve Fund (NPRF) injecting half and external private equity half; that these would invest with a seven-year horizon; and that they would invest in “early stage RD intensive SMEs”.
The underlying implications are that there is an existing failure in the market that starves these sort of enterprises of this funding, that there are returns to be made for the NPRF from such investments that are at least as good as can be made elsewhere, and that this investment is the appropriate form of investment.
All of these can be challenged.
Venture capital is a catch-all phrase that can be taken to encompass a wide variety of investments from angel capital (at the very initial stage of conception of an idea) through private equity for buyouts. The evidence is overwhelming that angel capital, not other forms, is the essential element of funding for start-ups.
Regardless, the evidence from the European Venture Capital Association is that early-stage venture capital returns close to zero over a five to 10-year period such as is envisaged here.
Finally, there is a thriving venture capital sector in Ireland but, given the preceding facts, it is not surprising to note that it is concentrated on buyouts and reorganisation. Now if only there was a set of distressed companies in Ireland that the NPRF could invest in . .
Overall the document is not yet a plan. It is a precursor to a plan. What we now need to hope for is that the plan, when it does come, will come from the office of the Taoiseach and the Minister for Finance and not from that of Mr Strauss-Kahn of the IMF.
Brian Lucey is associate professor of finance at the school of business studies in Trinity College Dublin