by Colm Keena
This is the background in which the political career of Bertie Ahern must be viewed, and in particular his management of the economic boom.
Chapter 12
OPPORTUNITY KNOCKS
By 1996 Ireland’s economic circumstances had turned around in a way that J. J. Lee could not have envisaged seven years earlier. The economy was growing at more than 5 per cent per year. The term ‘Celtic Tiger’ had been coined and had taken hold, and studies of precisely how the great economic turnaround had occurred—and of what was continuing to drive it—were being conducted at both the national and the international level. One can only speculate that Bertie Ahern looked at this development from the opposition benches and wondered if he would ever get back into power.
At the most simplistic level the change in the economy occurred because a number of factors that had been holding back the economy had been dealt with or had dissipated, and it was now catching up with its European peers. Ireland was experiencing a corrective bounce.
The period of economic growth had begun in 1987 and continued through the first half of the 1990s but without an obvious impact on the lives of many. Ireland experienced an above-average level of economic growth while maintaining low inflation and an excellent balance of payments position and overseeing a huge improvement in its public finances. However, unemployment remained stubbornly high, with more than 20 per cent of the work force on the live register of unemployed. These were the years of so-called ‘jobless growth’.
The reasons for the ‘invisible’ growth were outlined in a medium-term review (1994–2000) published in 1994 by the ESRI. (The establishment of the institute was part of the change in economic policy introduced by the former Taoiseach Seán Lemass, which Lee said was an attempt to foster performance over possession. One of the glaring failures to emerge after the collapse of the boom was the paucity of professional analysis to which Irish society and Government policy are subjected.) The ESRI review included a chapter by John FitzGerald and Patrick Honohan entitled ‘Where did all the growth go?’ which examined the phenomenon of jobless growth. A principal reason for the lack of employment growth was that the greater economic resources being produced were being invested on slowing, and then turning around, Ireland’s foreign debt. As the authors put it, in the early 1980s Ireland had lived far beyond its means and had almost bankrupted itself. By the early 1990s it was doing the opposite: its means had increased, but the money was being used to pay off its debts and wean its way off its borrowing habits. Consequently the average worker was not experiencing any great leap in personal income, and unemployment was remaining at a record level.
Spearheading Ireland’s recovery from the late 1980s had been the growth in manufacturing exports. While some Irish firms had been involved, the size of the contribution from foreign-owned exporters was unique in Europe. The effect on Ireland of the foreign-owned firms was less than it would have been if they were indigenous or more embedded in their host economy. Meanwhile, Irish business had suffered intensely from the contraction in the economy in the early 1980s. Honohan and FitzGerald in part explained this by showing that Irish wage levels had risen vis-à-vis those in Britain in the twenty years previously, weakening the competitive capacity of domestic business so that when conditions became strained, many businesses quickly collapsed. However, in the period since the mid-1980s the competitive position of Ireland relative to its nearest neighbour had improved, and the competitive edge had been maintained. Agriculture, despite continuing to contribute to economic growth, was still witnessing a falling off in farm employment. On the other hand, a series of mergers and acquisitions had seen the emergence of a number of large agri-business firms that were using their size to invest in product development and the process of selling their products on international markets. However, labour-saving technologies had dampened the sector’s effect on employment numbers. There had been a marked increase in employment in services, reflecting international trends in outsourcing and developments in technology, though the increase in Ireland had not quite tracked the international trend. The number of jobs in the Republic in 1994 was still less than in 1980.
Wage restraint, transfers from Europe and relatively low interest rates, and their effect on Irish debt payments, all played their part in the improvement in circumstances during the early 1990s. Irish interest rates were by the late 1980s already tracking Germany’s, and the increase in German rates, brought about by its reunification, caused a delay in the recovery of Ireland’s fiscal position (by increasing the cost of servicing Ireland’s debt) and contributed to a general economic slump in Europe. The higher debt-servicing burden for Ireland, which meant that more money had to be raised in taxes, affected the country’s ability to achieve wage restraint so as to boost Irish competitiveness. German reunification delayed the arrival of the Celtic Tiger. The effect of developments in Germany on Ireland’s employment and emigration performance is an example of how Ireland exists and must manage its affairs in a European context. Arguably it was the failure to focus on the European context in which Ireland operates that was the biggest mistake made in economic management during the Ahern years.
The 1994 ESRI publication pointed out that as the Irish national debt fell, the pressure on the economy from servicing the debt would ease and there would be greater scope for increasing economic growth to lead to job creation and affect the material well-being of people generally. There were other factors feeding into the positive economic background. Demographic change meant that Ireland was about to experience a period where there would be a lower percentage of older people dependent on the working population to support them. With a greater proportion of the population in the work force, there would be higher per capita income on this basis alone and a reduced requirement for public services. An increased level of educational attainment would also provide a boost to the economy. For these and other reasons the review opted for a bullish forecast for the coming six years. While the figures were to prove incorrect, notably in the predictions for getting rid of unemployment (it eased more quickly than predicted), the trend was spot on. Europe was about to experience a recovery, and Ireland a boom. If it wanted to spread the benefits among all the population, wage restraint would have to continue so as to boost employment, and resources would have to be targeted at those in danger of leaving the educational system too early, so as to reduce the number of people entering long-term unemployment. Upskilling and training would have to be provided to those already unemployed. There would be an opportunity for reform of the tax system. As a set of challenges set out for those charged with the management of the state, they were not difficult to understand.
Three years after the review the economy had prospered at a rate that had taken everyone by surprise. Net emigration had ended, and former emigrants were returning. Confidence in Ireland and its prospects was commonplace. The institute came out with a new review in the same year that Ahern had become Taoiseach for the first time. ‘Who put the tiger in the tank?’ was one of the questions asked, and, as the authors made clear, no single factor could explain the extraordinary developments then occurring in the economy.
According to the review a number of mutually reinforcing domestic forces with widely divergent time-scales had come together to provide the Republic with an unprecedented push into the first division of European wealth levels. Sustained public policy over a period of four decades had built up educational and training levels (human capital) and had proved successful in attracting foreign direct investment. The crises of the 1980s, which had almost led to a loss of economic sovereignty, had provoked a much-needed shake-up of institutional attitudes, not least in political, public service and trade union circles, and had forced the Government to remedy the public finances. Pay restraint and social partnership had restored Ireland’s international competitiveness. A better level of education was driving the increase in female participation in the labour force, affecting migration and the marriage and birth rates and, through increasin
g earning power and productivity, boosting economic growth. There had been a sharp change in the dependence ratio, or the ratio of those outside the work force to those inside it, and Ireland was rapidly moving from having the highest dependence ratio in the EU to having the lowest. A demographic dividend would give the country an opportunity of about twenty years during which it could consolidate its position and prepare for a more difficult future.
International factors were also at play. The American and British economies were growing at a satisfactory pace, and the Continental European economies appeared to be recovering from recession. European monetary union was due to take place in 1999 and would ensure the continuation of relatively low interest rates.
The 1997 review, in making its forecasts for the coming six years, presumed fiscal responsibility, moderate wage demands, modest reductions in direct taxation and increased investment in infrastructure. The circumstances in which Ireland found itself were a ‘historical opportunity for Irish society. It should not be wasted.’ This was the context in which the 1997 general election, and indeed Ahern’s career as Taoiseach, took place.
The ESRI envisaged that the ‘current exceptional rate of growth in the economy is likely to continue into the next decade.’ Maintenance of Ireland’s competitive position would see the economy create jobs at a rate that would be exceptional in Ireland’s history and in relation to the EU norms of the time. Furthermore, and unlike previous spurts in employment, the growth in jobs would see a sustained falling off in the unemployment rate.
In the introduction to their review the authors referred to Lee’s book and to the question it had posed as to the cause of the Republic’s lack of economic success. ‘Now the question posed by outsiders looking in is why it is such a success. To those of us living through the experience there is a certain sense of bemusement at this rapid reversal of fortunes.’ The review put an emphasis on the changes to educational provision in the 1960s—twenty years later than most western European countries. Increased access to education was a key factor in explaining the transformation of the Irish performance, the authors said. Increased educational attainment explained many of the demographic changes that were now producing positive economic benefits as well as directly providing for increased productivity. Ireland had been a laggard at introducing educational reform after the Second World War, and its ‘baby boom’ was also taking place decades after that of most other Western societies.
In a chapter entitled ‘Interpreting the recent Irish growth experience’, John Bradley, John FitzGerald, Patrick Honohan and Ide Kearney probed the factors that had led to the sudden economic blossoming, making the obvious point that understanding the causes of the success was an essential first step to forecasting its future. It is also, of course, an essential first step in deciding how to manage that future.
Interestingly, the authors considered the existing literature on the link, if any, between the harsh cutbacks introduced by Haughey in 1987, with the support of Alan Dukes and Fine Gael, and the sustained period of economic growth that stretched from that year to the date of the review. The popular view was that the 1987 cutbacks had led to renewed confidence in Ireland’s future and to a concomitant increase in private-sector investment and activity. However, the authors noted that the studies that had been carried out had come to an alternative view, namely that it had just so happened that the cuts had occurred at a time when international interest rates fell, when Britain introduced tax cuts and when there was unexpectedly strong global economic growth. Irish policy-makers, the authors said, had been ‘lucky’.
In the chapter on the origins of, or explanations for, the Celtic Tiger, the authors noted the effect on individual and institutional attitudes of the pessimism that had developed during the 1980s. Because of the level of despair, everything was up for questioning. A greater spirit of self-reliance began to manifest itself among younger people, many of whom, even if they chose to emigrate, had a stronger determination than heretofore that they would return. Reforms were introduced in the semi-state and state sectors because the need for them was so evident. But the most dramatic change, according to the authors, came in the attitude of the leadership of the trade union movement, which convinced its membership of the need to focus less on local pay and conditions and more on the competitiveness and long-term sustainability of the economy.
These were the considered views of some of Ireland’s most respected economists, published by the institute set up by one of Ahern’s stated heroes, Seán Lemass, to encourage a higher standard of performance in Irish society. These were also the ideas that drove the partnership process with which Ahern was so closely involved. He had reason, therefore, to be more aware of the importance of these factors to the long-term health of the Irish economy than most senior figures in Irish politics.
Chapter 13
PARTNERSHIP
The dire economic situation, as well as fears within the trade union movement that it would be sidelined, as was the case in Thatcher’s Britain, was a contributing factor to the first partnership agreement, the Programme for National Recovery of 1987. The return of Charles Haughey and Fianna Fáil to power was also a factor. Alan Dukes, Minister for Finance in the 1980s’ Fine Gael-Labour coalition headed by Garret FitzGerald, said he detected a view at the time that the labour movement preferred Fianna Fáil to the Labour Party, despite its formal links to the latter. Haughey was sympathetic to a desire for a deal that had emerged among the social partners and was willing to give it a go. Ahern was the man he appointed to steer the issue to a conclusion.
A report by the NESC, ‘A Strategy for Development, 1986–90’, set out what the social partners might agree in the year before Haughey’s return to power. The council involved employer, trade union and civil service representatives and was a forum in which they could come together to discuss the nation’s woes without having to commit themselves to any particular policy. The economist Jim O’Leary, who was working for the NESC at the time, is credited by some with coming up with the formula that led to the document. When Haughey was returned to power and appointed Ahern as Minister for Labour, the partnership approach was looked on favourably and was soon implemented.
A key aspect of the 1970s and 1980s, according to Blair Horan, general secretary of the Civil and Public Service Union, was that wage increases were contributing significantly to inflation and that the abnormally high income tax rates being imposed by the Government to redress the crisis in the public finances were feeding into the demand for wage hikes. This is a significant point worth bearing in mind when considering what happened during the Ahern years. According to Horan,
the 1987 settlement was that we would go for low pay increases and the Government would reduce the tax take. It was a trade off. The abnormally high [income tax] rates that were the result of the 1970s were lowered.
The pay deal aspect of the agreement was a modest 2½ per cent annual increase over three years. The deal included general objectives aimed at the public good, such as maintaining social welfare levels, narrowing the Government deficit and reducing the ratio of the national debt to GNP (almost 130 per cent by 1987). The principal objective of the plan was to enhance Ireland’s international competitiveness.
It was not envisaged initially that the Government would play a crucial role in the partnership arrangement; rather, it was thought that the structure would be a matter for the employers and the trade unions. However, the state became centrally involved, and over time the process became more complicated, with a fourth pillar, the voluntary sector, eventually being incorporated. There were three-year deals covering pay in 1990, 1994 and 1997. Then came Partnership 2000 (1997–2000), the Programme for Prosperity and Fairness (2000–3), Sustaining Progress (2003–5) and Towards 2016 (2007). During this period the ability of the structure to agree three-year pay deals that were adhered to came under great strain and arguably collapsed.
As has been seen, the external environment into which Ireland was exporting improved
considerably at about the time Ray MacSharry began imposing his cutbacks and the partnership process began to deliver wage moderation, industrial peace and medium-term consensual plans for the management of the economy. Improved wage competitiveness vis-à-vis our competitors, especially Britain, boosted economic activity. The profitability of companies began to recover and turnovers grew, although the investment in new employment was not sufficient to create significant net job growth.
When Partnership 2000 was being negotiated in 1997 John Bruton was Taoiseach. He and his Government oversaw the acceptance of the new deal, even though the trade union movement found it more difficult than heretofore to get it past its members. The success of the process was creating a new challenge.
The economy was booming, and the media were reporting ever-greater company profits and windfall gains for the owners of capital. There was also frequent coverage of the growing daily fee rates being charged by professionals. Some of the latter were equal to or above the monthly average industrial wage. The relentless increase in the price of housing was putting pressure on the average worker. Some banks were beginning to shift from using multiples of a person’s salary as a measure for mortgage purposes to affordability based on the person’s take-home pay. Because of this, every tax cut became a boost to house prices. The significant tax cuts introduced by McCreevy in his first budget were a direct spur to an already-strong property market.
Horan, who studied for a degree in economics during the 1990s and took an objective as well as a professional interest in the Government’s policies, was prompted to write to Ahern as early as April 1998. ‘Dear Taoiseach,’ he wrote,
I am writing to express the serious concern of my executive council at the soaring house prices in Dublin, and also increasingly in provincial cities. This is such a serious problem and one that will affect the model for economic success developed under social partnership that I would like to set out our views on the matter.