Economic Policy: Manifest Response

The author of the Fianna Fail 1977 Election Manifesto defends its economic strategy, pointing out that the employment targets were actually exceeded and that the critics of the policy have never defined an alternative way of meeting the massive employment problem the country faces.

Paddy Geary's attempts to rewrite history to suit himself are worthy of a Goebbels. He persists in attempting to purvey a peculiar version of recent economic history in order to satisfy himself that the Manifesto was the main cause of our economic ills. Since the issues involved are not just economic, but raise far wider questions about the whole conduct and future of our society, it is important to correct his selective version of events. In support of his case he makes four main arguments, so let me begin by commenting on each of these.

We are told that "first, the economy was not in recession in mid-1977. A large once-for-all stimulus in such conditions amounted to a government spending its way out of a boom!"

It is news to me that there was a boom under way in the first half of 1977, it would have been news to the Coalition and to many business men, since the Coalition were only claiming modest growth for that year, and business men had recorded an all time low in investment prospects at the beginning of that year (the last available survey). True there had been a recovery in exports in 1976 - but this was at a time when sterling (and with it the Irish pound) had fallen to below 1.60 dollars to the pound. The Coalition's own paper on economic development had described the situation as intolerable, and there was no prospect that any recovery would make an impact on the heavy unemployment then prevailing. The case for the stimulus was to try to get Irish expansion up to a 7 per cent rate - a figure achieved by many other successful developing countries - so why could not Ireland reach the same standards as others?

Secondly, we are told that "the efficiency of such a policy in a small open economy is very limited: it was argued that it would be substantially reflected in a big increase in imports and a deterioration of the balance of payments".

The answer to this is that the risks to imports and balance of payments were fully recognised, and among other things this was the reason for the Manifesto's emphasis on a special 'buy Irish' campaign to switch 3 per cent of spending from imports to home products. Geary seems to have a defeatist mentality which assumes in advance that all such efforts must fail - but then no policy can be effective! As for the actual outcome in our case, there was no deterioration of the balance of payments in 1978 despite the high growth of that year; the balance of payments problem emerged in 1979 and 1980, largely as a result of the Iranian oil crisis, which caused similar problems (still with us) for all oil importing nations.

Thirdly, we are told that "half of the proposed borrowing in 1978 was for current purposes; the idea that a sharp boost to personal consumption would contribute significantly to sustained growth was doubted".

The answer to this is that the borrowing was for tax cuts which were equal to about a 4% wage rise. These were to accompany a pay rise - as stated in the Manifesto - of 5%, making a total proposed increase of 9%. This is hardly extravagant when it is remembered that inflation was running at 15% in June 1977, and the Manifesto target was to halve this figure the following year (which was in fact achieved). Far from being an excessive boost for personal spending, these Manifesto tax cuts were intended to ensure that living standards were not reduced during the period when inflation was being brought down.

Fourthly, we are told that "the Manifesto's emphasis on job creation was seen as a source of difficulties. Its employment targets were in the light of Irish experience extravagant: it was feared that failure to meet them would lead to the abandonment of the plan to reduce borrowing on the grounds that it would be politically less damaging" .

I fully agree that the targets were extravagant in the light of experience - they were also necessary if there was to be any attempt at coping with the employment needs of a rapidly growing population. But interestingly the latest statistics (which I presume were not available when Paddy Geary wrote his article) show that these targets were actually surpassed! Against a 3 year target of 75,000 more people at work, the figures show a rise of 82,000 for the three years April 1977 to April 1980. So if there has been any movement away from the targets for reducing borrowing it is not because of the job creation commitments in the Manifesto.

So much for specific responses to Paddy Geary's arguments. Let me now restate the basic Manifesto case - since this appears nowhere in his article. The main problems in 1977 (as now) were high unemployment, high inflation and high government borrowing. There was no suggestion from any quarter that all three could be solved simultaneously. The Manifesto put forward a package which would tackle unemployment and inflation, and success with these would then permit an orderly reduction in government borrowing over a period of years. The basic attack on unemployment and inflation was to come from increased investment (which would give jobs and raise productivity) especially in the private sector, and from lower income increases (which would keep down prices and also make Irish products more competitive). As indicated above, the tax cuts were a once-off measure to protect living standards during the initial phase when this higher growth, lower inflation process was getting under way.

It is worth pointing out that the results during the first eighteen months were very much on line with expectations. Employment did increase rapidly, inflation did fall dramatically, growth did speed up and investment did show a major rise, especially private sector investment which rose by almost 20 per cent in 1978 and by 15 per cent the following year.

The setbacks of 1979 had their origins in both external and domestic causes. Externally the oil crisis mentioned above shoved up inflation in all countries and also brought a slowing down in world trade which in turn dampened down growth. Domestically the position was aggravated by additional pay increases in both private and public sectors as well as by strikes which caused substantial loss of output. There was little we could do about external factors. With the domestic problems the basic choice was whether to seek a peaceful solution or attempt to hammer out a result through conflict(s).

The National Understanding - which Paddy Geary criticises - was an attempt to seek a peaceful way forward. It set out to demonstrate that conflicts between employers and workers about pay alone were ultimately futile since the actual value of any pay packet could still be influenced by taxation, government spending and other factors over which workers had no control. By setting out to have all these items taken into account, the National Understanding was offering a mechanism for resolving questions of how living standards for various groups should evolve over time. The pay increases, whether under the first National Understanding, or under the National Wage Agreement which preceded it, were more or less in line with the inflation levels being experienced - one must look to special pay increases for the excessive growth of which Geary complains.

While the last two years have been difficult ones for the economy not only here, but throughout the world, and while progress on those domestic issues which are within our own destiny may not have been as rapid as one would wish, this does not invalidate the approaches enshrined in either the Manifesto or the National Understanding. Rather would it be more accurate to say that like Christianity it is not that they have been tried and found wanting, but that they have not been tried. Understandably each sector or group has tended to concentrate on those more acceptable elements in the overall package, while playing down the less agreeable aspects. Delays and setbacks are not evidence that a policy should be abandoned - they may well constitute the case for pressing on with greater urgency in the future.

In the final analysis, all of these issues affecting employment, inflation and living standards are not narrow economic debating topics which can be resolved in accordance with some textbook principles. They are issues which exert a profound influence on the daily lives of the people. and in a democracy, government should take account of the people's wishes as well as leading them towards the acceptance of necessary action for the good of the community.

The Manifesto was an example of that leadership role. It took the major issues of the day and set out a course of action which could help to solve the key problems. While it is natural in a democracy to find different people holding different views, the ultimate challenge to put to critics of the Manifesto approach is to invite them to put forward some alternative solution, for in the final analysis progress depends not on criticism but on action, and nations are made great by the deeds of their people.