The Everlasting Boom

Martin O'Donoghue interviewed on the performance of the economy in 1978, prospects for 1979 and the effects of EMS membership
"We are well on the way to the attainment of the Government's economic targets for 1979 and full employment by 1983."

"The 7 per cent growth rate this year is not a consumer boom - investment has grown by 14 per cent and consumer spending by only 8 per cent."

"The increase of 17,000 in the numbers at work this year is the largest single increase in employment ever in our history."

"We are well on the way to the attainment of the Government's economic targets for 1979 and towards the attainment of full employment by 1983", according to Martin 0 'Donogghue, Minister for Economic Planning and Development, in an interview with Magill prior to the announcement of the decision on joining the European MoneeItary System (EMS) and the completion lof the Government's deliberations on the White Paper on economic developpment.

O'Donoghue said that the 1979 ecoonomic targets could be met whether or not Ireland joins the EMS, nor should the failure to reach a national wage agreement seriously disrupt Government plans. Furthermore, the shortfall in the unemployment targets for 1978 should not disturb progress towards the 1979 objectives.

"The 7 per cent growth rate in the economy should be repeated in 1979, there should be a drop of 25,000 in unnemployment, the borrowing requireement should be down to 10.5 per cent from 13 this year but inflation might be in the 6 to 7 per cent area instead of 5 per cent, depending on what happens the next wage round," O'Donoghue said.

"The 7 per cent growth rate is not a consumer boom, as some of our critics have alleged. The fastest growing cateegory has been in investment, which has been running at 14 per cent. The inncrease in consumer spending has been only 8 to 9 per cent. In addition, public sector investment has been running at only 12 per cent, while private sector innvestment has been running at about 18 per cent. The entire manifesto strategy was to boost employment in the public sector in 1978, while private industry geared itself up for expansion in the following years and this has happened.

"There has been a major increase in farm investment, which will have spinnoff effects in terms of jobs, and the IDA will end up by signing up projects for about 30,000 jobs this year although they were talking only in terms of creaating about 27,000 at the outset of the year. This can be repeated next year."

O'Donoghue said that the Governnment had set five main targets for 1978:

• The creation of 20,000 jobs in the public sector. This was accomplished.

• The reduction of the inflation rate to 7 per cent. Because of the higher than anticipated national wage round, inflation will be about 8 per cent for the year, but still a substantial improvement from 14 per cent in 1977 and the 17 per cent in 1976.

• A growth rate of7 per cent in Gross National Product (GNP). This has been attained.

• A borrowing rate limit of 13 per cent. It is expected to be slightly lower.

• The reduction of employment by 20,000. The drop in unemployment will have been about 17,000. While the Government delivered on its 20,000 job creation programme (the same figure for the Government's job creation target and its unemployment reduction target has caused considerable confusion), reedundancies in the private sector were higher than anticipated and job creation lower.

"While, obviously, we have been dissappointed at the shortfall in the overall growth of employment, the drop of 17,000 in the numbers at work in 1978 represents the largest single increase in employment in our history."

Doesn't the likelihood of there being no national wage agreement next year seriously disrupt the Government's economic strategy?

"I'm not perturbed about the possiibility of there being a different form of wage agreement", O'Donoghue said. "What does worry us is the amount of increase that would arise. The fact is that the limit on real wage increase has got to relate to the growth in the econoomony.

"A 2% per cent increase in the nummbers at work, with a 7 per cent growth rate, means that at best there is only 4% per cent increase available for the inncomes of those at work. Any attempts to get real increases in excess of that are self-defea ting,

"Increases of 50 per cent, as currenttly being demanded by some of the pubblic sector service workers, are simply not on."

Entry into the European Monetary System (EMS) could obviously have serious disruptive effects on the economy and on the Government's tarrgets. The negotiations of the last several months have been directed towards negotiating a financial package which would offset these potentially detrimenntal effects on the economy and ensure that the Government's programme reemains on course, O'Donoghue said.

He explains: if both Britain and Ireeland were to go into the EMS then withhout offsetting action it would be expeccted that the growth rate would be lower and therefore increases in employment would be lower. The borrowing rate would be higher but the inflation rate would be lower. because the EMS would have a deflationary impact.

Ireland could also encounter balance of payments problems, possibly leading to a run on the Irish punt - perhaps even forcing us out of the EMS. Observers see these problems as justification for Ireeland's requests for financial aid from its EMS colleagues. O'Donoghue, however, refused to comment on any issues relatting to possible devaluation.

"The primary reason for the adverse effects of EMS membership is that Ireeland's domestic costs are running higher than those of Germany, France and the Benelux countries, and every 1 per cent increase in domestic costs could mean a drop of up to 2 per cent sales. This means that we would be selling less, hence production would drop and emmployment levels would be affected. Atttempts to counteract this on our own would make our borrowing requireements too high.

If Britain stays out and we go in, then all these factors would be exacerrbated:' the growth rate would be even lower, employment lower, the borrowwing rate even higher and inflation lower at least within a few years of entry.

"The Government's approach to the EMS negotiations has been to seek agreement on a financial package which would insulate Ireland from these addverse effects of EMS membership while we are adjusting our domestic policy and getting domestic costs in line with those of the other EMS members. The figure the Government proposed was £650 million spread over a five-year period.

The main potential source of financcial aid is West Germany and it has been the Helmut Schmidt in Bonn that the Irish government has had to primarily persuade. The aid would be spent on capital investment on roads, telephones and water supplies, thereby helping to cut domestic costs and, in the meanntime, creating jobs to offset the loss of jobs caused by EMS entry.

However as the negotiations opened in Brussels at the Heads of Government. meeting, it became apparent that the West Germans were prepared to finance only a three year loan instead of a five year one, thereby reducing the size of the financial package to under £400 m.

It also became apparent that the Gerrmans were going to insist on conditions being attached to the loan/grant, incluuding the maintenance of a low inflation rate, the adherence of the Fianna Fail manifesto commitments on the borrowwing rate and the reduction of public expenditure as a proportion of GNP. O'Donoghue, however, refused to be drawn on any of these issues.

A further possibility - on which O'Donoghue refused to comment - was that Ireland may devalue the Irish punt vis-a-vis the other EMS currencies at the point of EMS entry in order to ensure that the British pound is not devalued against the Irish punt. As stated earlier, the British pound is almost certain to fall against the EMS currencies and Ireeland could not easily afford a situation whereby the British pound was devalued against the Irish: our exports on the British market would fall and their imports here would rise .•