ESRI report ignores economic reality

There was a low turnout at the launch of the Economic and Social Research Institute’s (ESRI) quarterly economic commentary last Monday morning. Perhaps the economic and business heavy hitters were down at the Four Courts for the Quinn Regulator case, which fizzled out within a minute of starting.

(Pictured: John Fitzgerald of the ESRI)
The message at the briefing was: don’t panic, everything is okay. There will be a resumption of moderate growth in 2011; the bank stuff is manageable, though it’s a pity about unemployment, which won’t get better any time soon. Oh, and although it’s not the place of the ESRI to say so, the government is doing a brilliant job; the financial markets are very pleased.

The reason for the optimism about growth next year (actually starting in the second half of this year) is that exports are projected to do well because the international economy is starting to recover and there will be a demand for our products.

But, on the basis of the material presented in this same document, surely there is reason to be worried about what is happening in the export markets?

We regard ourselves as being on the verge of an economic precipice because the gap between revenue and expenditure is projected to be 12 per cent of GDP this year and almost 11 per cent next year, and the state’s total debt is projected to be almost 90 per cent of GDP next year.

But if we are a basket case because of these figures, what about those export markets? Britain, Germany and France are almost as bad as we are - Italy far worse. US government debt as a percentage of GDP is projected to be 93.4 per cent next year.

So, if we are in such terrible trouble because our debt is so large, what about Uncle Sam?

And if Uncle Sam and the others are in trouble, it doesn’t look too good for our exports, does it? And, by the way, the total debt in Japan is projected to be 199 per cent of GDP next year.

On page 13 of the report, there is an interesting disclosure - that budgetary cuts of a further €3 billion planned by the government next year will reduce our growth rate by 1 per cent. You might think 1 per cent hardly matters here or there but, compared with a projected growth of 2 per cent next year, it matters quite a lot in terms of employment and taxation revenue.

It is a bit of a surprise, therefore, that there was no elaboration of the consequences of the projected budgetary cuts.

These will cause further havoc in health, education and public services generally, as well as worsening employment prospects.

On the unemployment issue, there is a surprising elaboration.

The generally accepted figure of unemployment is given as 13.5 per cent. But then (on pages 30 and 40), the report essentially says that the position is actually significantly worse.

The 13.5 per cent figure does not include quite a few more who are not counted for various reasons, and the actual figure is 16.5 per cent. This is a pretty startling level of unemployment, suggestive of enormous social hardship, which is not alluded to at all.

Wouldn’t you think this would prompt a rethink of the planned budgetary cuts for next year - cuts that will dampen growth by a third - to relieve the hardship of unemployment? All the more so since the level of debt here is nothing exceptional.

The commentary seems indifferent to the cost of the banks’ bailout. It acknowledges that the €25 billion being given to Anglo Irish Bank and Irish Nationwide is money down the drain.

It says this is a pity, but "manageable". It says the total amount being allocated to the banks and Nama is likely to be about €73 billion but, aside from the €25 billion given to Anglo and INBS, the rest should be recouped - so no need to worry.

This confidence is based on an expectation that, because there is a higher discount than was previously projected being applied to the loans that Nama is getting from the banks, we might be able to make a profit on Nama, that the banks will recover and will make money, and the state will sell off its shareholding and make more profit.

On the very day the commentary was published (last Tuesday), Brendan McDonagh, head of Nama, said the reason for the higher discount on the loans Nama was taking from the banks was not based just on a lower valuation of the assets backing the loans.

It was also because some of the banks screwed up the documentation on security for many of the loans, and the EU was insisting on other factors being taken into account. So the basis for the optimism about Nama was exaggerated somewhat.

And just one question about this optimism on making a profit from the bank bailout: if the prospects for the banks are so rosy, how come private investors are not keen to buy shares in these banks?

I have been wondering for some time what the word ‘social’ is doing in the title of the Economic and Social Research Institute. Yes, it does bits of social research on unemployment, education, health, housing and the like from time to time.

But none of its economic commentaries evaluates the social consequences of what it describes, or the social consequences of the policies it advocates - and nor does it appear to care much.