George Lee’s Speech

Thanks to Patrick for posting the links. He mentioned George Lee’s talk, which I have just read.

I have blogged about Deputy Lee and I state again that I dont have any connections with him or his party. He is improving the quality of the political debate around economics in my view. Whether his position is correct can be left to the comments and hopefully the comments can stick to the economic merits of these suggestions rather than more personalised political arguments that are best debated on the many politics blogs in the Irish landscape.

The speech, unsurprisingly, is critical of government performance and policy. A summary of the substantive economics points is as follows:

The size and swiftness of the current proposed fiscal adjustment is too large. The government should reconsider trying to get the budget deficit back to 3% by 2013. “What’s so sacred anyway about having a General Government Deficit of 3% of GDP by 2013, especially if achieving that target runs the risk of turning an economic recession into a depression?”

The tax base was narrowed too much during the economic boom and should be broadened. “Taxes on the average worker were cut to the lowest combined rates in the developed world outside of Mexico and Korea. Despite the fact that global interest rates were historically low and that access to credit both at home and abroad had never been easier, massive tax breaks were given to property developers and investors. This was an irresponsible approach to the structure of the taxation system and of our economy that has now blown up in our faces.”

Guaranteeing all bank debts is irresponsible. “There is no sane reason why Irish taxpayers should continue protecting investors who bought bonds issued by Irish banks….The protection given by the Guarantee to bond investors in Irish banks should be removed September next year when the first two-year term for that Guarantee is up. This shouldn’t preclude the Government from renewing the Guarantee for normal wholesale borrowing by Irish banks. It would, however, help send a message to the international financial markets that the Irish Government is reducing its debt exposure in a rational way and is not lumbering ordinary taxpayers with debts obligations they should have no liability for.”

17 thoughts on “George Lee’s Speech”

  1. I very much welcome George Lees speech. It is at variance with what both Richard Bruton and especially Leo Varadkar have been saying in relation to tax and fiscal retrenchment and that, in my view, is welcome. I am wondering what reaction there is here on his mentioning of Stability and growth pact and other EMU imposed restrictions!

  2. Infairness, does anyone seriously believe we’re going to get to the magic 3% figure by 2013? Governments tend to promise big and deliver small, so by at least aiming for 3% we’ll hopefully get it to 5% or thereabouts. If we aimed for 5% we’d probably end up for 7-8%.

    Also, it is kind of important to at least suggest to international bond investors that we have some intention of getting the fiscal deficit under control! Cos you know, we’re going to be hitting these guys up for €100bio or so in the coming years between the deficit and NAMA…

  3. I think George may find that the Government agrees with him on the three points highlighted.

    Taking those three points in reverse order:

    “- Guaranteeing all bank debts is irresponsible…….This shouldn’t preclude the Government from renewing the Guarantee for normal wholesale borrowing by Irish banks.”
    The details of the extension of the Guarantee have not been published but it is unlikely to be a blanket extension.

    “- The tax base was narrowed too much during the economic boom and should be broadened. ”
    This is the one major fault which the Government is willing to specify as one of its error. Its put Charlie McCreevy in the firing line. It also helps justify tax increases.

    “- The size and swiftness of the current proposed fiscal adjustment is too large.”
    It is unlikely that the whole of the McCarthy report will be implemented. Just this morning Micheal Martin said we had to make €4bn in cuts. I think that the report details €5.3bn in cuts? George may have given the Government some more wriggle room on this. The Labour party would appear to be of George’s mindset already.

  4. Liam,

    I fully understand your desire to stick to the economic merits of the more substantive observations George Lee made, but it is not possible to make any meaningful comments without entering into the area of political economy and taking account of the political context. George Lee either took the opportunity, or was encouraged, to begin to shift and develop FG’s economic policy narrative. In addition to the quotations you have selected, for me, his comment on the pre-2007 universal feel-good mood is, perhaps, the most significant:
    “At the start of 2007, just before the last General Election, the Department of Finance estimated that by this year, 2009, the Exchequer would collect just over €56 billion in taxes on economic activity of all sorts. That is a very big sum and it was on the basis of that €56 billion sum, and the official forecast that there would be even more money available in 2010 and 2011, that all political parties drew up their election manifestos and packed them with lavish promises for the electorate in 2007.”

    This highlights something that has surfaced frequently on this blog: the lack of economic literacy in the formulation of economic and fiscal policy – particularly in the Dept. of Finance. But, for me, it highlights an even deeper malaise: the lack of adequate scrutiny by the Oireachtas. It is perhaps too much to expect a Dail dominated by teachers, farmers and local business people to scrutinise policy proposals adequately and to hold an over-mighty executive to account, but resourcing and empowering TDs in committees to retain the necessary expertise would compel the “permanent government” behind ministers to conduct and present more extensive and transparent analysis. It might also encourage the emergence of Dail candidates with a better grasp of the public interest and some economic literacy.

    This shift in FG’s economic policy narrative is very much a work in progress. The three quotations you select may have some significance, but they don’t take us very far. If the Government remains in power it will be forced by politcial exigency to slow-down and down-scale the extent of fiscal adjustment. (The inappropriateness of the Eurozone’s GSP (aka Gloom and Stagnation Pact) has long been recognised – and a coach and four has been driven through it by the French and Germans governments even before this latest crisis.) It is almost certain that the Commission on Taxation will recommend a broadening of the tax base and the closing of loop-holes that allow higher earners to avoid taxation. And, because NAMA is being constructed away from public scrutiny, it’s difficult to discern the extent to which bondholders’ feet will be held to the fire.

    And, although he quotes approvingly the IMF’s characterisation of an optimal fiscal package, he doesn’t follow through – though I suspect FG is working on updating its investment stimulus proposals in the background.

    Finally, it is also significant that he concluded on “trust in government” which may indicate a greater focus on democratic governance.

  5. It is certainly great to hear such a well informed, serious speech from a TD. It is also good to see FG acknowledge, however implicitly, that their own 2007 manifesto was not exactly that of a party that saw a property crash coming. Also welcome is their acknowledging (again implicitly) that their support for the bank guarentee was, at least in hindsight, mistaken.

    But having said all that I wonder whether the true upshot of any shift towards the view that “the size and swiftness of the current proposed fiscal adjustment is too large” will be simply to give the party room to oppose every proposed cut and/or tax without appearing “irresponsible”?

  6. @ Paul Hunt

    I wholeheartedly agree with your statement about the quality of forecasting in the DoF that lead to such wildly misguided revenue projections for 2009. I would question whether the key failure here is in the quality of economic knowledge or abilities.

    Instead for me the whole Irish budgetary story stems from the failure to think deeply about the future and more specifically to engage with the fact that there is no such thing, at any one time, as the future. We are always faced with a situation where starting from today and looking out several years, at least several very different futures are possible depending on how key uncertainties in the global and more local environment play out. This is not a reality which even the best of mainstream economic thinking has been very quick to recognize, but which should have smacked any casual observer of the global economy over the last 18 months – half the i-banking world disappears, major banking sectors quasi-nationalized, world economy falls off cliff because an insurance company and a bank teeter on the brink?

    The failure of all actors (private or public) in a Small Open Economy like Ireland, which has little control over many of the key drivers of its economic destiny, to recognize this fact and to make better use of tools such as divergent scenarios in their planning and decision-making means that what we have just experienced was more or less inevitable. Adding on top of this deep structural problem the hubris and selfishness which encouraged many to extrapolate forward from those ahistorically good times and its not hard to see why we are where we are.

    Tragically, I see little in the current economic debate as represented by this blog, by An Bord Snip’s report, and by the wider media which appears to have learnt this lesson. For example, from what I understand of An Bord Snip’s recommendations of reduced funding and the scrapping of programs in areas like funding for energy and climate change appear extremely short-sighted.

    Unless we put these longer-term questions and, I would argue the specific idea that different futures are possible on the table, we are in deep trouble. The Irish economy is massively influenced by what happens in the world beyond our shores and there importantly different ways that that future can play out. We should be constructing a robust strategy for Ireland’s economy and its people across a number of those different futures. That means a bigger change of mindset than just greater Oireachtas scrutiny of the permanent government, though I agree that that would be a helpful start.

  7. There are a number of things in the audio version that are not in the written version. The very strong statements in the audio about why cutting expenditure would be a mistake are much less tempered than in the written version. Its very difficult to understand what the precise policy conclusions one can draw from combining both versions. The audio version seems to conflate economic growth recovery with the fiscal targets being suggested by many economists and largely accepted by the government. In general, the audio version sounds far more like a play to a crowd than the written version and is hard to take fully seriously. If any party or politician is going to seriously advance a view that the current fiscal targets are misguided then they better produce some alternative estimates pretty quickly that address the risks associated with allowing debt/gdp to rise beyond that projected under the current track.

  8. If I have a valid complaint about this blog, and the other one ‘across the street’, it is that neither of you details what your Economic Model-in-Use is. It is essential that you do so, else one cannot conduct any meaningful analysis of the many and varied comments.

    If, your Model-in-Use is Permagrowth, then you are in for a most unpleasant surprise – Permagrowth is on life-support. We are in a transition period. There has been no real ‘growth’ for the last decade, its been virtual, debt-fueled.

    I would be grateful if you would please state whether you are using an ‘equilibrium’ model or a ‘process’ model for your economic ideas. There are really major differences between the two in terms of outcomes.

    I am presuming that most commentators are using the Permagrowth (equilibrium) economic Model-in-Use. This pair got us into the mess we are in, so how on earth will they get us out? They won’t!

    The most useful solution, albeit the most difficult, is a Debt Jubilee. And it would be prudent to try it out before we discover that fossil fuel production has actually peaked. Fuel=energy=growth. Unfuel=unenergy=ungrowth -> Boom!! (as in bust).

    Got to think outside that box folks!

    Brian P

  9. I listened to the audio of George Lee’s speech and I was very disappointed with someone who I expected to add economic expertise to the political debate. His speech seemed to appeal to every populist opportunity and did not really address the title of the debate “Climbing out of the recession – the options.”

    It was obviously a severe critique of the Government and Department of Finance. However, his proposed solutions were very thin on the ground (as observed by one questioner later on). In summary he appeared to advocate cuts in tax rates while stating that there was no need for expenditure cuts. He seemed unconcerned as to whether this was realistic or viable.

    He claimed that the deficit would by solved by economic growth connected to a massive stimulus package. Is this realistic given that we are already borrowing at a rate that will mean one in every 5 euros of taxation will be used to repay borrowing in 2013? I see the need to reduce the budget deficit to 3% in 2013 as basic common sense. I would agree that the original Stability and Growth pact rules were too restrictive but 5 years is more than enough time to adjust. What is the point of crippling ourselves with debt? Also, it was inadequate for him to say that people with PhDs should come up with the ideas for economic growth. The only real solution he offered in answer to the question was an old idea on pension funds investing in Ireland that is reliant on legislation forcing them to do so (completely illegal in an internal market).

    All in all it was very poor from Deputy Lee; he had no solutions and seemed to leave basic economics at the door before he walked in. I am amazed some of the commentators can read great economic policy theories into a speech that seemed designed to appeal to what we all want to hear: “Less tax and high public expenditure. I would be very interested to see if Richard Bruton (who has consistently articulated sound economics) had any say in the speech.

  10. @Brian Wood

    Could you please spell out your (non-biblical) understanding/definition of what a Debt Jubilee is Brian? Whose debts? What happens to the creditors? What’s the ideal ‘outcome’ of this Debt Jubilee. Thanks.

  11. Brian,

    I understand that you find it frustrating to see others operating on what you deem, from an ecological point of view, to be false premises. But I feel I speak for many when I say that your attempts to turn every discussion thread into a debate about first principles (not to mention your use of Random Capital Letters) makes you come across as a crank.

    I’m not saying that the foundations of conventional economic approaches are solid. I’m just saying there’s no need for you to try and turn every thread into a debate about them.

  12. George Lee clearly sees the main chance and wishes not to repeat the Tallaght strategy. He knows he is operating in a corrupt economy. He is attempting to remove one form of corruption by employing another. So what else is new? He is clearly a politician now and uses his economics knwldege and credentials to further his ambitions.
    Are they worthy of support? What is new in what he says? Is he just another Tribune of the Plebs? To be accepted by FG he has to walk a tightrope. Will he attempt to deal with corruption or just change those who operate corruptly? I have seen too little to suggest that he is just another pollie.
    When I see him suggest that the gardai can investigate politicians and that he sets up an anti corruption body such as exists in every Australian state and federally, he will not get my support, desoite his kind words at the PAC to me!

    @ James Conran
    What is wrong with being a crank, James? What are you afraid of? Is he getting close to something fundamental?

    A jubilee for some but not for others? Inflation overnight! Pay everyone EU100,000 would be more equitable but frankly, unlikely. Better to let those who leveraged too highly suffer for their belief in the media and economic ignorance. Not everyone has read Michael Shedlock daily for 6 years….

  13. @Pat Donnelly

    I was advocating paying everyone a lump sum (with some conditions about how it could be used) months ago before they threw it all at zombie banks. It would have had a more positive impact I’m sure.

    As for Michael Shedlock …. an interesting read but I won’t be subscribing.

  14. Liam,

    To get back to the question your raised initially, George Lee’s view that the 3% target should be abandoned ignores, among other things, Ireland’s dependency on lending from the EU and the international markets to keep us afloat through this crisis and the likely repercussions of any Irish government saying that they will now throw caution to the winds and in that time honoured way find ‘an Irish solution to an Irish problem’. There’s a strong element of economic nationalism in his prescription, reminiscent of the thinking of the old Sinn Fein of the early part of the last century more than anything else. It’s also entirely at odds with FG’s policy on the public finances.

    As for his point on the tax base, that’s called stating the bleedin’ obvious and it’s not much use without specifying proposals for increases in income and other taxes that are now required to close the gap. Again, it is also at odds with FG’s policy in this area.

    His point on the banks guarantee is more geared towards populism than what’s practically possible.

    I’m therefore sorry to have to disagree with your view that “he is improving the quality of the political debate around economics .” Of course when you are in opposition you can say whatever you like because you don’t have to stand over it, but if Lee’s cheap populist rant at the MacGill summer school is indicative of the quality and substance he is likely to bring to our economic debate then it’s more likely that all he will achieve is to add to the unpleasant and generally useless background noise we are growing accustomed to.

  15. Veronica
    On the point below, are you overstating this? Many economic commentators have leant toward something similar to what he is saying (in the printed version of the speech of least).

    “His point on the banks guarantee is more geared towards populism than what’s practically possible.”

    In terms of whether he is improving the quality of the debate, in retrospect I should have omitted that sentence as its only a distraction. People can decide for themselves whether he is improving the debate or not.

  16. Liam,

    You may be right that I am overstating it – I only listened to the audio version of his speech, which is the true version of any speech. (Otherwise there wouldn’t be much point in the universal ‘Check against Delivery’ disclaimer.) It seems to me that while many economic commentators lean towards Lee’s view, there are just as many others who don’t. But neither side have ultimate responsibility for making the final judgement call on what’s the right thing to do in all the circumstances, as opposed to what may appear to be the best option from an economist’s perspective.

    Obviously George Lee has to marry his politics to his economics. Because of his background and profile, his every utterance carries a great deal more influence than a normal ‘rookie’ TD and I guess that’s why I’m a bit put off that he appears more keen on saying things that people want to hear than a more sober analysis of the options facing us. Perhaps that’s too much to expect of any human being in his position and if so, then I am being unfair.

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