Cover story: McDowell's plan for prosperity
Policies for the future and failures of the past: Tánaiste Michael McDowell talks to Constantin Gurdgiev about the need to build continued prosperity, push public sector reforms and who he would consider for a coalition partner.
If anything, the last six months have shown conclusively that our economy is vulnerable to adverse shocks from abroad and uncertainty at home. In terms of the economic framework for the country, lack of competition and reforms in the public sector over the last 10 years imply that in the next few years Ireland has some hard choices to make in terms of where we want to go. There is an acute need for reforms in the public sector and in sectors controlled by semi-State enterprises. This is more than a simple agenda of getting value for money. It is an agenda that lies at the heart of our interactions with the Government. Should the Progressive Democrats return to Government, how can they carry out such reforms in the light of Fianna Fáil backbencher opposition to any idea of tackling trade unions and public sector employees?
According to McDowell, the PDs are "putting together a group of policy leaders which will be entrusted with overseeing the implementation of our policy commitments". These commitments unveiled two weeks ago in Wexford were based on an economic analysis that, along with Budget 2007, assumes Ireland can manage an economic growth rate of 5% over the next four to five years. "If that happens and there is no change in our tax system from the current situation, there will be, by the end of 2012, a massive fiscal surplus - in present value terms, something to the tune of E6bn per annum," claims McDowell. "This has to be addressed, because under current rates of taxation, the State will simply accumulate more and more in assets. This means that from our point of view, there are two main issues arising. One: do we want this income for the state? This is the issue about our taxation policies. Two: if the Government does bring in extra money, do taxpayers get real value in return?"
Public spending and prosperity
In the relation to taxation and public expenditure, McDowell proposes to follow "a reasonably conservative expenditure growth path", with public expenditure growing "by no more than 7 or 8% in nominal terms, assuming economic growth of 5% in real terms". "If we do budget for conservative growth rates in expenditure," the Tánaiste insists, "we can then concentrate Government attention on getting more value for money, on improving the quality of public service. The private sector needs good public service. Many of our problems at the moment arise from the fact that we need an internal examination of the public sector - how it operates. We need to identify what is working in the public sector and what is not. My experience of the public sector so far is that it is oriented towards easier-to-manage capital expenditure programmes and it is underperforming when it comes to current expenditure programmes. But even in relation to capital projects, the public sector has difficulties in extracting value for money. Although things have improved in this regard recently with the new CIF contracts."
The PDs are forecasting growth of 5% per annum while aiming for 7-8% increases in public spending. How does this stack up against the idea of reducing the role of government in the economy? If inflation is running close to the EU average, these figures would imply increasing the share of the public sector in overall economy over time. McDowell insists that he does not have an ideological position on "driving the state share of economy down. But I do have an ideological preoccupation with not allowing it to rise." If so, the PDs' figures imply that inflation in Ireland will remain above the 3% level for the foreseeable future.
In Wexford, at the PDs conference, the Tánaiste forcefully asserted that he believes that people should have a right to enjoy the fruits of their labour and that the Government take from taxation should be moderated. Is this consistent with having no ideology on the size of Government take in the economy? "If you look back at the past 20 years, what has worked for this country was the fact that we had policies in place that were based on the proposition that the Government can't do everything for all people. This basically means that if the Government is faced with a choice of taking in an extra 3-4% of private income or not, the answer should be no, let's keep this income where people can make spending decisions for themselves. When the Rainbow Coalition left the office, a worker on an average industrial wage paid 27% of his or her income in taxes and social insurance. This is now down to roughly 16% and it means that over 10% of the average industrial wage earner's money was returned to them."
The Rainbow can counter this assertion with an argument that anyone can cut taxes when the economy is booming and the receipts from indirect taxation are going up. What would happen if the PDs' growth projections do not materialise and we are facing an economic slowdown?
McDowell offers a robust reply: "First of all, we have to absolutely guarantee that whatever policies this Government adopts will be responsive to what happens in the real world. So if economic circumstances change, we will adjust Government expenditure accordingly. Having said that, I think there is a connection between the influence of the State on the economy, the share of the economy that the State takes, and whether or not the economy is prosperous. It is not sufficient for the Rainbow to say ‘All of this is fine while the economy is doing well...' The real question one must ask is why the economy is doing well? The economy is doing well because the State encourages people to create wealth."
Public sector reforms
Creation of wealth, economic prosperity and quality of life in Ireland all depend on having a meaningful reform of the public sector. Politicians have been talking about one for years, and there is little change that came about. Taoiseach Bertie Ahern has just appointed a committee to oversee the OECD process of reviewing Irish public sector performance. Yet, there is hardly any sign of independent thinkers or potential critics on a committee staffed with Civil Service veterans. How do the PDs plan to address the problem that there is very little political will in Fianna Fáil in having real reforms?
"A part of my proposal to the Government is to create an independent body that will oversee the competitiveness of our public sector. Just as we have the National Competitiveness Council to oversee the performance of the private sector, we need an independent organisation overseeing performance in the public sector. I agree with you that we can't just have an internal judgment on this issue. This was the problem with benchmarking in the past."
It's a fine idea in theory, but voters might be quite sceptical as there has been very little independent analysis coming out of our so-called "independent" bodies. We often hear more truth coming from the foreign think tanks and international organisations than from our domestic watchdogs. McDowell agrees: "This is precisely my point. I do believe we need a public sector productivity watchdog with real bite, addressing [the public sector's] capacity to drive forward programmes, to deliver value for money."
This assessment body will have no power to drive the proposed reforms and enforce their implementation. McDowell argues that "within the Department of Finance, there should be an inspectorate just to deal with efficiency issues in public service. This inspectorate should look at how various public bodies deal with the expenditure programmes, have these programmes progress at acceptable speeds, etc, so everybody working in the public sector will have someone looking over their shoulder to some extent. I don't think you can give a public sector assessment council a power to usurp what effectively is the function of the Government. It is the Government and the ministers' function to make certain that their departments operate according to the desired standards."
According to some critics, the Government can be criticised as being too keen on shifting responsibility from the elected officials to unelected and unaccountable super-regulators. It might have worked in a few cases, but it certainly has not worked in energy, telecoms and health insurance.
"I would look at the case of the energy regulator as not being an ideal outcome. The same is true of ComReg - when Charlie McCreevy wanted to allocate mobile licenses, he wanted to do it by auction. The regulator effectively overruled the government on that issue. Our recent experience with CER shows that you can have massive increases in prices predicated by the process over which there is very little democratic control and accountability. I take the view that, in a democracy, it is the business of the Government and the Dáil to oversee the whole policy dimension. Impartiality and independence are important, but following the democratically mandated policy set by the Government is hugely important as well. I think one of the real problems that beset our regulatory system is that we have departments of State that own large monopoly bodies, like the VHI, the ESB, Board Gáis, the CIÉ etc. The departments always saw them to be under threat from competition, so there was effectively a conflict between their regulatory mandate and the fact that they had ownership of State enterprises.
"The idea of regulators was to put an independent referee between State companies, the departments and the participants in the market. But it has not worked in that way in many areas. In respect of energy regulation, telecoms regulation and health insurance - wherever there was an overhang of the old regime."
There is probably more to this story than simply an overhang from the old regime. The regulatory environment in Ireland is rapidly becoming a textbook example of State capture by monopolies and interest groups. Take for example a deregulated taxi industry. Last year, a set of new regulations for the sector was lauded as a breakthrough for consumers. In the end, consumers are facing 12% higher costs and there is no change in the quality of services. One might suspect the regulator has gone too far to meet taxi drivers in fear of major disruption to services. There is no incumbent State monopoly in this sector, but there is a culture of entitlement ahead of consumer interests.
One way to address this problem around the world has been to appoint as regulators and their advisers truly independent outsiders who are not afraid to say no. Instead, the regulatory bodies here became a career diversification opportunity for civil servants and State sector employees. Is allowing the public sector to select its own watchdogs any different from rearranging the deck chairs on the Titanic?
McDowell takes exception to this. "Bill Prasifka was Aviation Regulator before he went to the Competition Authority, and he is a genuinely independent regulator so the system worked in his case. But, in general, I agree with you - we should think outside the box and this process cannot simply be a matter of the civil or public service transposing itself into the regulatory body. If we are going to come into the Government after the next elections, it is a value of mine that the regulators should be independent people, but I also believe that it is the right of the Oireachtas to give them policy direction."
Assuming the PDs are in the next Government, the party will be involved in liberalising energy and transportation markets. Many currently State-owned assets will come under increased pressure from competition, leading to the possibility for rationalising State ownership of some enterprises. Does this mean that the agenda of privatisation is still on the table for the future?
According to McDowell, "it is not off the table in the sense that there are some areas where there can be further competition brought in. But I don't see us selling our railways or privatising the water supply. I do not see us simply selling State assets on an ideological basis. Yet, there are areas where privatisations and deregulation can be beneficent. For instance, I do believe that in the review of the energy market there is a very strong argument being made that we need separation of electricity transmission and distribution network from generation. The distribution network is essentially a public asset and should not be privatised. In relation to the generation side, I don't see any reason why we can not intensify private competition. Likewise, in transport, I see the benefits of having far more competition from private sector, more private bus operators and access to routes. We need to decentralise the whole system."
There is a wealth of factual evidence pointing at the decreased reinvestment rates for the multinational companies operating here. Some companies - large and high-value employers - have already left Ireland. Inflationary pressures mount, consumer uncertainty rises and signs of a slowdown in the housing markets are appearing. Is McDowell concerned with the near-term future of the economy?
"The first thing I must say to you is that if we elect a parliament in the next 90 days that is fragmented and anti-growth, we will see a very rapid negative reaction from foreign investors. If for instance Sinn Féin or the Green Party were to have a significant role in the formation of the next Government, there will be a knock-on effect in terms of depressing business confidence in Ireland.
"While our media and academics might like a two-horse race, the truth is that if you favour prosperity and growth, the two parties whose platforms are compatible with the ideas of prosperity and growth are FF and the PDs.
"Why should you believe that you can have a prosperous society with a Government that is at best indifferent to prosperity and at worst hostile to it? Look at the candidates' and parties' philosophies and rhetoric - opposition parties are hostile to the construction sector, they don't like developers, they are against foreign direct investment and multinationals, they oppose profits. If we elect a Dáil dominated by people like that, they will have an almost immediate negative effect on the economy."
As long as there is a chance that the next ruling coalition will take a different shape from the current one, there will always be speculation as to who can and who cannot be ruled out of governing and opposition coalitions. Is there a possibility for a Fine Gael/PDs-led opposition?
McDowell has no problem with FG as a party. "The real question is this - are they willing to sacrifice everything, including their core values, in order to get into power? You look at Enda Kenny and Pat Rabbitte - Rabbitte said repeatedly and unequivocally that if Labour goes into Government with FG, Labour will be in the driving seat. Aside from ideologies, we have some 15 years of experience in being in the Government, Labour and FG in their current composition have about two. Is this an experienced team to lead Ireland?
"To be fair, Pat Rabbitte did move quite a bit forward from his earlier days when he started as a Marxist-Stalinist. Now, as a potential minister for finance, does he have what is required to support economic growth? What credibility does the Labour Party have under the leadership of Pat Rabbitte to be a party in support of prosperity and success?"
On the other hand, the PDs might face the decision of being in the Government with FF plus another party. Are there any parties that would never be considered as potential Governing coalition partners?
"I am not interested in doing a deal with Sinn Féin - they are still a Marxist party, anti-European, anti-liberal. Sinn Fein does not like anything that the PDs are standing for. As far as I am concerned, it would not make sense for the PDs to join a coalition solely for the purpose of being in the office if such a coalition does not allow us to effect policies. Our position has always been that we will contest an election as an independent party and that we will do a deal with any party with whom we are ideologically compatible. I am not shifting from this proposition. FG and FF are parties which have broad ideological compatibility with the PDs."
What about the Greens? "In the run-up to the 1997 election, the Greens had on their website an economic policy document which talked about, among other things, local authorities issuing their own currencies and that they were not opposed to the development of barter economies. Now, they have moved far from these positions. They are no longer talking about their proposed site value tax, or E800m in carbon taxes. In fact, they given up on pushing any of the economic policies they believed in the past. But if they are in Government, will they put an end to investment in new roads? Trains are fine, but they can't take you shopping for groceries."