Sunday Herald, Halifax
27 February 2000
On the eve of the budget, consider the Celtic tiger
By David Gratzer
THE LIST of problems is long: economic growth figures for the last decade that are more meek than robust; entire regions of the country where, as union economist Manus O’Riordan observes, “no culture of employment” exists; stagnation of after-tax income for working people.
And then there’s the brain drain. Notes Rafique Mottiar, a senior economist at the central bank: “It seems that half the college graduating class goes straight from graduation ceremonies to the airport for America.”
These problems sound too familiar to us Canadians. Rafique Mottiar and Manus O’Riordan aren’t, however, Canadians – they’re Irish. And the painfully long problem list referred to in the above paragraph described the Ireland of the 1980s.
And there were more troubles. The Irish debt spiralled out of control, reaching 125 per cent of GDP. From 1976-1986, labour unrest led to 546,000 days a year lost to industrial disputes. Despite the high birth rate, the total number of jobs in 1986 was the same as in 1971. Unemployment in the mid-1980s sat at just under 20 per cent.
The Emerald Isle was a basket case.
And while the 1980s may have been particularly bad, economic stagnation marked much of the second half of this century. No wonder, then, that the best product Ireland exported was people – more than 800,000 from 1949-89.
But that was then. Ireland today is a different story.
Fifteen years ago, Canada’s per-capita gross domestic product was 2 1/2 times Ireland’s. Now, Ireland’s GDP is 15 per cent greater than ours.
From 1993-97, 200,000 net new jobs were created. Unemployment is under six per cent, and falling. In 1999, the GDP grew a staggering nine per cent.
Fred McMahon details the transition in his new book, Road to Growth: How Lagging Economies Become Prosperous, published by the Atlantic Institute for Market Studies (www.aims.ca). McMahon’s first book, Looking the Gift Horse in the Mouth, won the Sir Antony Fisher International Memorial Award, one of the highest honours in public policy.
Written with clarity and eloquence, Road to Growth is another McMahon gem. Ireland’s success, as he explains, was due to a relatively simple strategy: the Irish government made the country a good place to invest.
The strategy rested on three pillars. First, the government slashed taxes, in general, and corporate taxes, in particular. Second, the government cut spending. By GDP, the Irish introduced deeper cuts than Margaret Thatcher’s in Great Britain. And finally, the government sat down with corporate leaders and powerful labour unions and negotiated to hold wage growth down.
Entrepreneurs and individual citizens suddenly had money to invest and spend. The effects were dramatic and immediate and, perhaps, counter-intuitive – workers enjoyed huge income increases despite wage freezes, and tax revenue soared after tax cuts.
Such a strategy, of course, flies in the face of many of Canada’s economic policies for the last three decades. Federal philosophy follows the old Keysian line that government spending stimulates the economy – thus, our high taxes, regional transfers, and mega-projects like infrastructure.
High taxes clearly retard economic growth. So too, explains McMahon, does government spending: “The ‘crowding out’ effect occurs through several channels. Large government borrowing forces up the cost of capital, making investment more expensive. High taxes reduce the money people and business have to spend and invest. Government expenditures bid up the cost of scarce resources . . . again making investment more expensive. And high taxes coupled with generous social programs create incentive not to work, furthering the cost of labour.”
McMahon’s book goes further and investigates jurisdictions like the Netherlands, Michigan, Massachusetts, and the U.S. Deep South. In some cases, prosperity was always unknown; in others, external events conspired to replace opportunity with stagnation. But each jurisdiction looked to a relatively similar formula: lower taxes and less government intrusion. Today, they’re booming.
Canada’s problems are minor compared to those of Ireland in the 1980s. As the minister of finance will observe tomorrow, our books are balanced. Canada now boosts one of the fastest debt repayments among the G-7 nations. Taxes will be modestly reduced.
Still, we have problems. After-tax income shrank from 1989-99 by two per cent. In the 1980s, it grew by 16 per cent; in the 1970s, 48 per cent. As Royal Bank economist John McCallum observes, the average Canadian income sits at 61 cents for every dollar earned by an American. Over the next decade, with a growing productivity gap, that will fall to 50 cents.
Tomorrow, the minister of finance will not address these problems. Canadians must then decide: are they content with the Liberal message or do they want to go Irish?
David Gratzer is a medical student at the University of Manitoba. His articles on national and international affairs have appeared in several Canadian newspapers and magazines. He is also the author of Code Blue: Reviving Canada’s Health Care System.