Michael Burke: The number of corporate insolvencies in Ireland has soared to 1,406 in 2009, according to InsovencyJournal.ie. This exceeds the level of insolvencies in 2007 and 2008 combined, which totalled 1,136, with an increase of 82% on 2008 alone. The highest number of monthly insolvencies was in December, at 156, indicating that the decline is on an accelerating trend. This represents a significant deterioration in the outlook for businesses.
The composition of insolvencies is revealing. The problems of the construction sector are well-known, but these now form a minority of the failed business in 2009, approximately one-third of the total. The next 3 largest categories for insolvency are directly related to the slump in consumer demand; services, retail and hospitality, and together these represent 45% of the total. Of the remainder, manufacturing, the motor sector, IT, and transport comprise 18%. There is no employment breakdown of the data, but a reasonable assumption would be that job losses in these latter sectors would account for a greater proportion of the total, owing to greater average enterprise size.
The data are an indictment of government policy and those of the business lobbyists, such as IBEC and their supporters in academia. The nature of the economic crisis in Ireland is a combined property and banking crisis, which has precipitated a slump in activity led by investment. It was not, at the outset, a crisis of falling consumer demand. Banking write-downs of residential mortgage lending are testament to that; running at one-tenth the level of writedowns to failed property speculators. At the end of 2008, personal consumption was declining by 3.6% from the previous year, less than half the decine in the GDP/GNP measures which were down between 7% and 8%. The driving force behind the aggregate decline was an enromous 26.1% fall in investment (gross fixed capital formation), led by but not confined to construction investment.
However, since that time there have been a series of austerity measures totaling 6.4% of GDP, with threats of more to come. This has had a direct contractionary effect on economic activity. Worse, the measures have been concentrated on the lowest paid and welfare recipients, precisely those who are obliged to consume a greater portion of their incomes. As a result, the latest data show private consumption had almost caught up with the rate of decline in GDP, -6.8% compared to -7.4% in Q3 2009. At the same time, the absence of any stimulus measures and against a backdrop of falling demand, investment continues to plunge, down 35% year-on-year in Q3 and is now back to a level last seen in Q3 1998.
Of course, all these insolvent companies will no longer be paying corporate taxes. Neither will their redundant workers be paying income taxes, and many will be obliged to seek welfare benefits. Yet the policy enacted was in the name of fiscal rectitude. The complete failure of that policy, even in its own terms, can be gauged from the fact (as shown in the latest Budget Report) the government's own forecasts for the deficit keep rising.
A rational economic policy would begin with measures to stimulate the economy and staunch the flow of insolvencies, (as has happened all across Europe and in other leading economies), an end to cuts and a major increase in government investment. The government is about to embark on a programme of €54bn borrowing to hand over to bank share and bondholders. The idea that, say, one quarter of that amount could not be borrowed to fund investment is a nonsense. This paper from Lane and Benetrix shows that, even in ordinary circumstances, the multiplier effects of government investment are enormous. The stimulative effects of investment plus the taxes they generate means it is a reckless policy of malign neglect that is currently being pursued.
IBEC's stance is that of the small shopkeeper who hopes to stay in business by cutting staff wages. When replicated economy-wide, this is a policy of contraction. It has already been pursued with disastrous consequences. There are now a further 1,406 reasons why it should be abandoned.
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