Monday 20 March 2000
The Montreal Gazette
Quebec is far from Ireland’s path
by Fred McMahon
“We would do well to follow in the footsteps of the Republic of Ireland,” Quebec Finance Minister Bernard Landry said in his budget speech last week, “a small country that experienced phenomenal growth. We are moving toward the Irish model.”
Ireland is indeed a grand model. Just 15 years ago, Canadians on average produced 2-1/2 times as much as the Irish. Today, the Irish produce more than Canadians do – 15 per cent more.
In the 1980s, Ireland’s unemployment rate soared to nearly 20 per cent. Today, Ireland suffers a shortage of workers, despite huge numbers of young people joining the labour market (birth control arrived late in Ireland) and the unprecedented entry of women into the work force.
Ireland’s economy sped past Britain’s. In Canadian terms, it would be as if a poorer version of Newfoundland transformed itself overnight into a province richer than Alberta. Or if Quebec did the same trick, for that matter.
But sadly, Landry’s hatful of tax cuts have little to do with the radical transformation of the Irish government and economy that occurred in the twinkle of an eye in the late 1980s.
The 1980s had been one of the worst decades in Irish economic history. Government was bloated. Militant unions gave neither government nor employers much peace. Perhaps because the Irish had no one to blame, they tackled their economic problems head on. They did not have the luxury of reform in an upswing, as Landry now has. The Irish performed radical surgery in the midst of an economic hurricane.
“We had declining economic growth and declining employment,” Manus O’Riordan, head of research for Ireland’s largest union group, told me when I visited Ireland to discuss the turnaround. “Wages were up, but inflation and taxes were up more. Living standards were declining. We knew we had to do something.”
That something was quite remarkable. Labour militancy and high taxes made Ireland a high-cost place for business. “People won’t invest if they can’t make money,” O’Riordan told me.
Worked out a deal
So Irish unions sat down with business and government to work out a new deal – something that would be quite unthinkable in Quebec today. Unions pledged labour peace and wage moderation. “We wanted something in return,” O’Riordan said. “We wanted tax cuts so our members could take home more of their pay.”
Ireland was about to restructure its government and society more abruptly and radically than Margaret Thatcher had dared in Britain. In just two years, 1987 to 1989, Ireland slashed government spending from more than 50 per cent of GDP to less than 40 per cent.
Taxes were slashed as well, though less radically to help move the budget toward balance. In 1988, taxes fell from 37.4 per cent of GDP to 33.8 per cent. (In Quebec, they still exceed 40 per cent of GDP.)
Ireland was transformed from a high-cost to a low-cost place to do business, from a nation racked by labour militancy to a nation where unions favoured strong profits and moderate wage growth, from big government to relatively small government.
The Irish anticipated a nasty downturn as the economy restructured. But the luck of the Irish held. A timely devaluation eased transition. Powerful economic growth took off immediately.
Critics call the Irish strategy a race to the bottom in wages and government. It’s anything but. Ireland’s government is raking in more than ever because of the Emerald Isle’s astonishing economic growth.
Growth solved the deficit problem the Irish had left themselves after restructuring. Workers are earning what once would have been unthinkable wages. Pay, in real terms, rose faster after wage moderation than during the period of union militancy when inflation and higher taxes ate up gains obtained by belligerent unions.
The new union strategy emphasized the need for healthy profits. Profits create the means and the incentive for further investment. That, in turn, increases the productivity of workers who share added returns with their employers, leaving profits and wages stronger. And so the virtuous circle turns.
Quebec today, with its militant unions and big government, looks much like Ireland before its transformation. Across Canada, spending by all levels of government equals about 42 or 43 per cent of GDP. In Quebec, it’s 50 per cent, the level in Ireland during the bad days. Landry’s budget increases spending.
Tepid tax cut
Landry’s tepid tax cut – which amounts to about $1 billion a year out of a budget of nearly $50 billion – hardly creates the winning conditions to transform Quebec into North America’s version of the Celtic Tiger. Nor do Quebec unions show any sign of understanding the fundamental economics that transformed Irish attitudes.
Other jurisdictions have already cut taxes, and plan further cuts.
Quebec will remain a high-cost place to do business, swinging between weak upturns when everyone else is doing well and investment starts to spill over the border, and devastating downs. But would any Quebec government dare attempt the real Irish transformation?
Fred McMahon is policy director of the Toronto-based Consumer Policy Institute. His recent book, Road to Growth, published by the Atlantic Institute for Market Studies, examines how the Irish economy recovered.