Downturns in the economy have some upsides.  The biggest one is that we have to take a look at the big picture of how the economy is built and what is needed to make it strong again.

For about 10 years, we have had growth that is a kind-of self perpetuating thing.  When some companies and industries began to invest in Ireland, we had available jobs for all kinds of people.  Irish people came home from wherever they were living abroad, more women entered the workforce than ever before and newcomers arrived from abroad - mostly Eastern Europe.

When people came to Ireland, they needed houses, so this meant houses were built.  The relative scarcity of housing in the begining meant that house prices began to rise.  When they were rising, they looked like a good investment and so people bought investment properties and this caused house prices to rise further.

More Irish people were working than ever before.  This meant that childcare was in demand.  This created more jobs, inticed more people to relocate to Ireland and this meant more houses were needed.

95% of the population were working and buying.  Buying and buying and buying.  This meant that VAT receipts were very healthy.

However, what we know now when we look at the entire economy and the fact that the top tier of Ireland’s money-making effort (banking, foreign direct investment) has weakened, we see that the knock-on effects are bigger than they might be.

With less money sloshing about, there are fewer VAT receipts.  VAT is a major source of funding for hospitals, education, infrastructure and social welfare.

The Eastern Europeans are going home.  This means that more and more houses are lying vacant.  There are fewer renters and this will mean that more houses will come onto the market and average house prices will return to 3-4X average salaries (that should mean about 100-150K for a three bed in suburbia).  Rents have already fallen a lot in the past six months and are likely to fall again soon.

The government seems keen on reducing the number of ‘committees’ (some call them quangos).  This will mean fewer jobs there.  This will cost the state less, but again, this means that more people will have to live on less money.

We don’t like paying taxes.  We have one of the lowest direct tax takes in Europe.  With a reduced VAT intake, it is difficult to see where money will come from unless it comes from personal taxation.

So, what’s the upside?  Remember, I did say there was an upside.

Well, it looks like we are about to refocus the way in which we do business.  Brian Cowen seems likely to announce a 500 million venture capital fund to get indigenous high-value companies off the ground.  We need to be clear about this - this is an absolutely necessary thing to do.  It falls under the heading of “future-proofing”.

What we would ideally do is to start up about 200 companies with this fund (probably a bit ambitious to say 200, but let’s be optimistic).  Initially, they would employ 3-5 people.  About 90% of them would fail to mature as stand-alone businesses with a long-term future.  The fate of those particular companies is that many would become incorporated into other businesses, they would be sold off at a profit, etc.

10% (about 20) would become really strong companies.  This is my estimate.  One or two would hopefully have a profile like Elan, Ryanair, Alltech, etc.  These companies would each employ more than 1,000 people each in 10 years time.  These 1,000 jobs would  indirectly support about 5,000 other jobs.  These six thousand jobs would pay 50 Million per year (say) in PAYE tax and more in VAT. All together, these 20 successful companies could be contributing some billions of Euro to the economy in 10 years time. They would be highly-skilled specialist jobs that would depend on intellectual property, know-how and in-house secrets.  They would be very difficult to relocate to a country with a cheaper wage bill.

However, crucially, they would act as a superior buffer against downturns from outside the state.  Sure, they wouldn’t be the cure-all, but they would be much better than a situation where we rely so heavily on VAT receipts from spending and stamp duty from house buying.

In the fullness of time, these companies would act as role models for further development.  I think people look at Ryanair and are impressed that a small indigenous airline became one of the biggest in the world.

So, if Brian Cowen does announce and implement this measure, this is good.  It represents a certain amount of risk.  We know that some of the money will result in failed companies and to not say this at the outset is wrong.  It will produce failed companies.  Companies that are outcompeted by others with better ideas or more funding elsewhere in the world.  However, if we do look to Ireland’s brightest and best, then we stand a very good chance of having a better platform for national development.