John McHale on Economic Recovery

Today’s installment in the Irish Times is written by John McHale:  Minimising the Pain.

2 replies on “John McHale on Economic Recovery”

John’s article has a compelling logic despite its dismal analyis. It was particularly important to make the point that the €2 billion reduction in public expenditure sought this year is only the first instalment of a painful adjustment programme stretching out to 2013. John suggests that the bulk of this expenditure reduction should be met by a reduction in public sector pay including pensions of around 10 percent on average. He also suggests much of the remainder could come from freezing nominal social welfare payments in the light of the expected decline in the aggregate price level this year of 3 per cent, rather than the positive inflation anticipated by the government when increasing these payments in nominal terms in the last budget. Both measures would help to protect public services during a period of necessary fiscal retrenchment.

However, any government contemplating these measures will be very conscious of the charge that it is placing the burden of the crisis on the elderly and the vulnerable, even if – in the latter case – this is only a half-truth. Linking the change in social welfare payments to the actual change in the cost of living would be important to address this concern. There will also be a need for flanking measures to make clear that those groups and individuals which benefited particularly from the boom years are making an appropriate contribution.

More generally, my plea in an earlier comment for some insights into the the legal and institutional mechanics of introducing pay reductions in the public sector went unanswered. I think until someone produces a roadmap to show how this might be done in practice, the calls by John and many others on this blog for public sector wage reductions will inevitably be ignored.

Sadly the inability to pay clause appears in the private sector provisions of the latest agreement, but not in the public sector provisions.

However, this is the sort of problem we pay politicians to solve. They have lots of leverage here. They can offer the unions carrots, for example introducing tax changes that made the overall system fairer. And they surely have lots of sticks to brandish as well.

The way I see it, we can cut services, or make people pay for them, or cut the cost of providing the services. The latter seems the fairest way to go in general (although I would make an exception for university fees).

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