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Fiscal Policy

More on the Government Plan

The Department of Finance has released an explanatory document on the plan (including a ready-reckoner to work out how much public sector workers will lose at each income level): you can read it here.

It would be useful to see a more extended presentation of the government’s fiscal plans for 2010-2013. Although the cancellation of the scheduled pay increases will achieve €1 billion of the required €4 billion adjustment in 2010, the balance between spending cuts and tax increases remains unclear for each of the years 2010-2013.  While yesterday’s plan is a start, it is important to present the multi-year strategy as soon as possible. Otherwise, economic performance will continue to be affected by an avoidable level of uncertainty regarding tax and spending levels. If the government wishes to secure agreement with the social partners on the non-pay elements, the process needs to re-start sooner rather than later.

Update:  As noticed by Patrick,  Department of Finance now has a new ‘ready reckoner’ that adjusts for the reduction in taxable income: you can find it here.

9 replies on “More on the Government Plan”

There is also a more elaborate “Pension Contribution Ready Reckoner” now posted on the Department of Finance’s website which clarifies what was unclear in the initial statements, namely that the pension contribution would be netted from gross income in the calculation of taxable income.

What is now needed from the Department is a thorough presentation of the basis of calculation of the net contribution of this scheme to closing the givernment deficit.

Thus we would have gross receipts from the pension contribution, less reduction in income tax take from public servants’ pay, less secondary reduction in tax revenue from reduced spending (requires the usual assumptions on saving behaviour).

Doubts have been expressed about the magnitudes here, and clarity is both easily provided and urgently needed!

PAtrick is right – clarity is needed urgently as the figures are now even more doubtful given the pretty catastrophic UE figures this morning. TBH I think the exch returns plus the UE plus the confusion on the figures make yesterdays song and dance act moot in terms of actually making a substantial contribution to the widening hole in the finances.

From Irish Times 29/1/09 Draft Framework for a Pact for Stabilisation, Social Solidarity and Economic Renewal:

“While the uncertainty about international developments makes predictions difficult, Ireland now faces the prospect of: – a reduction of up to 10% in national income over the 2008-10 period – a loss of more than 120,000 jobs over 2009 and 2010 – an increase in unemployment to more than 10% – tax revenues in 2008 more than €8 billion below expectations, and a further fall projected in 2009, creating an unsustainable Exchequer deficit – without further adjustments, a General Government Deficit in the range of 11% to 12% of GDP for each year up to 2013.”

Do any of these optimistic “projections” still stand given the recent figures?

From everything I hear, the Irish economy is within two years of total collapse. The media fails to be independent and objective. Only the economists of the two largest universities understand how close we are to a a problem which will take several generations to solve. Let’s all be prepared…

After 36 hours of pondering this it’s still hard to understand the Government’s negotiation strategy. Hard to see how Public Sector Trade Union negotiators could ever have endorsed the pension contribution plan in isolation without any significant balancing items to be announced simultaneously.

As Philip implies, the bulk of the proposed multi-year correction (tax and spending) needs to be sketched out to ensure a more general acceptance.

Nevertheless it is interesting that as many as 45% of respondents to the Irish Times online survey think the pension contribution is fair. Maybe says more about the IT’s demographic, though.

A quick analysis of the pension contribution examples on the DOF website suggests that the cost to the Exchequer of the pension levy in terms of tax and PRSI foregone will be about 30%. So, the levy will raise a net €800m or thereabouts in 2009 (close to €1bn in a full year).
That’s before accounting for second-round effects on tax receipts through lower spending etc which, applying the average buoyancy factor used in budgets of recent years, will provide a further offset of perhaps €230m.
Applying the same factor to the rest of the 2009 savings (but being careful to exclude the ODA cut!) suggests that the net effect of yesterday’s announced measures on the 2009 budget deficit will be to reduce it by a bit more than €1bn with the net effect next year being about €1.2bn.
As other commentators have noted, that’s some distance from the €2bn number that has been bruited about the place by the government. Considering how long yesterday’s package was in gestation, it points to a very high effort to outcome ratio. This augurs badly for the huge challenges that lie ahead. Did someone say something about labouring to produce a mouse?

The Taoiseach told the Dail on Tuesday that the Government would save €1.4 billion on the public service pay bill, “the great bulk of which will be achieved through a new pension-related payment to be made by all public servants, including employees of local authorities, with a small element of the total to be secured through reductions in travelling and subsistence rates and other savings.”
http://debates.oireachtas.ie/DDebate.aspx?F=DAL20090203.xml&Node=H8#H8

The ready-reckoner supplied by the Department of Finance suggests a very much lower level of net savings to the Exchequer. For example a HEO on €51,980 would pay a pension contribution of 7.60% but the net amount would be €2,092 (ie. 4.02%). If this was the average rate of net contribution, the net saving on the €20Bn. public sector pay bil would be €804M., less than 60% of the savings which the Government is seeking (and I think the HEO’s contribution would be somewhat above average for the public sector).

Patrick reported that “…. as many as 45% of respondents to the Irish Times online survey think the pension contribution is fair. Maybe says more about the IT’s demographic, though.”

In an almost identically-worded Indo poll, 58% are in favour. Which one has more public sector workers, would you say?

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