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Fiscal Policy

Some Progress in Understanding Fiscal Impact of Pension Levy

As reported by today’s Irish Times, the tax offset means that, while the pension levy saves €1.4 billion in gross terms, the tax offset means that the net saving will be €900 million in a full year: the explanatory articles are here and here. However, according to the Irish Times report, the loss in tax revenue as a result of the levy was already factored into the previously-published tax projections of the government. Accordingly, it is the gross €1.4 billion that is relevant in getting to the target of  €2 billion in savings.

9 replies on “Some Progress in Understanding Fiscal Impact of Pension Levy”

That seems to make no sense: they didnt know they would have a levy when they published the Addendum document. At that stage, weeks ago, the levy wasnt being discussed. If they did factor this in, then it would imply that the dept went into the talks knowing or forecasting that they would have to put the levy on. As the unions had always been against this, then it would to me imply that they were negotiating under a pretence, which does not bode well for any further talks.

Accordingly, the figures still dont add up, IMHO. 900m is the only real cut that we have. The rest is, as described by Mr Goggin, handwavium.

Instead of Barrack Obama “yes we can” they seem to operate on the basis of “well, we might”

if we are to impress the international financiers that Ireland is a viable economy then the state will have to (unfortunately) cut deep and wide to prove their revenue raising abilities. I would say this is a first step, and most importantly one that they don’t back down on. The concern is really have they done enough, not have they done too much.

what do we want?! ‘Gradual change!’
when do we want it?! ‘Whenever you’re ready!’

While the reaction of the public sector unions was fully to be expected, I have been surprised by the lack of understanding generally of direction and the size of the differential between public and private sector wages. Seeing as the CSO publishes all these stats regularly, I can’t understand why the government isn’t using these stats day in, day out.

The nebulous nature of the debate on same in Monday’s Questions & Answers stirred me into a small rant on the topic:
http://ronanlyons.wordpress.com/2009/02/04/public-sector-pay-in-ireland-the-e50000-question-its-not-that-difficult/
If we could get that chart out into the public (sector), am I naive to think that people might grasp the situation a little better?

Couldn’t agree more with Ronan – I cannot understand why the government aren’t using these figures (and others) to further justify the cuts needed.

The scale of job losses in the private sector (with much much more to come) is surely justification enough for real wage cuts (which might even come to pass with this cut if deflation undershoots), notwithstanding the terrible public finances.

An idle thought to end this point – Thatcher killed the unions in the UK in part by making them seem incredibly unreasonable and sapping their appeal. The unions here in Ireland would want to tread pretty carefully, as they are increasingly out of touch with the public on this one. Witness the Herald headline on Tuesday (“Just do it!”) and remember they respresent very few private sector workers, who are the ones taking all the pain!

‘While the pension levy saves €1.4 billion in gross terms, the tax offset means that the net saving will be €900 million in a full year.’ This implies a tax offset of €500m, which seems low if it includes the tax (and PRSI) deductibility of the levy and the second round effects on expenditure tax receipts arising from reduced public servants’ disposable income. I would have thought that the tax offset thus defined should be closer to €700m.
Anyway, this is at most a second-order matter. The more important point is that the net effect of the levy on the budget deficit will be considerably less than €1.4bn. The same point applies to the rest of the package of measures announced on Tuesday.
My own estimate, for what it’s worth, is that Tuesday’s package will result in this year’s deficit being not much more than €1bn lower than it would otherwise have been and next year’s about €1.2bn lower.
This conclusion holds whether the tax revenue losses in question were anticipated in the Stability Programme Update or not. Who knows if they were? More to the point, who cares?
The frightening thing is that the number at issue is of little consequence in the context of the rapid deterioration that’s taking place in the public finances. The contribution of Tuesday’s package to solving the problem, even if very generously measured, might amount to €1.5bn in a full year. On the same day, the contents of the latest Exchequer Statement prompted some observers to cut their tax revenue forecasts for 2009 by €3-4bn while the annual cost of the 36,000 Live Register increase in January will be of the order of €700m.

To be fair Ronan the figures you use at your blog don’t compare like with like – the public-private sector gap doesn’t entirely disappear when you compare people of similar qualifications/seniority etc. but a large chunk of it does.

I would agree with Jim O’Leary’s comments. Most Public Servants pay tax at the higher rate. This may seem an odd comment considering the number on lower than expected incomes. However a very high proportion of staff are married women taking advantage of atypical working, e.g. job-sharing, term time leave during the summer, three or four day weeks etc. For example an AP1 on the top of the scale, €90,000, would be on €45,000 while job sharing.

One Asst. Secretary with a staff of over 1,000 estimated to me that less than 50% of his staff work full-time. He also commented that it was the only way he was holding on to some key technical staff, such as the AP1 above.

There was only 114,000 people at Class B & D in 2006, per DSFA 2007 Annual Statistical Report. This is probably below 100,000 by now, which means that about 75% are insurable and paying at Class A.

There is also the loss of the Employer Contribution to Social Insurance Fund.

Which would be worse in this case:

(a) the Government, having got its Stability Programme Update to the European Commission completely wrong last October, submitted an “Addendum” which is so confusing that it seems to promise further measures to save an additional €2Bn. this year but, in fact, our partners in Europe were supposed to understand that some part of that amount (say €700K) had been factored in to the projections for 2009.

(b) the Dept. of Finance, realising the utter confusion about these numbers, went spinning to the Irish Times to cover up a gross miscalculation regarding the impact of the pension levy.

Please let it be the former. I want to believe people in Merrion St. know what’s happening even if they are not making themselves clear to anyone, not even to the European Commission which has dissuasive and preventive powers in relation to the Stability Pact.

I see nothing in the Addendum document to back up the claim that Finance had factored in the reduction of public service pay consequent on a pension levy. My question to the Department of Finance would be: what anticipated savings have been factored into the “additional adjustments” totalling €14Bn. which are indicated for the years 2010 – 2013?

An amazing aspect of the Addendum document is that it bears no relationship to the Estimates of Receipts and Expenditure 2009 which is the key document on which the Government asks the Dail to vote funds to the various Votes (Departments). If the Addendum document has made a variety of new assumptions on the revenue side, has it also made assumptions on the expenditure side which are not reflected in the Estimates?

http://www.finance.gov.ie/documents/publications/other/whitepaper08eng.pdf

Incidentally, one of the worst decisions the Government made last year was to bring forward the Budget to October. Everyone realises now that the Government did not have the information in October on which to base decisions for 2009 but a more fundamental issue is that they abandoned, apparently on the spur of the moment, a process of reform which had improved substantially the process of fiscal planning. For example, what happened to the annual Pre-Budget Outlook document which was supposed to provide the economic and fiscal background to the Budget?

Brian Cowen’s speech as Minister for Finance gives a sense of the importance he attached to these reforms, at least until 3 September when the Cabinet got back from holidays to discover how bad things had become.

http://www.finance.gov.ie/Viewtxt.asp?DocID=5000&StartDate=1+January+2009

To see how far we have come since October, the projections in the original Stability Programme update supplied to the Commission in October stated “A General Government deficit of 6.5% of GDP is forecast for 2009, followed by deficits of 4.7% in 2010 and 2.9% in 2011.”.
Contrast this with the Update projections for GGB of -9.5% in 2009, -9.0% in 2010 and -6.4% in 2011 (and that’s after the additional -€16M adjustments!).

http://www.finance.gov.ie/Viewtxt.asp?DocID=5045&UserLang=GA&StartDate=01+January+2009

It appears that the Public Service are being asked to take pay cuts and no pay rises while Bank of Ireland employees will be getting a 3.5% pay rise. See this morning’s (Cork) Examiner.

Existing Bank of Ireland employees have of course a much more generous pension than Public Servants, being entitled to a 2/3 of final salary pension. I understand for older staff that it is a 2/3 of final salary scheme, excluding SW pension.

Public Service pensions, are worth about 57% of final salary when the lump sum is taken into account.

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