Dave Thomas (general secretary of the Association of Higher Civil and Public Servants) argues that pay cuts for civil servants are ‘not the answer’ : the article is here.
Without having the time today to fully discuss this contribution, I will note the following sentence:
“First and foremost, public servants did not cause the economic crisis.”
This type of argument has been used by many interest groups to argue against expenditure cuts of various forms. However, it is also the case that ‘group X did not inflate the property bubble’ and the problem is that the windfall tax revenues during the bubble period allowed a rapid increase in public sector pay and many expenditure lines. The goal now is to restructure the economy and the public finances in order to undo the the adverse impact of the whole bubble-crisis episode and the relevant benchmark is not the level of earnings or public expenditure at the peak of the bubble but the appropriate levels of earnings and spending in order to ensure that Ireland can grow along a sustainable, non-bubble path.
87 replies on “Civil Service Pay Cuts Not the Answer”
Many civil and public servants contributed to the property bubble through spending their money on property. So did many other sectors of society. If we are going to exclude them all from having to contribute to the fiscal solution then we will be looking for approx €1million per annum from each bank employee in the country and many of them will have a valid defence that they had no influence on lending policy.
We didn’t start the fire
It was always burning
Since the world’s been turning
We didn’t start the fire
No we didn’t light it
But we tried to fight it
Well, no. It wasnt always burning, it was lit with a devils brew of benchmarking, low interest rates, ssia’s and insane procyclical planning . And I doubt that the cs/ps workers who gladly took the benchmarking and purchased villas in croatia were busy fighting it.
Less lyrically, the scale of the issue facing govt now is such that if we were to pay nout to all of the PS including pensions we would still be 5-10b in the hole.
“But just as we sought equality of treatment during the Celtic Tiger, we are also seeking fairness in the new economic context.”
I can only assume he’s advocating massive job cuts in the public sector in light of this need for equality!! What per-centage of the private sector work force has lost their jobs in the last 2 years? 200k on 1.8mio, so roughly 11% or so? So 35k public sector job cuts then Dave?
I agree completely Philip.
A big problem however is that some of the same right wing commentators who cheer-led the bubble have now embarked on a moral crusade against the public sector, when they might more usefully look at their own track record, and at the failure of ‘light touch regulation’. This makes sense given the extent to which their ideology has been discredited, but it is having a corrosive effect on the body politic.
Not surprisingly, this is making people angry, which is not making it any easier to achieve the reductions in public sector pay which I agree are required — especially at the higher end. We will either hang together or hang separately.
a preemptive strike on soon-to-be-published findings of Review Body on Higher Remuneration in the Public Sector
“While the 2002 benchmarking report recommended increases for the great majority of public servants, the most recent benchmarking report (December 2007) recommended a zero award for the vast majority of public servants, with the exception of a small number of grades. This fact is conveniently ignored.”
The author also conveniently ignores the fact the salary levels of his own members weren’t even considered by the Benchmarking II report.
Instead, its the Review Body on Higher Renumeration in the Public Sector that considers the salary of most members of the Association of Higher Civil and Public Servants.
Lo and behold, their 2007 report recommended some tasty increases for AHCPS members: http://www.reviewbody.gov.ie/publications/highrem42.pdf
Naughty, Dave. Very, very, naughty.
The standard line of defence “public servants did not cause the economic crisis” is particularly disengenuous coming from the Gen Sec of AHCPS. It is easy and lazy to moan about the malign influence of the “permanent government”, but it is the role of senior civil servants not just to obey ministers, but to inform, guide and advise them as they seek to implement policies for which a democratic mandate has been secured.
The Taoiseach has publicly defended the economic record of this and the two previous administrations – and, particularly, his economic stewardship as Minister of Finance and, subsequently, as Taoiseach – by asserting that decisions were made on the “best policy advice”. Apart from some likely limited external advice (from international bodies and/or consultants), it is probably safe to assume that most of this advice was provided by the senior ranks of the civil service.
I found it hard to believe that all of these senior officials were completely happy with the government’s policy and fiscal stance. They cannot have been unaware of the various warnings of independent informed commentators about the unsustainability of the property bubble, of the banks short-term money market financing of the fiscal stance. I realise that it is extremely difficult for officials to confront a determined and wilful minister with the possible detrimental impacts of a particular policy course, but we don’t need “Yes, Minister” to recognise that senior officials are not without influence.
It would be surprising if expressions of dissent by senior officials were made public, but, if some dissent were expressed it is unlikely it would be completely suppressed. Often its effect is seen in subtle variations in policy implementation (not precise u-turns, of course) and delays in bringing legislation forward. In my view, there were a lot of dogs that didn’t bark. Before presenting his reprise of Pontius Pilate, Mr Thomas could usefully ask his members involved about their role in providing the “best policy advice” to government.
I realise the culture is very different, but the role of Brooksley Born in the US in confronting the imperium of Greenspan et al when they decided on minimal regulation of derivatives in the late 1990s is enlightening. She may not have won – and we are all the poorer today because she didn’t – but she certainly was a dog that did bark:
“Group-think” without adequate transparency or scrutiny led to this mess; and there is little interest in addressing this systemic failure.
He did himself no favours by launching the worn out mantra of ‘we didn’t cause…’. But having said that, I found his tone far less belligerent than that of the other main unions. He was always going to get a roasting on these pages but I think it is isn’t that helpful to launch into tirades that don’t really matter: such as the percentage of people unemployed.
Brian is right – the fire wasn’t always buring. Right too that benchmarking was a disaster. (But I think the reference to the apparment in Croatia is a bit gratuitous). At least some of what Mr. Thomas says is correct: public sector pay will not be a magic bullet and the tax base will need to be adjusted (again as Brian points out, even if we didn’t pay the PS we would still be in a hole, therefore, even if we rolled back benchmarking we would still be in a major hole.)
The trouble is that the political machine and its ancillary, social partnership, spun completely off a sustainable course. Politics got divorced from economic reality. And those in leadership positions – politicians, unions, and indeed business leaders, led their groups into believing that the gains acquired during the boom were both deserved and sustainable.
In my opinion public serive pay has to be cut. Not necessarily a one size fits all chop, but a very substantial adjustment. At the same time I see how it will in fact be a serious burden for many individuals. Yes, it is worse to be unemployed than take a salary cut, even a big one, but individuals don’t necessarily guage their status/happiness against the worse off. People compare against their peers and against what they themselves have been experiencing recently. So someone in the PS whose salary increased handsomely during the boom would have probably grown their living standards and expectations to match – and might now be locked in to financial commitments like a mortgage. If their pay comes down say 20% in real terms, it is a major cut in their standard of living. Yes, the new lower standard of living might be all the country can afford, and yes, other people may be worse hit, but how do we construct a political environment where these arguments can be made and won?
For example, it will be very hard to get buy in while the political class is seen to be so out of touch.
One way or another our fiscal gap will close for it cannot be sustained. The question is whether we can close it in a controlled and equitable way, or in an unfair way where strong groups shield themselves from the bulk of the burden.
While, as a general rule, I’m not in favour of public sector pay cuts or social welfare cuts, a cut in either is hardly as onerous when inflation is strongly negative, -6.5% on the CPI and -3% on the HICP, as when inflation is +3% or +5%. In 2009, it would be possible to cut both in nominal terms, thereby saving the taxpayer billions, while leaving them uncut in real terms.
One of the problems in Ireland, which I have referred to in other threads, is the very poor quality of economic forecasting, particularily by the official bodies. I just looked up Brian Lenihan’s budget speech from Oct 14 last. This is what he said:
—-“inflation will ease to 2.5% on average for the year 2009”
I’m not sure if he was referring to the CPI or the HICP. I think it was the CPI. Either way, had he predicted his ancestral county of Roscommon to win the All-Ireland in 2009, that would have proved a more accurate forecast than his inflation forecast. On the CPI measure, inflation has eased to -6.5% and will average -5% for the year. On the HICP measure, inflation has eased to -3% and will average -2% for the year.
This inaccurate forecast has proved costly. Both public sector wages and social welfare benefits were increaed by 3% in the Oct 2008 budget on the assumption that, as Brian Lenihan predicted, inflation would only ease to about 2.5% in 2009.
I’m not blaming Brian Lenihan personally. I assume he doesn’t sit up at night with his calculator working out such forecasts himself. It was probably economists in the Department or in the Central Bank that provided him with that forecast. Why aren’t they being called to account? Even last October, many of the small stockbroking firms were predicting that inflation would be strongly negative in 2009, as the factors causing it (the fall in oil and commodity prices, and the fall in sterling v the Euro) had allready occurred by then.
From an economic and, indeed, social justice point of view, the obvious thing would be to cancel the 3% increases in public sector wages and social welfare benefits granted in 2009 on the false assumption that inflation would still be 2.5% in 2009, instead of -6.5% (CPI) or -3% (HICP). That would still leave both groups among the few in the developed world enjoying increases in their real incomes in 2009. However, I see a political problem there, in that, were the Government to do so, the Irish Times would be running stories next week on how social welfare recipients in Ireland were now only surviving by eating their children, even though their incomes would still be higher in real terms than a year ago.
” assume he doesn’t sit up at night with his calculator working out such forecasts himself. It was probably economists in the Department or in the Central Bank that provided him with that forecast. Why aren’t they being called to account? ”
Well, the DoF does its own forecasts, the CB theirs. A quick perusal of this document
might cast some light on the DoF issue.
“we didn’t cause this”
right up there with another of my favourites:
“sharing the pain”.
Sums it up for me.
If there is one body in the public service that could be accused of having caused the problem is it higher civil servants. People like heads of departments, senior finance mandarins, governors of the central bank, the financial regulator.
Politicians? Sure, idiots the lot of them. But that, surely, is why senior civil servants exist and why they are paid so much. The minister gives a goal, the civil services comes up with the goods, the minister tells everyone he’s a genius.
One way of putting it, a la zhou:
“. . . public servants contributed to the property bubble through spending their money on property”.
Another way of putting it:
“. . . public servants bought houses to live in. They did so at prices determined by a market manipulated by bankers, developers, speculators and estate agents under the light supervision of their governmental admirers”.
” . . . public servants contributed to inflation by buying food at the artificially high prices determined by grocery chains”
” . . . public servants contributed to global warming by travelling on big, belchy buses.”
Fair point about the mandarins – but this isn’t about whacking them.
i think Zhou’s point was that (a) public servants were as much a part of the bubble as Joe Private Sector, who’s is definitely suffering more than the PS are at the moment, and (b) part of the reason the public sector is paid as much as it is is because of union demands for increased pay to meet the rising cost of living (ie high property prices). This ultimately helped perpetuate the bubble economy further. Given that a huge amount of the money being used to pay public servants was derived from temporary bubble economy tax income, this starts to take on all the hallmarks of a ponzi scheme does it not?
With property prices a hell of a lot lower now, there seems a fair argument to be made about reducing PS pay as well. This would fit with John’s core point about there being heavy negative inflation levels existing at the moment.
Civil Servants and Public servants did more than buy houses to live in. Many of them also bought investment properties and bank shares.
For what its worth, I very reticent generally against cutting the wages of relatively low paid (<€35K) civil and public servants.
@Peter Maguire, I’m not advocating whacking mandarins and, yoganmahew, I’m not into whacking politcians either. The point is we are where we are and no group or interest will volunteer to accept the pain that is coming. Harsh medicine will be concocted in the DoF and the Government will use its Dail numbers to enforce its application. This will lead to economy-damaging – and, potentially, democracy-destabilising – confrontation.
My contention is that more transparency in the mixing of the medicine and more scrutiny of the mixture (leading to possible modification) is more likely to generate a grudging popular acceptance. This requires the input of economic expertise in a transparent manner at the formulation and scrutiny stages. It is not intended to deprive Government of its decision-making authority or responsibility but to ensure that decisions are soundly based.
The current system of governance isn’t geared up to do this, but some steps in this direction are required to meet this grave financial, economic and fiscal challenge.
Gee, to read this blog, you’d think it was pure paranoia to think that a political decision to scapegoat the public sector had been made in the highest circles of government and industry. But it is patently obvious to anyone with eyes and ears that just such a campaign has been ongoing for months now.
Allow me to present a more charitable reading of the claim that ‘we didn’t cause this’ from my own non-privileged perspective:
1) Far from the public sector having been bought off during the boom years, the trade unions were repeatedly given pay deals that kept up with neither inflation nor growth. They were then mollified, along with the rest of the electorate, with giveaway budgets and the slashing of income tax rates.
2) The shortfall in income tax receipts was made up by transaction taxes like stamp duty.
3) It is not the case that public sector expenditure ‘exploded’ during the boom years as the OECD report on Ireland’s public sector makes clear. I cite p. 52:
Can a mod clean up my blockquote error? Thanks.
@ Paul Hunt
are you sure we shouldn’t at least consider whacking politicians? Like literally, with large pieces of wood?
@ those who know
are the armed forces taken into account when collecting information on the size of public sectors in other countries? ie if we stripped that out, surely ours would be bigger in relative terms to other countries?
I recognise the temptation is strong, but the ballot box has to be the only instrument. Now that this option seems to have been postponed for some time, I think the focus should be on ensuring that the fiscal and economic adjustments have some underlying economic rationality – governed by the application of equity and fairness. Although there is requirement for a major reform of democratic governance in the medium term, particularly, in relation to the formulation and scrutiny of economic policy, in my view some elements of this are required immediately.
I’ll join you in forming an orderly line to do so.
Defence was 1.6% of gov’t expenditure in 2005. It’s too small to do what you’d like it to do.
Oops. My bad. I misunderstood your point.
I don’t know the answer.
You might as well quote the figures for Outer Mongolia, so irrelevant are the 2005 GNI/GDP figures to this debate.
Public spending has increased *substantially* since 2005. But the GDP declines in ’08 and ’09 mean the real economy is right back where it was in mid-2005.
So where do you think the percentage of GDP/GNI consumed by the public sector has gone since those figures you quote were compiled? A little north? More like a lot.
If data are to be bandied about, lets ensure at least a modicum of currency.
This is still not an answer to your question but it is a clue. According to the CIA factbook, Ireland spent 0.9% of GDP on defence in 2005. Comparable figures for other countries:
@ Proposition Joe
If data are to be bandied about, lets ensure at least a modicum of currency.
Was this also your reaction to various ESRI and CSO reports on public sector pay released in recent weeks that relied on 2006 (i.e., pre pensions levy) data? Or were you instead citing them as proof that you are right to grind that axe?
And if you make the claim that ‘public spending has increased *substantially* since 2005’, I’m going to have to ask you to provide the data to back it up. Too much of this debate is dependent on what ‘everybody knows’.
I don’t think defence spending is a major distortion. Ireland spends just under a percentage of GDP on defence, Denmark is 1.5%. So not much difference there.
But this raises an imporant point: it is not the percentage of GDP that is spent that matters, but how it is spent.
Suppose countries A and B both spend 15% GDP on health. But in country A the wages are 25% higher than in country B. So in B they have 25% more health professionals than in A.
Prop Joe is right: the OECD review figures are outdated and our expected 15% or so drop in GDP will mean our public spend as a percentage leaps up. Probably to above the average. But even before that is taken into account, it is not only valid, but necessary, to ask how is the money being spent.
Unfortunately the recent ESRI report cited here also gave us a comparison of 2006 public sector premium. I did not read a single comment calling for a “modicum of currency” in that thread.
I agree wholeheartedly with Kevin O’ Rourke’s take on this. I’ve said this many times before, if Biffo came to the people tomorrow and said, all ministers are taking a 50% cut, all TDs and senior civil servants a 25% cut and we are asking all other PS workers to take a 20% cut, I doubt it will cause as big an uproar.
“And if you make the claim that ‘public spending has increased *substantially* since 2005′, I’m going to have to ask you to provide the data to back it up. Too much of this debate is dependent on what ‘everybody knows’.”
The expenditure figures for each year from ’05 to ’08 are available here via the following links:
I think you’ll agree the increase was *substantial*. Without or without the emphasis 🙂
On the CSO/ESRI data, the point is not so much the *age* of the data, rather whether events have rendered it completely obsolete. Whereas the GDP trends up to ’05 have been turned on their head since then, I’d expect the ’06 data used in the ESRI studies on the PS pay premium to provide a lower bound on what currently obtains.
We can argue the toss on whether the pension levy is a pay-cut or a contribution to a still-very-favourable pension scheme, but even if you take the former view, you you can still adjust the PS premium by a rough average levy deduction and get a ballpark lower bound on where things currently stand.
Word never mentioned in the article despite its references to the private sector — pensions. Just a complaint about the levy.
And not a word about the status of that “wider process of modernisation and change” that was supposedly a part of benchmarking.
Public expenditure last year was 48% of GNP, compared to an EU average of 45%, excluding the military. This year, the figure for Ireland is going to be 55%, higher than any other country in the EU.
We spend a fortune on our public services and get far less than countries who spend a mere 50% of their economy.
Besides the particular sentence you focused upon, i thought it was a fairly reasonable article, which doesn’t make a case for special pleading -only fair treatment.
Also, i think it’s important that we don’t lump every public servant in the same bracket. The wages of a soldier or a cleaner are very modest. If anything, they are less than their private sector counterparts (albeit with job security). Whereas the wages of University professors and gardai seem outlandishly inflated. We need to get past this whole narrative of ‘public sector’ as some sort of catch all group and start looking at specific sectors and wage agreements.
We need to look at reducing wages in areas where people are genuinely overpaid, we need to look at reducing numbers in areas which are no longer important to us, but we should also avoid degenerating into a lynch mob where all state employees get their whole employment package cut simply because the exchequer is in trouble. Even private sector companies have to play within the labour laws set down, and submit to Labour Court rulings. Part of the venom in this debate was caused because the State excused itself from these normal channels of mediation when it brought in the Pension Levy through legislation earlier this year. If it had played by the rules, it could have cut payroll without inflaming its employees to such an extent.
Public sector did not receive a 3% award in 2008. In fact outstanding awards of 6% were cancelled.
I wonder how widely known it is that the recommendations of the second Benchmarking exercise – which proposed increases for only a small minority of workers – were never in fact applied. Difficult to row back on something that was never implemented.
I agree on the audacity of the bubblists in now lecturing on the remedies.
Not having partaken of that hemlock, I can claim some moral platform but as my father used to always say — self-praise is no praise!
The problem with this issue is that when the facts are unpalatable, they are ignored and it’s always easy to pull something from the ether.
Irish Times Kathy Sheridan’s interview with Bertie Ahern last Saturday: “So for example, while his economic legacy may well be the perceived ATM facility he presented to the public sector, as well as Fianna Fáil’s enchantment with house-building, he cannot see a downside to either. Yes, he was shocked to read how the public sector had raced ahead of the private in average incomes. The thing is, he doesn’t believe it. The authors are not comparing like with like, he says, ‘since private sector people get VHI, car allowances . . .
Then he’s off – but is suddenly back with a Central Statistics Office study, which shows that national pay agreements between 1997 and 2009 left the private sector ahead by 10%. So the 9% from benchmarking simply bridged the gap. That’s all. ‘So I don’t know what they’re talking about,’ he says, mystified. Well, um, it’s that like-with-like thing again . . . How do you argue with a man intent on burnishing his legacy?”
Dave Thomas, Irish Times Monday: “Benchmarking remains one of the great misunderstood phenomena of the Celtic Tiger era.”
ESRI published paper 2004:
Public-Private Wage Differentials in Ireland, 1994-2001.
The authors estimated that in 2001, the public sector premium comparing similar jobs was 13%. Public sector premiums in the late 1990s were in the range 4-6% in France, Italy and the UK.
The paper noted: “A curious feature of the PSBB’s (benchmarking) report is that it furnished no specific justification for any of the pay increases it proposed. Instead, it provided a generalised rationale for its corpus of recommendations that echoed its terms of reference and cited a number of broad considerations.”
Thomas hits the nail on the head with the reference to “determined on the streets.”
The typical private sector worker, without an occupational pension and no weight of collective power to lean on, can be lucky and get true to RTE’s Liveline. He or she may get ladled with empathy from a multimillionaire on the public payroll, Joe Duffy, but what value would one put on that?
After the average award of 9%, while ignoring the value pensions, the premium increased.
So why were special adjustments needed in 2007?
Besides cost of living increases isn’t there also an annual increase for each year of service up to a maximum?
What was absolutely bizarre in 2007 was that the SG of the Taoiseach’s Dept who was in charge of the first benchamrking process got a 25% pay hike and the pensions of 3 predecessors were also increased by 25%.
The Dublin City Manager was less than 2 years in the job and he got a 36% pay hike as did his 2 living retired predecessors.
A little inequity here compared with the majority of private sector workers who have no pension and some of those who have are subject to the vagaries of the market?
The McCarthy report also provided examples of gardai who can retire at 50 on a full public pension and then take a job or run a business; an individual can be appointed a judge at 55 and retire at 65 with a full public pension indexed to currrent pay levels for life.
These sort of issues do not register with people who take them for granted.
How many people who have never experienced the fear of running out of money in the modern economy, can appreciate the misery that economic mismamagement has brought to the lives of the 200,000 who joined the dole list in the past year?
You’re confusing two separate awards.
2.5% was paid in early 2008 as the last tranch of the initial phase of Towards 2016:
Its the T2016 Transitional Agreement increases (due to kick in about now) that you’re probably thinking of.
@ Prop Joe,
My response was probably ambiguous, there was as you point out an earlier award.
However, John’s statement was “Both public sector wages and social welfare benefits were increaed by 3% in the Oct 2008 budget “….
and it was this common misconception which I was attempting to rectify.
“First and foremost, public servants did not cause the economic crisis.”
As FF are continually pointing out, the crisis was caused by the US administration allowing the collapse of Lehman Brothers. Any possible doubt about the validity of this claim was dispelled by Bertie Aherns revelations, in an interview with Kathy Sheridan published on Saturdays IT.
“That decision will in history be written as the biggest mistake that American administration ever made, because Lehmans was a world investment bank. They had testicles everywhere.”
Didn’t we always suspect that the overexuberance of the financial institutions was testosterone fuelled?
Some historical data on public sector pay 1970-1987:
Is the Irish public sector a burden? O’Riordan, William K.
Macroeconomic and fiscal deviations from plan 1985-87. Honohan, Patrick
I think the entire issue of whether the public sector “caused” or did not “cause” the economic crisis is beside the point.
Cuts to public sector pay, to the extent that they need to take place, will in no case be designed to “punish” public servants for their errant ways. Therefore it is of no concern whether they ways were errant or not.
Instead, there purpose must, I imagine, be to help restore competitiveness while preserving a balance between a public and private sectors in the economy.
The reason why the public sector is “targeted”, while the private sector is not, is because the latter adjusts automatically to reflect labour market conditions. Because public sector jobs are for the most part guaranteed and recession proof, this does not happen.
I think most public servants don’t have a problem with this kind of thinking. But when invectives start getting thrown around (“lazy public sector workers, living off other people’s taxes, don’t earn their living like we do in the real world”) the public sector – justifiably – retrenches.
The other thing worth remembering is that it is ultimately the productivity balance, and not the wage package, that matters. Productivity per euro spent can only be increased through wage cuts if workers do not respond by cutting their labour input.
That will depend on how the cuts are introduced. If it’s a matter of “look, we value your work, and we need a greater sacrifice from you, so we have to ….” that will go down a lot better than “you’re all a bunch of lazy, overpaid leeches on the tax system, so take a 20% pay cut up the schnozzle…”
I have argued before that it might be easier getting unions and their constituents to agree to hiring freezes and increased working hours / productivity than to out-and-out pay cuts.
As regards responsibility, one issue in common between senior managers in the public service, the central bank and the private sector banks, was that nobody took a principled public stand and shouted stop.
It is usually a very costly thing to do and most people go with the flow, because more often than not, it pays dividends to keep your trap shut.
It’s also worth noting, that payoffs for failure, were also comparable.
You are comparing the coddled supremos of the public sector to ordinary private sector workers. it is not a like-for-like comparison. If you want to take SGs and all compare them to company directors. Most public sector workers did not get 36% raises or pension topups. Those who received this largesse should be the first to give it up and let us start with Ministers and TDs and top civil servants. Let us roll back the massive pension increases given to senior politicians and civil servants. And then we will talk about the public sector as a whole.
In my opinion, this private vs. public debate is a red herring that takes away focus from the real issue which is the massive differential in the pay and pensions increases amongst those who have power and those who don’t.
I don’t know how you can look at those figures and come to the conclusion that the problem is profligate spending rather than a complete collapse in revenue. Most shocking of all is the meagre pittance the government collects in corporation tax and capital gains tax. Yet in between the relentless demonisation of the public sector there is no talk whatever about increasing the corporate and capital gains tax rates. ‘Oh no, we need them in order to
poach, er, attract multinationals’. Is it Botswana we’re competing with with that tax rate or is it Uzbekistan?
I also read with interest the Ronan Lyons article that LCR linked to. In it, he writes this:
OECD figures show that all in, amazingly, a married worker with two children on the average industrial wage in Ireland not only pays no tax but is actually subsidised by the state. Contrast this with the typical OECD country, our economic peer group, where the average earner pays 20% of income in taxes. This undertaxing of workers is a phenomenon that has developed since 2000, mostly through changes in the tax credits – as opposed to the rates themselves.
Yet, strangely, I don’t read in the Sindo or the Sunday Times every week article after article insisting that we are undertaxed, never mind even a single article not penned by Gene Kerrigan suggesting that our corporate tax rate at 12.5% is criminally low. Why would that be?
I think Mr. Thomas is correct that the tax base will have to be widened, i.e., some lower earners will have to be brought into the tax net.
Is bertie saying that lehmans made a balls of it?
Yes, indeed. Much better that those dastardly minimum wage earners pay tax than , oh, we remove the subsidy for upper middele class parents on sending their offspring to college.
The fall in CGT may, just may, be down to the almost total lack of ,well, capital gains, last year
“I don’t know how you can look at those figures and come to the conclusion that the problem is profligate spending rather than a complete collapse in revenue.”
Well its easy – you look at the increase in spending and compare it to the trend in GDP.
Oh but we’re operating under extra-ordinary circumstances, not seen since the thirties, say you.
Well lets look at the trends prior to the perfect storm hitting:
Year GDP Spending
2004 4.7 7.0
2005 6.2 8.9
2006 5.4 10.7
2007 6.0 10.3
2008 -3 9.3
Do you see a pattern emerging? Spending has been running significantly ahead of economic growth for years. In 2006, while the boom was still boomy, spending increased at almost *twice* the rate of growth.
Now, for how long do you think that could be sustained?
Clerical employees in industry – – like-for-like in terms of jobs and company size:
Weekly earnings index base Sept 2000=100
Electricity/gas 160.0 (ESB/Bord Gais)
Chemicals, chemical 134.5 (multinational dominated- Pfizer etc)
Optical/electrical 131.2 (multinational dominated- Intel/Dell etc)
“Most shocking of all is the meagre pittance the government collects in corporation tax and capital gains tax.”
We had total tax revenue in 2007 (the last ‘normal’ year) of 47.2bn (although 2008 actually had broadly similar levels).
Of this 6.39bn was corporation tax, and 3.1bn was capital gains tax. So combined we have 9.5bn, or 20% of total income comes from these two elements (21.5% in 2008). The equivalent in the UK would be around 11.3% in 2007 (11.4% in 2008).
So despite having such ‘meagre’ capital gains and corporation tax rates in your opinion, how did we end up with a situation where they make up such a significant portion of our tax revenue? Should they make up an even bigger portion of our tax income, despite their enourmous cyclicality??
Well ESB/Bord Gais are nominally independent aren’t they? And i have written against their rent-seeking earlier today.
BTW, I think that public sector pay should be cut but starting at the top. In fact I think public sector pay should be capped at 150k as an emergency measure and public sector pensions capped at 60k. No exceptions.
But we should also raise taxes including that holy grail – corporation tax.
Anyone who argues that the budget can be fixed through cuts only or through increased taxes only is delusional. We need both.
@Eoin: Oh come on? Are you going to pretend that there is no tax “planning” done by multinationals who chose to “earn” a larger than normal share of profits in Ireland?
Back of the envelope observation on the figures I gave above …
The cumulative outstriping of GDP by public spending during the period of Cowen’s stewardship at Finance (2004-2008) resulted in expenditure ending up ~15% higher than it would have been had it simply tracked growth in the real economy.
OK before anyone jumps on that, I know there are all manner of multipliers to consider, and that GDP itself wouldn’t have grown as much had Cowen not being spraying petrol on the fire.
Still, its instructive to note that if he’d tried to be a tad more cycle-neutral in fiscal policy, as opposed to crazily pro-cyclical, we would have a much, much smaller adjustment to make.
“Are you going to pretend that there is no tax “planning” done by multinationals who chose to “earn” a larger than normal share of profits in Ireland?”
I don’t think anyone is going to pretend that. The point being made is that if you raise corporation tax, those earnings will move elsewhere to be taxed at whatever the next lowest rate is, so the benefit to the exchequer may not be great.
Despite that, I would welcome it if all the multi-nationals left. It would end the GDP/GNP argument (as GDP falls to a lowered GNP), it would mean that we could stop having spurious comparisons with private sector pay. Finally we could get back to a land of milk and honey, or milk quotas and sugar-syrup anyway. With the consequent rise in unemployment, we could put our surplus manpower to work building up our indigenous heavy industries and our armies…. then we could invade Belgium. They’re asking for it, they really are.
my point is that they already make up a huge amount of our tax revenue. It seems a bit bizarre to complain how ‘meagre’ this revenue is. Should we aim for 30%?
Also, ignoring the corp tax and looking just at capital gains: it made up 6.57% in 2007 and 6.8% in 2008 of our total tax revenue. Comparison UK figures – 0.9% in 2007 and 1.2% in 2008. Our NOMINAL capital gains receipts are actually in the same ball park (3.1bn Ire vs 3.8bn UK 2007) as the UK’s nominal cap gains receipts despite them having an economy roughly 10 times the size of us!
I would like to see low earners pay at least a token amount of tax. I see this as a politically and socially important.
The college fees issue is a different matter. My instinct on college fees is that we had a system to favour the deprived ahead of the well off before and it didn’t work. I think the principle of free university fees is admirable. We have income tax to deal with those dastardly upper-middle-income types and their high earning off-spring.
The evidence seems to suggest that it is people at the lower end of the public sector pay scale that are the most overpaid, relative to the private sector.
Much is made of the importance of “sharing the pain” – a 5% pay cut is more acceptable to people on lower wages if people at the top get a 10% cut etc.
However, I for one would prefer a 4% pay cut while the top brass get a 0% cut, to a 5% cut while the top brass get a 10% cut.
I dont know if someone else has posted this link, but here is a response from Levine to Krugman’s “dark ages” piece.
Much of the recent discussions about public sector pay and budget cuts has been based on figures which included semi-state commercial bodies. This is obviously faulty inasmuchas the State does not pay the wages of these workers (ESB, Bord Gais etc.)
What is the average salary again in the ESB? €70K or something? I wonder who pays for that….
i thought it was higher, or at least the average earnings were higher (ie including overtime etc), more like 100k? And that per employee costs after pensions, prsi etc were more like 144k, at least in some of the bigger power plants. And people wonder why we have the highest energy costs in Europe…
@Eoin & Zhou
In 2006 the average was €92k, rising to €142k in Poolbeg.
Apologies, my figs above were 2006 and 2007, not 2007 and 2008.
We only have two semi stable taxable factors in the economy which we can yield predictable and at least semi-sustainable material revenue from – personal incomes and personal property assets. Even these are probably running at 80% (unemployment and lower personal earnings) and 65% of peak values respectively.
Beyond this we have a somewhat-predictable cyclical factors like VAT, corporate profits and exise duty. However i’d imagine that the corp tax receipts from the banking and construction sectors were probably running at close to a billion per year (higher?) at the peak, and i think we’re all very honest about these not returning to anywhere near the previous levels for some time to come (banking), if ever (construction). We also know that VAT levels have fallen off a cliff, and certain inputs to this (cars, houses) are not going to contribute as significantly in the next few years as they have in the past.
After this we have the highly cyclical and possibly temporary/one off revenues relating to stamp duty and CGT. These will probably not approach peak levels for a couple of decades. Maybe never.
As such, if we refuse to reduce public sector & social welfare expenditure levels by a truely significant level (20-30%), then the only rational alternative is to increase the only predictable and sustainable taxes, those on personal income and personal property wealth, and to do so significantly. I just wish those who are against the public sector pay cuts would be honest about this and stop claiming this is all about class warfare or a ruse from IBEC etc.
So, to those who are against public sector pay cuts, can you provide more details on how high our new taxes should go and what they would yield us? In particular i’d like you to suggest where the new income tax, CGT, corporation tax, and property tax levels should be pitched, and how much of the fiscal deficit would be closed from this.
here are a few suggestions as to how we close the budget gap
abolish PRSI ceiling
*third rate of income tax at 60% on the rich-say above 75k per year.
*CGT up to 40%
*Corporation tax double to 25%-Banks 40%
*Windfall tax on multinational profits at 10%
*windfall tax on land at 80%
*wealth tax at 10%
*cut tax relief on pensions and mortgage to zero
*levy of 1% on all deposits above 100k
that should about do it. I don’t know what it would raise but I sure feel good now.
i appreciate the honesty, because there needs to be an honest debate here. Most of your provisions would have a significant effect on middle class ireland, directly and indirectly (via their employers). Rather bizarrely, its probably more honest and detailed than anything that SIPTU or the other unions have put out recently, or the likes of Vincent Browne/Fintan O’Toole have been willing to go on the record about. They like to paint all their vague policy proposals as affecting only the super-wealthy, but in reality the only way you can raise the 10bn or so thats required to close the gap is to massively tax the moderately well off middle tax.
Just to clarify what i think of your actual proposals – well some of them seem off the wall to be frank. A 10% wealth tax, a 1% levy on large deposits, the eradication of all pension tax relief, 40% CGT? Wow, no need to worry about investment or savings in the future – lots of deposits would have negative real interest rates right now! A 60% tax on the ‘rich’ – wouldnt €75k include a very large portion of the public sector (30%+?)? Is it now fair game to describe a large portion of the public sector as rich? Never mind the 40% tax on banks. Forget about any foreign investment, or employment, in that sector any time soon.
“cut tax relief on pensions”
Here’s an alternative idea for you.
How about taxing employers’ pension contributions as BIK?
Maybe at 60%, seeing as that nice round figure has taken your fancy.
This would yield about 4 billion from the annual accrued liability of public sector pensions alone.
Please can someone explain to me why we have such things as incremental salary scales in the CS/PS. If you are capable of doing the job on day one well then that is your salary. If you are not competent then why are the CS/PS employing idiots that take 5 years or more to get up to speed. For example at the higher level there are scales ranging from €89,000 to €119,000 over 5 years. The Government can start by getting rid of these ridiculous incremental salary scales. This is the main reason why Public Sector pay YOY has increased this year when it is supposed to be under the cosh.
Obviously you wont get a simple answer.
I remember talking to someone in the OPW a few years ago about…. decentralisation. He/She said that it took over two years to train any grade of staff to a level of competency and obviously, the decentralisation was knee capping the organisation.
As one of these idiots, I have to agree that the scales are creating pressure on the system. But I found the benchmarking exercise more objectionable to my ‘mores’ but not necessarily to my pocket.
All of this talk is circus speak until the political leadership man up and discipline themselves financially. The seem to be waiting for an encore of some sort so that they can do it.
Whatever about Bertie’s Lehman having “testicles everywhere.” One thing is sure, Bertie did not have the testicles to stop the public service from expanding at an alarming rate between 2001 – 2006. Of course there was an election to be won.
According to Michael’s Finfcts team and analysis done in June 2006. The elephant in the room, increased by 59% between 2001 and 2006. Payroll was up 18% while Pensions were up a staggering 81%. Dave Thomas and his beareded colleagues, were obviously playing a blinder! But it it no good playing a blinder for 10 minutes if you are going to loose the game, will the pensions and salaries have to be defaulted on at some point in the future?
It is time, the country copped itself on and stopped begging for the lend of 500 million Euro from foreigners every 7 days. Somebody is overpaid because half the money being borrowed is swallowed up for salary purposes and we are unable to raise that money internally.
Everybody maintains their sector, their group, their members are not overpaid.
I believe you all and there is an olympics coming up.
if nobody is overpaid, do we just cut our cloth to measure and stop borrowing 500 million every week, 50% of which we are told, is going on salaries. Maybe it suits to talk about it while the debt clock ticks away.
What about the fact, that part of the salaries paid this month and every month, have to be financed with interest on government bonds that don’t come cheap. Can some expert work out what the real cost of these salaries are when you add on the interest payments spread out over a time sequence covering the lifetime of the debt. Imagine McDonalds borrowing to pay wages, it would soon close down!
Was any of that tongue in cheek? Or is it someone’s official policy somewhere?
Actually CGT used to be 40% but nobody declared it. When it went down to 20% the take increased. You see all you have to do is invest outside Ireland and don’t bring the money home.
CT at 25%, bye bye FDI
Windfall tax on land at 80% – should bring transactions to zero.
Wealth tax at 10%. So tax my income, tax my gains and if I save money or act sensibly tax me again.
Net effect will be emigration, black economy and good old eighties Ireland again.
All this for second rate public services.
A 10% wealth tax is absurd.
No country in the world has anything anywhere close to that level of a wealth tax.
France has the highest I’ve seen at 1.8%
I’m still not sure if you are being serious.
Doubling the CCT rate would result in a lower CCT revenueIMO
Plus multi-nationals would pack up and leave overnight. I know for a fact my employer would be gone in the morning and I wouldn’t blame them.
Taxing banks that will probably end up almost nationalized won’t generate much for the exchequer.
Can’t seen much scope to increase revenue by increasing Corporation tax and we would probably lose more from Income tax receipts due to higher employment.
CGT to the marginal rate is a good idea.
A levy on deposits over €100k would just mean the deposits would leave the country.
Third rate of tax at 60% would raise about €2bn
Pensions to 30% is a fairer system IMO would the cuts in higher pensions subsidizing the gain for the lower paid.
Overall I think those measure would struggle to yield €4bn
The problem is not so much the level of pay at higher levels in the ps, since the numbers are relatively few. It is at the lower grades that the cuts need to be made in that a)they will have the largest monetary effect and b) that we see the greatest premia vs the private sector.
This was shown clearly by Anthony Murphy’s (Oxford University) unpublished review of Benchmarking 2.
For example a clerk at the top pay scale earns c. 37k. They are also entitled to a pension valued at approx 1 million towards which they will have contributed very little.
A clerk in say a shipping company would be lucky to earn 25k, no pension, high stress, risk of job loss and no annual increments!
Yes, there do need to be cuts at the higher levels to show leadership, but the only way through our budgetary impasse is to make meaningful cuts in the ps wage bill.
I do not understand how NAMA can hope to wash its face when people are talking of imposing 40% CGT and a windfall tax of 80% on land. Why would we take extreme measures to dampen down the price of land when we have just experienced the worst property crash in the history of the state and when so many people are in negative equity. Is locking the horse out of the stable the best that people can come up with?
@ Proposition Joe
So, if I put together the OECD figures and your figures, here’s what I get.
From 1995-2005, Public Sector spending did not keep pace with growth in either GDP or GNI with the result that the public sector represented a smaller portion of the economy in 2005 than it did 10 years previously.
In the last few years of that 1995-2005 period and continuing to 2008, public sector growth has outpaced GDP growth (according to your figures), in particular, I would imagine Social Welfare expenditure.
So we have 10 years where it doesn’t keep pace with GDP and a handful where it outpaces GDP and suddenly we’re all supposed to take on the countenance of Edvard Munch’s “The Scream”? Why is this not just the sort of countercyclical scenario that we’re all supposed to hope for?
Except, I forgot: during those years that the public sector was shrinking relative to the economy, the gov’t was giving the money away, buying elections by means of annual cuts in tax rates….
Yes, I am saying that CGT and corporate taxation rates should be increased. Is there any justification for holding the latter at 12.5%. Again, who do we think we are competing with with that rate? Montenegro?
“So we have 10 years where it doesn’t keep pace with GDP and a handful where it outpaces GDP and suddenly we’re all supposed to take on the countenance of Edvard Munch’s “The Scream”?”
The last year in which public spending growth failed to out-pace GDP was 2000.
So in fact we’ve had *nine straight years* in which public spending growth has out-stripped GDP, and no real prospect of reversing that trend until 2011 at the very earliest. That’s significantly more than a handful of years, I think you’ll agree.
I’m not sure why you insist on considering the entire decade 1995-2005 as one coarse-grained blob of data. But whatever the reason, its highly misleading as that period encompasses two very different phases of economic development, the initial one being sustainably built on solid foundations, and the latter being characterized by a rapidly inflating bubble.
why doesn’t the state just privatise a portion of the infrastructure it already owns – sell it to the Public Sector members who then manage it (as they already do) as a profitable activity and not rely on tax take for funding? that way nobody could tell them what to do. leaving us with only the no-alternative-but-state-run activities and that can be managed more closely.
why does CIE strike every single year? If the workers there owned the buses it wouldn’t happen, a huge problem here is that everything becomes a problem that should be fixed ‘by the state’, is that an answer typical of an entrepreneurial or knowledge economy?
Nevertheless, it remains a fact that Ireland’s PS expenditure was a smaller part of the economy in 2005 than in 1995, no?
But, fine, have it your way. Two very different phases. A first one where GDP outpaced PS growth and a second one where PS growth outpaced GDP. Given where Ireland’s PS was coming from in 1995, surely such growth was necessary as the OECD maintains. And surely much of the current growth is due to increased social welfare costs. What’s happened in the interim is that tax revenue has fallen off a cliff by much more than the decline in GDP would indicate. But of course you and the Independent newspapers and the gov’t parties and IBEC all want to treat the fall in tax revenue as though it’s some sort of natural calamity to be deplored but about which nothing can be done.
Yes, the gov’t was overly dependent on stamp duty and the like. So why are we not reforming our tax system? Why not increase the corporate tax rate from 12.5% to something at least in the ballpark of what our fellow EU countries charge? Why not a tax on wealth like the one they have in France? Surely the average worker shouldn’t be subsidised by the state as Ronan Lyons, citing the OECD claims (note to self: must remember this one next time someone trots out the familiar ‘we pay your salaries’ canard). None of this seems to be on the table. Instead, the gov’t wants to put the entire burden on the public sector.
I often hear it said that the ‘public sector needs to get real’ while pointing to the €22bn deficit. The same people also often seem to think that ‘there is no scope for increasing tax’. Who is it that needs to get real? Does anyone seriously think that a deficit that size can be made up entirely through cuts in the PS?
@Ernie and Prop Joe,
Could it be that protagonists on both sides of the argument need to get ‘real’ – we need to raise more taxes AND cut public spending. Frankly, I cannot see how the gap can be bridged with one of these measures alone.
I fear that ‘getting real’ involves an admission that, absent a return to serious growth, the gap cannot be bridged by any combination of cuts and increases. Which makes David Begg the most realistic public figure in this crisis…
Oh, there’s further scope for tax increases all right, but unfortunately only limited head-room remains for the old-reliable group that has taken the brunt of the tax hikes so far.
Lets say we agree that Northern European levels of taxation are appropriate for this country, and ignore the awkward fact the PS delivers nothing like the corresponding levels of service.
I’d agree that some new taxes could be levied on wealth, but there are issues (political and otherwise) with a residential property tax.
The corporate tax rate is not going anywhere, so we can forget about that. Were it not for the MNC sector we’d be in very deep do-do right now and there’s no way the political class will countenance owt but tinkering on that score.
So lets assume that the bulk of the adjustment will come from income tax. For illustration, lets imagine graphing the tax wedge at all income deciles and compare with the corresponding figures for the germano-nordic neighbours we seek to emulate.
Hmmm … zooming in on the mid-portion of the curve reveals we’re not that far off. The problem is that yield falls away rapidly from the ideal on both the low and high tails.
Grand, says you, lets close the loop-holes and de-roof the tax-shelters! Absolutely, I agree, but that still leaves a massive elephant in room. You, I and Ronan Lyons know who I’m talking about. The problem is that keeping the just-below-average wage earner out of the tax net has been an article of faith in Irish politics for at least a decade. Attempts were made earlier in the year to fly kites in that direction, but they didn’t really gain traction (or should it be altitude?).
Until we confront this issue, there’s no way we can go anywhere near closing the gap via taxation, despite your union telling you it’ll all be OK if only we’d tax cigars and caviar.
you still haven’t answered the conundrum in your “shocking” description of the CGT and CT figures as a “meagre pittance” when they make up over 20% of all tax revenue in a normal year and are running at twice the comparable figures in our closest neighbour.
The fact of the matter is that we currently tax income, profits and capital gains at more or less the same overall levels as the rest of the OECD (12.7% of GDP in 2007 vs OECD average of 13.0%). This would be roughly 14.9% of GNP, well above the OECD aerage. On what basis should we be increasing these rates if we can be pretty sure that they’ll also increase unemployment and decrease FDI at a time when the economy is still in a recession? Should everything in your proposed taxation policy be viewed as a simple tax grab for the benefit of the public service wage bill?
Lets say we agree that Northern European levels of taxation are appropriate for this country, and ignore the awkward fact the PS delivers nothing like the corresponding levels of service.
Do you think they’d stand for prefab schools for one minute in Denmark? You’ve got it exactly backwards: we don’t underfund our PS because it underperforms; it underperforms because we underfund it.
It never was and still is not funded at anything near the sort of levels that could deliver Nordic levels of service. The gov’t seems to have decided on Boston levels of taxation (more like Alabama, really) while attempting, feebly, to have Berlin levels of public service.
That said, I don’t disagree with any element of the rest of your analysis other than the insistence that the corporate tax rate must remain untouched. Again: what country is that 12.5% rate supposed to undercut? Oh, I know: it has to be that low to compensate for our poor infrastructure. Well, see above…
We also agree about the impossibility of keeping the average worker out of the tax net. It’s completely anomalous and obvious. But here we come down to the nub of the issue: because the elephant in the room cannot even be named (for political reasons) the gov’t has chosen to wage a proxy war against the public service. They would rather scapegoat 330,000 PS workers than have every average worker in the country on their backs. So the more emotions can be inflamed about the PS parasites living comfortably off the backs of the working stiffs (never mind the ones who aren’t paying any taxes but are being subsidised), the better it is politically for the governing parties.
Pity the selfish PS workers don’t seem to want to play along, isn’t it?
“Oh, I know: it has to be that low to compensate for our poor infrastructure.”
Its not just the poor infrastructure, its also the small domestic market, high costs, and in some instances the poor skill-base.
Say what?! But don’t we have the “best educated workforce in Europe” (TM)?
Not if you’re trying to recruit for the high tech sector. Property management, law, architecture, media studies, we’ve got grads coming out our ears. But pity the MNC needing a few dozen quality software engineering grads. Its not because they like multi-culturalism that you hear a Babel of languages in the IBM or Google canteen. They recruit abroad because we just don’t produce the appropriate skills. And if you’re recruiting mainly in Prague and Minsk and Mumbai, you’ve got to ask the question why you’re based in Ireland at all. Therefore serious carrot is required.
To say nothing of the fact that much of the profit supposedly made in Ireland by MNCs is pure vapour, the result of internal transfer pricing that’s motivated only by our low tax rate. Take away the low rate, and the motivation underpinning such arrangements goes also, meaning the pool of profit to be taxed will shrink significantly.
On the room-dwelling elephant, the other main issue is that the PS unions have got themselves into a bind on that score.
On the one hand you’ve got outfits like the CPSU and SIPTU who represent workers who are *both* just-below-average earners *and* public servants.
On the other hand you’ve got the labour aristocracy element, who for years have been masquerading as social crusaders when in fact their only aim has been improving the lot of their own well-paid members. Which makes it very difficult for them to turn around now and have a Pauline conversion on the tax-the-not-rich issue.
@ernie “we don’t underfund our PS because it underperforms; it underperforms because we underfund it.”
I would argue that the PS underperforms per your prefab example because when additional funding becomes available it is largely swallowed by current expense and not capital.
Lets blame one another rather than have a proper system!
So much more fun and it lets those who run the place loot it faster!
@pat donnelly @ernie a proper system comes about with proper accountability and real life responsibility, how can we have that conversation when talking about the current public sector set up?
It’s lonely talking about privatisation in the era of keynesianism 2.0 but it should be considered in several areas, it would be the best way of ensuring costs get into line with profits, get the funding out of the communal pot where it is constantly fussed over and let the provision of services become at least somewhat reliant on reality, that’s the adult solution.
Careful what you wish for. In my experience, just such blind calls for ‘accountability’ are what has led to the multiplication of costly and inefficient layers of bureaucracy in the public service. In health and in education there are now armies of very highly paid bureaucrats who see their sole purpose as making mostly dedicated professionals somehow ‘accountable’. They add virtually nothing to the ability of those services to deliver. But of course if you assume, based on the ideology promulgated in the Independent, that somehow these professionals must really deep down be layabouts, then the sting of the lash is too good for them, isn’t it?