Pre-emptive Strikes and Public Sector Pay

I’m almost reluctant to write about this topic because of the level of hysteria that it provokes. Still, we cannot deny that a national public sector strike is an important topic worthy of debate on this blog.

My overall reaction is that the debate about public sector pay is descending, perhaps predictably, into a damaging battle between vested interests. There is much to dislike on both sides of the debate.

On the one hand, we have the trade unions. SIPTU state that the purpose of the strike is to “protest against government plans to enforce pay and pension cuts in the December budget.”

However, the government has not yet introduced its budget so this is a pre-emptive strike, to coin an unfortunate phrase.  SIPTU are referring to the government’s plans to cut the public sector pay bill by €1.3 billion in the upcoming budget.  These cuts may or may not include the pay and pension cuts to which the SIPTU statement refers.

Indeed, some trade union leaders have argued that these cuts can be achieved without pay reductions. The Irish Times recently reported Impact General Secretary as follows:

Asked if he thought it was possible to find the €1.3 billion being sought by Government without having pay cuts, Mr McLoone said he believed this was possible if all sectors engaged with the challenge “to see if we can maintain services at the same level while reducing costs”.

In practice, the easiest way to maintain current service levels would be to maintain employment but at reduced wages. However, this is probably the least-preferred outcome for union leaders paid to protect the pay and conditions of their workers. They would most likely prefer to see employment reductions via redundancies and hiring freezes.

One could argue that the strike would be justified if discussions between the unions and the government on how to achieve cost savings have broken down. However, that does not appear to be the case. A government press release from three days ago states that in a meeting with ICTU:

the Taoiseach conveyed formally his deep disappointment that strike action in the public service is taking place next Tuesday especially as efforts to find a basis of agreement about managing the public service pay cost in this unprecedented economic crisis are continuing.

With discussions ongoing, it’s hard to see the strike as anything other than muscle flexing by union leaders to get the government to back off its plan to reduce the pay bill by €1.3 billion.

Unfortunately, the state of the public finances (an Exchequer deficit of €22.7 billion in the year to October) means that adjustments in both spending and taxation are necessary. And the public sector pay bill cannot be immune to these adjustments, strikes or no strikes.

On the other hand, much of the rhetoric coming from those who wish to cut public sector pay achieves little other than insulting public sector workers. For instance, on last night’s Frontline program—which specialises in divisive public versus private sector debates—Eilis Quinlan, the Chairman of ISME, stated that she wished to “correct the misperception that there has been a pay cut” and argued that public sector workers  were receiving something in return for their pension levy.

For public sector workers, who have seen their take-home pay cut without any corresponding increase in pension entitlements, these statements are deeply disheartening. It’s bad enough to have your pay cut—and a reduction in take-home pay without receiving in anything return is undoubtedly a pay cut—regularly hearing in the media that it hasn’t been just makes it worse. 

The issue of incorporating pension entitlements when assessing public sector compensation is a perfectly reasonable issue for debate but the no-pay-cut line of rhetoric (which I’ve heard before from George Lee and Marc Coleman) does not constitute a useful contribution to this debate.

More generally, there are many who, upon hearing about a study showing an x% public sector pay premium, enthusiastically recommend that public sector pay should be cut by x%. While I also believe public sector pay needs to cut, I think those recommending this need to be conscious of the level of commitments that many public sector workers have taken on. 

Prior to 2007, many of these public sector employees were encouraged by banks to take on huge mortgages backed by safe jobs with steady pay increases thought to be guaranteed. That reality has not materialised and the difference between what public sector workers expected to be earning in 2009 and what they are actually earning is undoubtedly stark enough that many of these people—particularly those with recently purchased houses and young children—are already suffering financial problems.

I guess my bottom line here is that the public sector pay bill needs to be cut, that maintenance of service levels implies that much of this cut should be the form of lower wage rates, but that this should not be something to be gleeful about. Certainly, if pay cuts in the December budget take the form of a further increase in the pension levy, I would strongly recommend that certain economic commentators give up on the claims that public sector pay has not been cut.

245 replies on “Pre-emptive Strikes and Public Sector Pay”

Karl
“maintenance of service levels implies that much of this cut should be the form of lower wage rates”

I don’t have a detailed enough knowledge of all areas of the public sector but surely those who work in it do. Every time people discuss service levels we get emotive discussions about gardai, nurses, firemen etc.

I suggest we leave them alone and wipe out entire departments that add precious little to the Irish economy or are basically a duplication or triplication of other departments work. Don’t redeploy the staff, make them redundant. Increase the hours worked for clerical staff, shorten holidays and reduce “sick day” entitlements. This too should reduce staff numbers.

I seem to remember the nurses striking for a shorter working week to match the clerical staff in their own hospital. Now there’s something wrong if the admin staff work less hours than the frontline staff who’s work is more stressful.

We can’t wait for staff freezes to reduce numbers by natural attrition, there has to be a one off reduction. As for expectations and taking liabilities sure most people had those and don’t get much choice when the job goes.

I think a lot of ground could be gained by realising the difference between the public and private sectors, in terms of how they adjust to recessions (fuller discussion here: http://www.ronanlyons.com/2009/11/24/public-sector-pay-and-the-idea-of-intensive-not-extensive-cuts/).

Any one of the macro professors here will no doubt correct me if I’m wrong, but a stylised fact of the real business cycle literature is that the private sector adjusts at the extensive margin (by cutting employees and overtime) rather than at the intensive margin (by cutting standard working week or nominal rates). Thus the search for private sector pay cuts may be ultimately a largely fruitless one, with the answer (higher unemployment) staring us in the face.

I don’t really feel that the option of widespread layoffs is open to the government, for a variety of reasons. It is important to remember that we’re already paying a huge proportion of our GNP on public services (ca.55% this year). As Karl has noted, given the tax receipts, doing nothing on spending is not an option.

So, given that we don’t have the same range of public services, this means that we’re paying a high price per unit of public services received. We should reduce this price, rather than reduce the quantity, of public services. And labour is the single biggest input in public services. This means that the government must look for adjustments at the intensive margin – by cutting rates.

This is almost entirely independent from, although in many eyes backed up by, statistics on the gap between public and private sector pay that Karl has mentioned.

The private sector stats we do have (on manufacturing and finance) show that these sectors, which are remarkably similar in total wage bill to the public sector (ex health), have cut their wage bills by 12% in the last year. The government should be looking to achieve similar savings (about €1.5bn by my calculations, link above) – and not by letting workers go.

Doing nothing, however, is not an option.

1. I know a few public servants at management level today who have arranged off-site meetings because they just have so much work they can’t take a day off – pay or no pay. Coupled with the flood workers in the south and west, I think its great for helping heal the private/public rift.

2. “it’s hard to see the strike as anything other than muscle flexing by union leaders to get the government to back off its plan to reduce the pay bill by €1.3 billion”

I think a lot of it is the union leaders managing anger – ie giving the members a day out even though the more practical ones such as McLoone and Begg know well that nothing will be achieved.

3. What depresses me most is that union leaders MUST know better than anyone where the waste is and where savings could be made without pay cuts- but are they willing to show us where the cuts could be made (which will inevitably involve pointing out those HSE workers with no or overlapping job descriptions or volunteering productivity improvements)? Services and pay of the sub 50k public servants could be protected – but only the leaders can tell us how. Will they?

I agree with KW saying the pension levy is a pay cut. Anyone who says the 7% pension levy was not a pay cut is dissembling. Calling it a “pension levy” so they can keep their pension entitlements has left us with pointless debates where it is attacked by those public sector workers who don’t get pensions. It’s a pay cut.

KW said:
“While I also believe public sector pay needs to cut, I think those recommending this need to be conscious of the level of commitments that many public sector workers have taken on.

Prior to 2007, many of these public sector employees were encouraged by banks to take on huge mortgages backed by safe jobs with steady pay increases thought to be guaranteed.”

This problem is not peculiar to the public service. Everybody is in that boat and we cannot afford to bail them out. Paying public sector workers more across the board to subsidise their mortgages is unfair to private sector workers who do not have access to the same relief. It would be highly divisive if this were a reason for PS workers being paid more, even if the GRA landlords & mortgage brokers association would welcome it.

It is also not a properly targetted measure to address the problems of negative equity and crippling private debt. Most home-owners don’t have mortgages. Of those people that do have mortgages, most are not in negative equity.

I expect that there can be no bail out for the unfortunates in NE and that the best we can do for them is to streamline settlements of accounts with banks and the bankruptcy process to get them back to square one as soon as possible.

clarification – by sub 50k I mean those earning under 50k per annum – lots of them and many not in permanent positions too.

@Karl Whelan
This article makes perfect sense. I believe that the government have used public sector pay in a divert and distract strategy:
1. Divert public outrage at our economic collapse from the government/bankers/developers/DoF.

2. Distract attention from NAMA. When you are about to borrow €54 Bn,
and will lose €40 Bn of it in the next ten years, it helps to focus attention far away.

Yes the DoF and the bank regulators destroyed the country.
Yes the trade union leadership didn’t care where the money was coming from.
But to listen to some media commentators, excess public sector pay is almost the sole cause of our collapse.

On NAMA why is there no public controversy over the following:
No other country that I am aware of has gotten out of an economic crisis and a massive deficit by borrowing €54Billion against the rapidly declining value of the property loans of a burst bubble.
Why has no one ever tried this before?
Is it a good idea?
Yes, the losses from NAMA and the discount are publicly debated but the fundamental concept is never publicly discussed.
We are all too busy discussing what fraction of €1.3 billion – for the unions will agree to a substantial cut – should be cut from public sector pay.

“the government’s plans to cut the public sector pay bill by €1.3 billion in the upcoming budget.”

A pay cut of €1.3 billion would result in a saving to the Exchequer of about €0.9 billion when account is taken of income tax foregone (at a marginal rate of 30%). There would also be reductions in VAT etc. collected as a result of reduced spending. Let’s say this would amount to €0.1 billion. On this basis, a pay cut of €1.3 billion would result in a net saving of about €0.8 billion. Likewise, a cut of a billion in social welfare might result in a net saving of, say, €0.9 billion. Taken together, these cuts would cost €2.3 billion but only result in net savings of €1.7 billion.

All this means that an additional €0.6 billion would have to be found from other sources to help make up savings of €4 billion.

@Me
Clarification: It should read: “Yes the DoF and the bank regulators helped the government/bankers/developers to destroy the country”.

Karl, your piece raises a number of issues in my mind, issues that I had been meaning to write about in the blog. So here they are, in no particular order of importance.

First, I agree that the pension levy was effectively a pay cut. The old saying “if it walks like a duck, looks like a duck, sounds like a duck….its a duck” seems to apply here. Public sector workers (rightly or wrongly) had certain expectations about their pay and pension conditions (in this case regarding the contribution to their pension which they would make) and the levy constituted a significant change in those conditions. Personally, I think it would have been more upfront and honest if they had cut pay. It would have been a more honest assessment of the situation.

Second, with regard to public and private wage comparisons, I would like to raise a couple of issues regarding the studies by the ESRI/CSO etc which have been quoted and referred to on this blog. The approach which they take is one which has more typically been applied to wage differentials by gender or ethnic group. Now note that one’s gender and/or ethnic group is a random factor. Barring some fairly exceptional cases you don’t choose your gender or race. That is not the case with entry to a public or private sector job. Public and private sector workers differ in terms of observable characteristics (age, education etc which these studies take account of) and also in terms of unobservable characteristics, some of which may affect wages. So, to invoke some stereotypes, maybe public sector workers are more risk-averse and maybe private sector workers are more ambitious/enterprising (I say this for illustrative purposes, I know you can come up with counter-examples on both sides). Anyway, the point is that these studies don’t control for this selection mechanism and this may influence their results. Note however, that if the public/private stereotype that I refer to above were true, then we would expect, all else equal, that public sector workers would have lower average wages, but less variance in their wages, compared to private workers. I’m not aware of data on the variance of private versus public sector wages over time, but we do know that average public sector wages are higher and have been for some time.

Another point to make with regard to the ESRI/CSO studies is that the inclusion of occupational dummies and establishment size exercises quite an influence on their results (mainly to close the public-private gap). I should note that the argument with respect to establishment size only applies to the CSO studies, as the ESRI argue explicitly against the inclusion of establishment size. Now including occupational dummies are fine for a study looking at say black-white wage gaps. There is no reason to expect any ethnic group to segregate into any particular occupation (the same is true, but to a lesser extent for men/women). But by their nature private and public sector occupations are different and so public and private sector workers will segregate into different occupations. Most of what the public sector does are tasks which would not be provided in a socially optimal way by the private sector. And yes, I know, public sector provision is far from optimal in many cases, but I don’t think its controversial to say that it is better that law and order for example be provided publicly rather than privately (for an example of the latter see the opening scenes in The Godfather 1, when people petition Don Corleone on the occasion of his daughter’s wedding). Anyway, the point is that because in many cases what the public and private sector do is so fundamentally different, my worry is that these occupational dummies are exercising undue leverage on the results obtained. And I fear the same may apply regarding establishment size The ESRI/CSO studies are ultimately based on Mincer type wage equations where the key right hand side variables are human capital variables. In other words, controlling for as many relevant aspects of human capital as we can such as age, experience, education (and not occupation which people will select into), do we observe a premium/discount for public sector workers? And the answer seems to me to be fairly unequivocal: yes, we do.

Finally, to return to the issue at hand (sorry for rambling on), I think the public/private wage level debate is really one for the medium term. In other words, if and when we get back to some form of fiscal balance, then we can think in terms of an appropriate balance between wage levels in the two sectors. At the moment, the situation is much more stark. The country is broke. Even allowing for some mixture of tax and spending adjustments, the scale of the problem is such that, in my opinion, it is not possible to solve this problem without cuts in public sector wages. In that regard, even though I am a (non-unionised) public sector worker, I don’t support the strike and I regard cuts in public sector pay as justified.

@ Sarah,

The union leaders don’t actually work in the public sector themselves so I’m not sure that they would have the intimate knowledge as to “where the waste is” that you ascribe to them.

It’s a pity the government couldn’t cast this debate as being about a proposal to cut pay rates in order to fund increased numbers, i.e. specifically as a job creation strategy, with x thousand low-paid (less than €30k) short term contracts (less than two years). Makework jobs if necessary. Even if there’s no room for “stimulus” per se there is always room for shifting around the composition of expenditure.

Taking a pay cut just to reduce the deficit doesn’t seem as compelling. But maybe I’m naive and any pay cut however framed would be resisted to the hilt.

@ All

by the by, apparently there’s a massive tailback at the border near Newry at the moment (per AA roadwatch). No prizes for guessing what our public sector strikers decided to do with their day off….

@ James

I agree, the Cadbury government’s (producers of fudge) communication strategy has been as bad as it’s policies. It’s all very well telling people we cant keep borrowing €400m a week but it’s a totally different story telling them what might actually happen should we not be able to borrow any more. What the IMF has forced the Latvian government to cut for example. They should be highlighting the massive drop in cost of living and doing everything to promote a further drop in the still bubblicious costs of doing business – rates, charges, energy etc. And of course the first weapon in their arsenal should be slashing their own salaries and benefits. Empathy marketing 101.

I agree with the “pay-cuts are undesirable, but necessary” line echoed above. I think part of the problem is that people do not quite grasp just how big a number €23bn is. Here’s that number in perspective:

Dept of Education budget in 2006: €7.9bn
Dept of Defence budget in 2007: €0.82bn
Entire Gardaí budget in 2008: €1.6bn
Dept of Agriculture budget in 2007: €1.24bn
Dept of Arts, Sport & Tourism in 2008: €0.72bn
Dept of Communications in 2008: €0.29bn
Dept of Foreign Affairs in 2008: €1.23bn
Dept of Environment budget in 2007: €5.4bn
Total = €19.2bn

So if we were to close every school and university; disband the defence forces; scrap the Gardaí; shoot the farmers; burn all the theatres; fire Trap; turn off the communications network; leave the EU; stop providing overseas aid and forget about all that climate change stuff… then we’re still about €3.5bn shy for this year alone.

Dave’s got the ball rolling in the citation of great thinkers. So, as Ferris Bueller once said, ‘The question isn’t “what are we going to do,” the question is “what aren’t we going to do?”‘

@ DM: some ramble,, laptop battery nearly died….

I agree with your last point.

As a psw, I am dissapointed that everyone cant get serious and down to business, agree to do a deal/or not and get on with it.

It is insulting that those in charge of Govt and in Union leadership seem to think we, the masses, need to be indulged in these courting theatrics.

Tick tock, time for a shotgun wedding!!
Al

Karl,

The government already know that the union leaders object to any further cuts in public service pay; that they’re not prepared to distinguish between types of public servant or relative pay rates, and that their preferred solutions to the present crisis involve extending borrowing at current levels and possibly more, to 2017 and beyond.

So any pay cuts in the forthcoming budget are not acceptable from their point of view, either to people who are chronically overpaid or to those who are arguably poorly paid civil servants or even some of the better paid ones who benefit from a range of some quite bizarre allowances.

We all know what they want and how they feel about it. The dogs in the street could bark it at this stage, and cats could miaow it. So why drag public and civil servants out on strike to make a point that everyone knows already? A demonstration of muscle? Of ‘people power’? Of anti-govenment protest that will change the government’s mind on its Budget strategy?

When the floods crisis in the west and south of the country erupted at the weekend, emergency workers in those areas declared that they would not join Tuesday’s strike; thereby presenting the national trade union leadership with the perfect opportunity for a massive PR stroke – cancel the strike altogether in solidarity with the farms and businesses and people who’ve lost their homes and their livelihoods and whose human suffering will continue long after the TV cameras have lost interest in their plight and the flood waters have receded.

Instead, the airwaves are being crowded out with exaggerated and probably apocryphal tales of crowded shopping centres and shopping trips to Newry and Gardai having to close down night clubs last evening because our striking public servants decided to go out on the town earlier in the week than usual and what they told the taxidrivers on the way home from their night’s partying about wanting the next day’s strike to occur more towards the weekend because it would suit their social planning all the better…which doesn’t do a lot for their credibility or the merits of their case.

Another PR disaster for the trade union leadership.

Meanwhile, I’m told it’s very cold out there on the picket line.

Karl made very valid points in his article but none more relevant than the issue of the debt accrued in the last 5 years especially.

How can you ask workers, private and public to accept recession wages while carrying boom time debt.

These mortgages were given based on earnings at least remaining the same. Stress testing applied to interest rate increases as wage reductions were never an issue.

Of course pay in this country should be reduced, that is a given as we are way out of kilter with the rest of Europe.

But there has to be an element of fairness and realism to these reductions. You cannot acknowledge we were overpaying ourselves and pretend there were not consequences.

If workers cannot meet their debt repayments because of falling pay and increasing taxes the problem has to be addressed. We cannot pretend that this is not an issue and is not already a serious problem.

We must look at a debt forgiveness mechanism and not just for those about to have their homes repossessed. We need to put something in place that prevents this threat ever becoming a reality.

Surely it is time for this Government to front up and admit to the total mess they have made of this countries finances and for the Banks to take their medicine for the pyrimid scheme they were running.

Even if it means further recapitalisation or even nationalisation or a Bank may need to fail but the country cannot surrvive if workers are saddled with this inordinate amount of personal debt.

@ Karl,

That is I think the most balanced description of the problem I’ve read yet.

The elephant in the room is however, as starkly Enda points out, that this budget is only one of many harsh budgets required to balance the books. Now ok, we don’t have to cut the full €23bn that Enda suggests. Hopefully by 2012 we might have positive growth.

Nevertheless, it seems we need to cut (or raise) €4bn a year for the next 4 years.

I can’t see any other way than to raise tax on the ordinary Joe or Josephine.

I suspect that’s what’s coming down the line after the public sector pay bill has been reduced.

A double hit on public employees.

Add property and carbon tax to that and living standards will fall dramatically.

I suspect a new social contract will be required. And, despite Eoin’s “wowza”, that must include a just resolution to the banking debacle.

@David Madden

“In other words, controlling for as many relevant aspects of human capital as we can such as age, experience, education (and not occupation which people will select into), do we observe a premium/discount for public sector workers? And the answer seems to me to be fairly unequivocal: yes, we do.”

A very worthwhile post, though I am little unclear if you are endorsing the ESRI/CSO wage premia findings notwithstanding what you have highlighted in terms of unobservable characteristics (e.g. motivation, entrepreneurship, attitudes to risk) and the difficulty of accurately modelling assignment/selection into either sector?

@James Conran

They would know because they spend a lot of time working out productivity deals and work practice agreements. For example, who do you think knows most about nursing practice – Colm McCarthy or Noel Doran (just as an example – don’t wish to imply that nursing practices are particularly ripe for reform). Or say the TUI would have far more intimate knowledge of teaching working conditions (ratios, substitute rules, problems around time tabling). They represent the workers so they know how the workers work. It makes perfect sense that they are experts. Otherwise how would they be equipped to negotiate deals?

I can speak from experience. I did spend 42 days (Feb and Mar) on a cold, wet and draughty picket line. Very enlightening experience! Seriously. Got the time to think about things.

Its your mental models that may be the issue. Few bother to reflect on this. Strikes were used before the invention of – well, almost everything we now take for granted. Would you drive a Model T to-day???

I can do no better than plagerize these two pithy quotes:

‘… (we) mine the swamps of complexity without adding much insight …’

‘… They – vested interests) have a massive sunk-cost resistance to accepting new ideas.’

and, ‘Fictions can be powerful’ (Michael Lessnoff)

and, ‘Your safety in turbulent times depends on your having provided for the education of the ‘inferior’ ranks as a barrier to those people being led astray by ‘enthusiasts’ and malcontents.’ (guess who?)

Massive, radical social, political and economic reforms are despeartely needed. The Permagrowth dinosaur is doomed to extinction. Reflect on my second quote above!

You need to really frighten the citizens, and crush the vested interests, if you accept that real change is needed – and the changes would result in a more equitable future for us all.

The outcome of my picket duty: seven years of debt slavery, and betrayal by our union! So much for principle.

B Peter

John Hill,

I was pointing out a couple of methodological issues with the CSO and (to a lesser extent) the ESRI reports. My conjecture is that if they were to take on board the comments I made (and taking account of selection into private/public sector is not a straightforward task) then the public sector wage premium would emerge as even larger.

I made these statistical/econometric points as its one area where I might be able to add value compared to others on the site. But in a way this is fiddling while Rome is burning. The country is broke and I think the adjustments have to be made.

@Eoin
I see the hysteria over what Brian Flanagan says is a net cut in public sector pay of €0.9 Billion as a cynical divertion.

A poster on politics.ie pointed to the following article:
http://www.independent.ie/national-news/public-sector-12-cut-across-the-board-1950731.html

“FINANCE Minister Brian Lenihan has indicated that he will use the 11.9 per cent pay cut private sector workers have already taken as a benchmark for public sector pay cuts, the Sunday Independent has learned”.

“On Friday, the CSO published a report which showed that workers in the financial sector have seen their pay cut by 11.9 per cent and sources have said Mr Lenihan would be seeking cuts of that nature for public sector workers”.

This is typical of the spinning I am talking about. Would the financial sector include the hopelessly insolvent banks, and the bubble occupations? They should have taken huge cuts. Or have they? In any event it’s only one sector. 70% of workers have not taken paycuts per the Irish Times poll.
http://www.irishtimes.com/newspaper/frontpage/2009/1121/1224259240244.html

“The vast majority (69 per cent) say they have not had their pay cut or working hours (76 per cent) reduced in the past year.”

As public sector workers have taken a paycut the vast majority of private sector workers have not. The adjustment in private sector labour costs has come through redundancy.

@Ronan Lyons
“Thus the search for private sector pay cuts may be ultimately a largely fruitless one, with the answer (higher unemployment) staring us in the face”.

One of the ten things (or less) I remember from my economic studies is that after economic shocks private sector wages do not adjust quickly enough. That is why we have unemployment. Wages are referred to as being sticky.
If this is an economic FACT, and given the opinion poll evidence, how did the perception develop that the public sector, having already taken wage cuts, had not had their wages cut to the same degree as the private sector.

Simple:
– the government needed to divert public anger at our economic collapse
– the government wanted to distract attention from NAMA

I do not believe that the government is going to cut public sector pay by a further 12% in this budget. They say they want to save €900m net. I would guess the trade unions would settle for €600m net. So the government are whipping us into a frenzy about a saving of €300m. Next year we are going to borrow €74 BILLION. €74,000,000,000.00.
SEVENTY FOUR BIIIIILLLLLIIIIIIIIOOOOOONNNNN.
€20 Billion on the official “deficit” and €54 Billion on the NAMA property loan mortgage. This dwarfs everything, even any long-term public pay decisions under discussion.

@All
Our major policy to get out of an economic crisis and a massive deficit is to borrow €54Billion against the rapidly declining value of the property loans of a burst bubble. Why has no one ever tried this before?
Is it a good idea? This huge issue is never publicly discussed.

What the proponents of cuts have failed to address is what their impact will be in terms of the wider economy and with it the stated objective of cutting the public sector deficit.

However, this issue has been addressed elsewhere and shows that cuts do not equal savings, but are a fraction of them.

http://notesonthefront.typepad.com/politicaleconomy/2009/11/economic-lessons-from-the-tao-te-ching—-the-sage-does-no-thing-but-leaves-no-thing-undone—-so-wrote-lao-tsu-in-wh.html

The reason is the cuts themselves are contractionary and will directly reduce both income and consumption tax revenues, as well as taxes from foregone economic activity in other sectors. In addtion, depending on how they are composed cuts could easily have the effect of boosting the numbers of those eligible for welfare payments.

For a serious debate on the merits or otherwise of public sector pay cuts it would be necessary to move beyond an assertion (as in the Pre-Budget Outlook) that the full amount of the cut can simply be lopped of deficit projections. No economy operates in that manner. That was done in the April Budget and the deficit rose.

Supporters of the cuts would need to provide alternative credible projections for the wider economy and the deficit in order to add something to the debate, beyond a repetition of the well-worn mantras on the current size of the deficit.

Since the pension levy is effectively a pay cut, why was it not done as a pay cut? Because FF was still playing electoral politics. If it was done as a pay cut, they would have had to cut the retiree pension benefits that are linked to current pay levels, and that would be a lot more people mad at the government.

@Frank.
So is a prospective public sector pay cut likely to overlap with the existing pension levy? That would mitigate the short-/medium-term impact on the wider economy and shunt much of the pain for the PS workers into the future (retirement). It would affect current retirees, though…

This govt’s willingness to rend the social fabric through commission and omission (i. fomenting a public v. private media war; ii. standing idly by while anti-immigrant sentiment rises – see today’s IT poll) is very worrying.

Regarding the “pension levy”, it’s definitely a pay cut. I’m part-time temporary in the public sector, and therefore have no pension entitlement, but still pay the levy. Pay cut would be much more honest, at least.

On the plus side, those who were on strike don’t get paid. Superficially, ignoring consequent costs to people affected, how much money does that save?

@Eoin
I agree, NAMA has little relevance. However, adding 54 bn to the national debt, plus other payments to the banks (amounting to 14 bn so far) also on the national debt limits the governments ability to spread the duration of the correction.

The public finance crisis and the banking crisis both stem from the same thing – the property bubble. But the solutions are not dependent on one another and are not really related. The government has decided it has to do both (save the banks and the state). Personally, I would have concentrated on saving the state. A lot of time has already been lost with two failed budgets. For the state to remain credible to its lenders, this budget has to be seen to work.

On the public/private divide: consultants describing 200k as mickey mouse money, gold-plated pensions plus the ability to have full tax relief on a private pension, a small or no payrise from benchmarking seen as a paycut… as a self-employed person who came back to Ireland in 2000, my tax has gone up most years (PRSI and Health levies in particular). My earnings haven’t. I too have had to contribute an extra 5% to my pension last year (I turned 40). By the time I am 50, I’ll be contributing another 10% if I want to have any hope of a pension. Half the male population in Ireland describe themselves as self-employed. There are no earning statistics kept, it appears, for self-employed, either as a whole or broken down by sector, but given the reduction in tax last year and how it looks this year, earnings have collapsed.

@Skepsis

Good question. I’m not confident that the government has fully thought through how its different ad hoc tightening measures interact with each other. The income tax system with the levies tacked on, the impact of pay cuts on tax revenue, the link between current salaries and existing as well as future pensions. The fiscal framework is also very confusing and suggests that even with whatever pain is coming in the budget, a huge amount of adjustment is being shoved into Budget 2011. Someone at dept of finance is keeping track …. fingers crossed.

@Eoin

“Apparently there’s a massive tailback at the border near Newry at the moment (per AA roadwatch). ”

Yes I heard Newstalk were on Grafton St. tackling shoppers asking if they were PS supposedly on strike. But if they’re not getting paid, surely they can do what they want? (once done with picket duty).

The Pre-Budget Outlook confirmed that taxes are back to 2003 levels while current spending is up more than 70%.

It’s a case of the feast and the famine and the same people who appeared to turn the water into wine are now warning of pestilence, unless their medicine prescription is taken.

A little tolerance can be in order for the infantry but not for wealthy trade union leaders and the leaders of IBEC who never pressed for any reform that would have impinged on their respective vested interests.

On the private sector side, IBEC lacks the cojones to push for public spending transparency, including on procurement, and action to end the high-fee professional services cartels.

As for the senior public service mangers who voted for a strike, developers and bankers have plenty company in the Celtic Tiger rogues’ gallery. Shame on them.

At a political level, there has been no vision of change and no start to needed radical reform.

A taskforce that must be in a comatose state, is apparently still reviewing proposals in the Apr 2008 OECD report on the public service.

So in the absence of credible leadership, this pre-Budget skirmishing has boiled down to fighting over the spoils that can be retained.

The public tolerance for mediocrity, cronyism and an extensive web of vested interests, has the “society” at a sorry pass.

Most of the Oireachtas of 216 member have nothing to say as they fear alienating some vested interest and beyond the Minister of Finance and the Minister for Education, no other minister has made any proposal, other than protect their own interests, as to what should be done to radically address the public finances situation.

Meanwhile, the Minister for Foreign Affairs remains a teacher on 20 years of leave – – it may seem like a minor issue but in well-run Nordic countries, the likes of him wouldn’t be tolerated in public life.

So this is the backdrop to the issue and to put the tin hat on it, the highest paid media people in the country are arbiters of what could not be called a public debate.

@Michael Burke,
You raise a very fair point and it’s one that hasn’t really been teased out fully, more a line of reasoning that remains hidden in the background. I would suggest that it comes down to comparing short-run and long-run effects. Others might more harshly say that those who fail to learn the lessons from our own past (late 1970s/early 1980s) are doomed to repeat it.

The argument runs as follows: Cut now in one (or perhaps more accurately three) fell swoops, and while very painful, it will allow Ireland to return a state of economic health more rapidly. Refuse to cut meaninfully and trust that the problem will go away at some point in the next ten years, and things become a lot more painful.

I presume that a relatively low rate of discounting the future is also applied to these arguments.

I’m a public sector worker, I turned up for work today. The office was very quiet but I felt it was important to turn up and be grateful for the permanent position I have and to show my opposition to the actions of the public sector unions. I also thought it worthwhile to pass the picket to indicate to my colleagues that not all of us see things the way they do. Some of my colleagues who agree with me that public sector wage cuts are warranted (especially at the top scales) were picketing, I don’t understand that. If you are angry at the government there are other ways of showing it other than striking.

I agree with Veronica that a core difficulty with plans to reduce PS, or any pay scales, is the level of private debt entered into over the past 8 years with Goverment and Banking guidance – ‘Soft Landings’ , Unsolicited Loans etc. There may have had personal stress testing against interest rate changes but not pay scale reductions. A solution would be to allow all interest payments as a charge against Income Tax. This could be costed as a basic rate allowance and with/without an introduction of a higher rate band.

@ Ronan L

Thanks. That’s a useful outline of the thinking.

But if that is the argument, wouldn’t we all benefit if someone put some credible numbers to this thinking and in that way we could judge whether the policy was actually a productive one, or not. That would be necessary in order to rebut Michael Taft.

I’m thinking here (in a scenario of assumed €1.3bn pay cuts and an overall programme of €4bn reduction in spending) what would be impact on GDP, unemployment, taxation revenues, welfare spending, the level of the deficit?

The PBO doesnt’ provide those, but I would have thought that vociferous proponents of the cuts would have those at their fingertips. Otherwise their claims on the imperative for cuts are not evidence-based.

@ YM

i agree with you about NAMA limiting hugely our flexibility. However, we had a rather drawn out discussion a couple of weeks ago that there was a huge correlation between posts/comments and NAMA, and that NAMA-obsession may be taking over some people’s more general economic or political opinions. When we have discussions about, say, ‘executive pay’ or ‘public sector strikes’ invaded by people clearly bent on turning the discussion around to the 54bn elephant in the room, well you’re only likely to make people already-weary of NAMA turn off, rather than generate a constructive dialogue. If we want every economic discussion on this site become a NAMA-is-the-devil discussion, well i don’t think we’re going to get very far. Discuss NAMA-as-NAMA if you want, not public-sector-strikes-as-NAMA.

@ Sarah

im not telling them how or where to spend their money. But i think we’ll all agree with (a) the irony of them flooding north when they’re moaning about a lack of taxes, tax exiles etc, and (b) the PR optics of all these workers, employed on the back of private sector taxes, heading across the border to gleefully spend it outside the State. This is before we get into the hilarity of their stint on the picket lines apparently lasting a couple of hours or so – not much courage of their convictions and all that. The Newstalk stuff would make it seem more like a lot of them considered it a ‘day off’ rather than a ‘day of action’.

When the trips North were noted in my office, well lets just say the response was a mixture of incredulity, anger and scorn. I expect a similar response was found in many other private sector offices.

@yoganmahew
The earnings of many in the private sector have collapsed. But when the people were asked 70% (presumably almost all private sector) said they hadn’t experienced this. When you exclude the unemployed the actual number of private sector people who have taken paycuts is small. When you exclude bankers and bubble related jobs it is smaller again. This is not surprising. In recessions wages are slow to adjust downward. Too slow. It always happens.

The government have mounted a year long campaign against public sector workers to deflect public anger against economic collapse and to distract attention from NAMA. It is simply a lie – yet another – to say that wages generally for those employed in the private sector are falling. (Also remember that the government taskforce on unemployment met only once. The only time the government mention unemployment is when they are bashing the public sector. They clearly don’t care about it except as a debating point). The level of public sector pay does need to be examined, especially the higher paid. I do not know if numbers are high internationally. The government believe this but they are too dishonest to come out and say it and it is too convenient to generate hysteria about cutting public sector pay – by net €300m. Less when you account for the multiplier.

@All
We need a thread about the genuinely important economic policy decision the government are making next year.

Our major policy to get out of an economic crisis and a massive deficit is to borrow €54 Billion against the rapidly declining value of the property loans of a burst bubble. Why has no one ever tried this before? Is it a good idea? Let’s have the thread and let’s have lots of academic economists on it.

Oh for heaven’s sake: what evidence does anyone have that the majority or even a large minority of the shoppers up North today were PS workers? A single article by the Press Association claiming to have interviewed a few?

Might there not be other plausible explanations for the exodus? Like, I don’t know, say an unexpected school holiday a few weeks before Christmas?

If this is how you people do sociology I can only imagine what kind of howlers work their way into your economics.

@Michael
“I would have thought that vociferous proponents of the cuts would have those at their fingertips. Otherwise their claims on the imperative for cuts are not evidence-based.”
There is little argument that the cuts will have bad effects. What most of those arguing for cuts are saying, though, is that the result of not making the cuts will be worse – borrowing ability will dry up and government will come to a sudden stop. Resulting in the cuts that have been refused being made all at once.

It only takes a single bond auction failure for this to happen. As the NTMA is auctioning about 1 bn a month at the moment, but will have to issue some new benchmark bonds early next year and begin rolling over some of the debt it started to issue last year, the opportunities for this to happen will increase. With the ECB removing exceptional liquidity support and appetite for riskier assets increasing, the chances of this happening are increasing (this is reflected in increasing CDS on Irish debt).

This is all without considering the depressing effect that interest payments and debt repayment will have on public spending into the future and the effect of interest rate rises. The Irish government is on teaser rates. It is extracting equity from future tax payments to fund its lifestyle. This is not a situation that can continue indefinitely.

But in light of this, I agree with you that the cuts have to be genuine cuts – not a reduction in one area of spending and an increase in another.

@E43billion
“The earnings of many in the private sector have collapsed. But when the people were asked 70% (presumably almost all private sector) said they hadn’t experienced this.”
My point is that the self-employed are not the employees that are being benchmarked against. But they are the ones who have largely taken the hit – contract workers, sub-contractors etc. Many are not registered as unemployed – if you have savings or assets, you are not eligible for JA. But to exclude the self-employed from average earnings calculations is ridiculous – they make up 50% of male employment.

Here’s what I take to be the key passage in Karl’s post:

Unfortunately, the state of the public finances (an Exchequer deficit of €22.7 billion in the year to October) means that adjustments in both spending and taxation are necessary. And the public sector pay bill cannot be immune to these adjustments, strikes or no strikes.

It’s a fair point. Yet it raises (only to drop like a hot potato or a Commission on Taxation Report) a burning question: if it’s such an emergency, why are the public sector the only ones being asked to shoulder the burden this year? Can one avoid the sneaking suspicion that it’s easier for all concerned–the government, corporate interests, Independent media, the banks, the wealthy–simply to scapegoat one sector of society? If this were a propaganda campaign mounted against the Jews, it wouldn’t look all that different except all you right thinkers would be deploring it. A typical edition of the Sunday Independent these days is a masterpiece of emotional manipulation (in other words, artful lying) on this score.

In this context, the only rational response of the public sector was a Great Refusal, an insistence that the entire approach to the matter be changed.

@yoganmahew

I understand that the deficit is too high, and presents a danger akin to a fire which could burn the house down.

My argument is that there are different suppressants required depending on the nature of the fire, otherwise you risking compounding the blaze, as happened in April. Cuts were made, activity declined and the deficit rose.

It seems to me that the current policy is not evidence-based; I would still like to see proponents of the cuts come forward with their credible projections for the key variables mentioned above.

“In practice, the easiest way to maintain current service levels would be to maintain employment but at reduced wages. ”
Karl – I was on (regional) radio this am, suggesting the choice was less people (and less services) or less pay. The message was ….poorly …. received.

@Michael Hennigan
I entirely agree.
@Yoganmahew
Public sector pay for many grades is out of line with our competitors. This will have to adjust. But it should be done over several years. I wonder if it is future public sector numbers that the government are focused on. They would hate if people were unable to pay their mortgages before NAMA was completed. The consequences for bankers, developers & politicians could be tragic!

@Ernie Ball

“why are the public sector the only ones being asked to shoulder the burden this year?”

Well, because they’re not.

There have been substantial tax rises & cuts in welfare already this year, and there will be more of both in the budget.

@Ernie

“Like, I don’t know, say an unexpected school holiday a few weeks before Christmas?”

The lack of driving licenses among the school-children of Ireland might nix that theory 😉

@Proposition Joe

Gee I guess there are no non-working mothers or unemployed people with school-age children in Ireland….

q: would the sum
(not paying ps workers on strike) + (additional taxes on petrol for travel to the north) be greater or less than the tax revenue lost due to the increased travel there today?

@Proposition Joe

There is no evidence there will be any substantial increases in tax in the budget. Quite the contrary.

Earlier this year there were tax increases and cuts in welfare. But you forgot to mention that there was also a 7.5% cut in PS pay. Can I take it that, now that it’s been pointed out to you, you’ll adduce that as a reason why PS pay cannot be cut? Of course not. That’s not how you operate. Earlier tax increases militate against more tax increases but earlier PS pay cuts only reinforce the need for more PS pay cuts. And you wonder why some don’t think you’re an impartial contributor to this fight…

@Ernie

” guess there are no non-working mothers or *unemployed* people with school-age children in Ireland”

Well speaking of gross misrepresentations … I guess they have to spend their lavish benefits somewhere. That 204 euros really burns a hole in one’s pocket.

Public sector pay cuts are obviously necessary – but the manner of implementing them should be to spread the burden fairly across the various levels of pay. I suggest that initially the sham of the benchmarking is entirely rolled back. Since the benchmarking exercise was designed by, and for the higher paid civil and public servants and obviously weighted heavily in favour of higher grades – a reversal of this would face little resistance among the middle and lower paid. I have no idea how much that would save – maybe somebody here can make an estimate. If further cuts are needed the same percentage cuts could be applied until the required amount is saved.

@E43Billion. Your @all is the real objective. But how to capture the General Attention? Appeal to their sentiments! Yes, but what you observe is ‘busy work’ – replies relating to disconnected specifics, unstated assumptions, and naive, unstructured and inadequate belief systems.

1. Get the Principle agreed firstly. This is fearsomely difficult to achieve.

2. Once the Principle is agreed you move on to sort out the viable options.

This process is only possible during wartime (ie. severe stress). I wish it were otherwise. Pray that no demagogue arises.

B Peter

@Proposition Joe

Yes, let’s speak about gross misrepresentations. Like:

The only resources the unemployed could possibly have are the €204/week.
Those on €204/week have no need for or interest in saving money up North.

Honestly….

@Michael
“as happened in April. Cuts were made, activity declined and the deficit rose.”
As far as I can see, what happened in April was that a cut was made, but overall spending remained the same, taxes were increased. Activity declined and the deficit rose.

@Ernie

I’m not sure I see your point.

Are you suggesting the unemployed have some secret income stream?

Nixers on the black, perhaps?

Or that they’d have accumulated savings?

@ Ernie

“why are the public sector the only ones being asked to shoulder the burden this year?”

Ballooning private sector unemployment levels? Really never came into your mind when you typed that? Really?

Also, the ‘burden’ that is being looked for would bring public sector expenditure back to 2006/2007 levels. Doesn’t seem quite as dramatic when i put it like that eh….

@ E43bn

“When you exclude the unemployed the actual number of private sector people who have taken paycuts is small. When you exclude bankers and bubble related jobs it is smaller again.”

Exclude the unemployed? Eh, right. Exclude “bubble related jobs? Tell you what, how about we ‘exclude’ the public sector wages and position increases which we entirely funded by ‘bubble related’ taxes?

“We need a thread about the genuinely important economic policy decision the government are making next year”. Eh? I’ll be nice and mark that down as extreme sarcasm…

@ yoganmahew

The decline in activity and rise in the deficit might themselves have something to do with the spending cuts and tax increases, don’t you think?

@ (nearly) ALL

Ronan L was kind enough to say I had raised a very fair point. But no-one has actually responded to it.

So I’d still like to hear from a proponent (or proponents) of the cuts what their assessment of the proposed package would be on GDP, unemployment, taxation revenues, welfare outlays and the deficit. Someone must have one, surely?

@Michael
“The decline in activity and rise in the deficit might themselves have something to do with the spending cuts and tax increases, don’t you think?”
What spending cuts?

As far as I can see, the only thing that has changed is the PS pension levy which could more accurately be described as a PS tax rather than a spending cut since it didn’t affect retired PS.

Apart from that, HPV? Christmas Bonus? Do tell how the government maintaining the same level of current spending 2008 to 2009 with the economy shrinking by 10% amounts to a spending cut?

@Michael Burke
Under the current budget estimates I think we will borrow

2010 €25bn
2011 €20bn
2012 €15bn
2013 €10bn
2014 €5bn
2015 €0bn

Total borrowings will be about €75bn. Added to the existing €75bn in the national debt and conservatively adding €20bn for NAMA losses and future bank recapitalization. The national debt will be circa €171bn in 2015.

Simply postponing the adjustment for just 1 year will result in borrowings closer.

2010 €28bn
2011 €23bn
2012 €18bn
2013 €13bn
2014 €8bn
2015 €3bn

Total borrowings under this scenario adds an additional €18bn to the national debt will be closer €188bn.

Ronan – the short-term fiscal benefits of cutting public sector pay are fractional: if the ESRI is correct, a 5 percent cut would produce a reduction of 0.3 percent in borrowing requirement in the first year (less if this post-April analysis is closer to the truth http://www.progressive-economy.ie/2009/10/deconstructing-public-sector-pay-cuts.html ). It will come at a high price – nearly €750 million cut out of consumer spending leaking into private sector job losses with a further cut in economic growth. This will help postpone the end of the recession.

The argument on ‘take the pain’ now makes a number of assumptions that should be teased out in more detail. For instance, the initial shock of public sector pay cuts give way to a larger shock in fouryears time: GNP, consumer spending and employment all decline even further. This sets up two processes:

First, when recovery starts it will commence from a lower base than would have otherwise been the case. This lengthens the period the economy is below peak levels before entering the recession, causing us to further fall behind European norms.

Second, the deficit becomes embedded into the economy going forward and manifests itself in low growth rates. Already, the OECD is forecasting a growth rate of 1 percent in 2011 (no doubt less for the GNP and half the EU-15 average growth rate). If we are looking into a low-impact growth rate for some years, we will struggle to bring the deficit under control, accumulating ever higher debt and higher interest payments. This, in turn, will keep investment, consumer spending and employment sub-optimal. What do we then? Call for another round of deflationary spending cuts or tax rises on low-average incomes, even though we have yet to put the recession behind us?

My fear is that the focus on fiscal policy means that analysis is disconnected from the impact on the economy (and vice-versa). I would think that those calling for public spending cuts might be on stronger grounds if they were to provide even approximate models of the intereaction of the two in the years ahead. But this is not done. As a substitute all we get is a ‘cuts = savings’ argument – a highly contestable argument and, ultimately, an unsatisfactory one.

James Conran – your proposition that public spendig cuts be translated into higher employment is on stronger ground. I’m still unsure about the net fiscal benefit such cuts would make, or the ultimate downside and how that can be compensated for and exceeded by public sector employment increases – but it is ground worth canvassing. At least you have identified a possible opportunity to mobilise scarce resources for re-investment purposes – in order to grow our way of this crisis.

@Ernie
Suggesting the public sector are the only ones making sacrifices is a good way to increase the divide between public and private sector. I heard that quite a bit on the radio today.

I agree that most private sector workers probably haven’t taken pay cuts (I’ll be interested in the Q4 figures to confirm or deny this). They are on pay freezes from my experience. But a huge number of them have lost their jobs. That’s how the private sector deals with these things. Which would you prefer – a 7.5% pay cut or a 100% one.

From a business point of view cutting employee numbers is the better way to go. It increases productivity and remember employee costs go beyond their pay. Every employee adds costs interms of expenses, stationery, phone, canteen, HR and most of all space. Let’s say you cut everyones pay by 10%, then you save 10%. Cut numbers by 10% then you save 10% plus the ancillary costs. Expand that into the public sector and let’s say 15,000 are laid off. Work out how many office buildings that is, telephone, light & heat, stationery, HR etc etc.

By the way as I drove to Dun laoghaire this afternoon I saw 4 lollypop ladies all dressed in their uniform with their signs having a chat. There were of course no pupils to help cross the road. Don’t tell me they weren’t on strike and will therefore get paid.

@ youganmahew

Spending rises involuntarily under the impact of recession. Because it does so despite cuts is not to say that the cuts weren’t made, but that they were counter-productive, ie cuts induce contraction which leads to higher spending and deficits.

@ Dreaded Estate

Thank you for providing some numbers. But they aren’t really to the point of my question. To recap I have requested not debt and deficit projections based on postponing a fiscal adjustment, which under your scenario is to add €3bn in borrowing in each year (forever?).

Instead, I requested detailed and credible projections for GDP, unemployment, taxation revenues, welfare spending and the deficit, arising from the fiscal tightening.

Now, Michael Taft, who is a vigourous opponent of the cuts has done this. His projections suggest the whole exercise is counter-productive. If he is to be rebutted, someone will need to provide an alternative set of detailed and credible projections.

union leaders have a simple mandate, they ultimately want to run what amounts to a ‘labour price fixing cartel’, any employer can compete on various grounds other than (god forbid) labour provision. They talk about things being for ‘the worker’ as if every ‘worker’ carried a union card, that is not the case, the ruse is that they use national agendas for member specific gains, having been in several unions in my life in different countries I have always found this theme to be a constant fact.

the ‘pay cut/not a pay cut’ is an aside, you can call it a pay cut or you can call it an attempt to actually pay for the provision of a very valuable asset, if i could get an iron clad pension for 15% pay cut I’d do it without hesitation, looking at the levy of itself is an error, rather look at the alternative. I’d queue all night to get a pay cut if it came with the guarantees a public service pension came with.

the CSO, ESRI and every other study have all shown that there is a premium in the public sector and NONE of them have ever found a way to include the value of (1) the pension or (2) security of tenure in those figures, so the premium is likely higher again, it may be hard to put a value on security of tenure but ask any person in dole queue for an opinion and I’m sure they’ll say that it is worth something, ask a person marching down the street behind a SIPTU banner and they’ll tell you its their right, the truth lies somewhere between those two, but you cannot avoid the fact that security of tenure has a value, one which is never accounted for.

unions are not seeking ‘fair’ they are seeking ‘rent’. its really that simple, and you will find that anybody having a rent taking opportunity taken away from them will always howl and howl loudly, in that respect unions and their members are ultimately predictable, but expecting protection in any way during such a financially tumultuous period is like a kid in a famine hit country stamping their feet and demanding chocolate cake… you can ask all you want, unlike Luke 11:9 you can ask, but you won’t receive .

@ Bond

“a mixture of incredulity, anger and scorn” is a poor marketing tool, often used in Celtic Tiger years and continues in use today. I recommend that it be dropped.

@ Ernie

First of all, what would make you think that having a child home from school automatically entitles you to a day off work. Where do you think we work, the public sector.

Secondly, why would all of the ex private sector now newly unemployed wait en masse to travel north for christmas shopping on the very day our public sector go on strike. Why not do it without the burden of kids asking are we there yet.

You will see from my earlier post that I have some sympathy with public sector workers but your and others in the public sectors total lack of understanding of what we in the private sector are having to deal with everyday is really starting to try my patience.

Try my 50% reduction in earnings and then try to consider my attitude of feeling luckier than most of my fellow small business owners who everyday fall by the wayside and go out of business with nothing but debt and no social welfare to take to the North.

Your lack of understanding about kids being home from school obviously means you do not have any so you would not understand what it is like to have to tell them that Santa will not be visiting this year.

Can we all do ourselves a favour and direct our anger and frustration, not at one another but at the useless assholes we call a Government.

@ Michael Burke

by your rational, shouldnt we keep borrowing ever larger and larger amounts in order to increase GDP, employment, spending and taxation? Or at some point should we suggest that imminent dept/gdp levels of 100% and annual deficit levels in the mid to low teens are not a good idea? A debt compound spiral eventually becomes a real danger as each euro borrowed becomes more and more expensive to service.

@ MB
Isnt it a little rich to be seeking to set the terms of a debate you parachuted into???
Now can you deal with DE’s projections and see if others will reward you with their time.
Al

@Eoin
Private sector wages are too high, hence the unemployment. I suggested on another forum and here that we cut private AND public sector wages to reduce unemployment and lower our costs. The reaction on the other forum was marvellous to behold. Many extreme proponents of public sector wage cuts were genuinely outraged. They simply refused to accept the idea. There was almost no concern for the unemployed expressed by those still employed in the private sector then. Almost no private sector employee agreed. They use unemployment as a debating point against the public sector. Otherwise they don’t care – except they want social welfare slashed. The richer and the self-employed were the most vociferous objectors. For some of the self-employed a further cut was understandably objectionable but I expected more from the wealthy. It’s not like they wouldn’t wriggle out of it after a year or two anyway – look at the bank executives and their €120k pension top ups on top of the €500k “capped” salary. On here there was pretty much universal resistance too.

Public sector workers are being threatened by Lenihan with their second paycut. He claims he will cut by 12.5%. I don’t think he will. It’s more terror by Vader. I think he really wants to cut numbers. But as I saw personally if the boot was on the other foot private sector workers would go nuts.

Finally, no internally selected Irish bank head is worth more than €400,000 in total. No one else on the entire planet wants them.

@ E43bn

wonderfully long and rambling post there, which dealt with in absolutely no way the key point in my original post…

“Exclude “bubble related jobs? Tell you what, how about we ‘exclude’ the public sector wages and position increases which we entirely funded by ‘bubble related’ taxes?”

Discuss.

By the way, i have repeatedly said i would like to see cuts in public sector wages recycled into private sector job creation or protection schemes. So a little less of your holier-than-thou “there was almost no concern for the unemployed expressed by those still employed in the private sector then.”

@Michael Taft
“The argument on ‘take the pain’ now makes a number of assumptions that should be teased out in more detail. For instance, the initial shock of public sector pay cuts give way to a larger shock in fouryears time: GNP, consumer spending and employment all decline even further.”
But equally, the cost of interest and repayment of debt on future spending ability must be taken into consideration. With the likelihood of 22% of tax raised being spent on interest, not to mention actual debt repayment, this will have a negative effect on future spending, particularly as interest rates rise.

So, how do we quantify this effect? With government spending now accounting for 54% of the domestic economy, is it unrealistic to say that that the current debt burden is projected to cost 10% of GNP by 2011?

@ DE

exactly. But hey, some people above think that as the private sector (to a large degree) borrowed us into this mess, only the public sector can borrow us out of it….

@M.B.

1. Nothing I said implies that I think having a kid home from school entitles you to a day off work. There are plenty of stay-at-home spouses in this country and plenty of unemployed.
2. A plausible reason for going today rather than on some other day is that from most parts of Ireland it is hard enough to go North, shop and come home all before the kids are let out of school.
3. Nothing I said justifies your hasty Brendan O’Connor-style conclusion that I have “no idea” of what the private sector are going through.
4. I have a son, so your perspicacity on this count is no better than on the others.

@Bond. Eoin Bond

You wrote:

Ballooning private sector unemployment levels? Really never came into your mind when you typed that? Really?

I can assure you it was uppermost in my mind. But you seem to think that those in the private sector who have not lost their jobs and who, by and large, have not suffered pay cuts have somehow made sacrifices because some others of their number have lost their jobs.

The question is: who is going to shoulder the burden? All of those who still have jobs or just one easily-targeted and scapegoated group? Do bear in mind that if taxes are increased, as they should be, public sector workers will pay them just as private sector workers will.

@E43Billion
“I suggested on another forum and here that we cut private AND public sector wages to reduce unemployment and lower our costs. ”
Indeed. But what needs to be done for both private and public sector is to reduce the total cost of employment. Universal pensions and universal healthcare would do much to achieve both, besides initially being positive both for personal and government balances.

Private sector employers will generally find a market level, where they are not tramelled by binding agreements brokered with the state. I wonder how many IBEC members have buyer’s regret now? Peace, but at what price? As pointed out by Stuart above, private sector employers get more bang for TCE savings by reducing headcount than by reducing wages. Remaining employees stay motivated too.

The same could be achieved in the PS by closing down many of the quangos that have grown up and paying only statutory redundancy (except, of course, to the boards – they are, after all, friends of friends 🙄 ). This is underpants and two pencils time.

yoganmahew – well, yes, exactly. As I said, the deflationary measures depress the economy now and depress the economy going further. Therefore, the economy’s ability to generate revenue is undermined. This inter-connected process lays the ground work for a low-growth, high-debt medium term. This high and growing debt – which deflationary measures have had a considerable input – will result in a debt-service millstone around the economy’s neck which in itself will have deflationary consequences. That’s why we should start re-thinking this sorry state.

@ Ernie

“Do bear in mind that if taxes are increased, as they should be”.

Why? The only reason that seems plausible for allowing public sector expenditure increases between 2004-2008 was that there was shedloads of tax receipts to pay for them. These were, however, temporary ‘bubble’ tax receipts, a one off that is not going to be repeated for the next decade or more. They should have been treated like that and not used to pay for non-cyclical current expenditure. Essentially what you’re asking for is a permanent increase in the income tax base to pay for the increases in public expenditure created by temporary super-cyclical ‘bubble’ tax receipts.

Basically, in your mind, if the Irish state was an employee who just got his hours cut in half, you’d be demanding that his pay was doubled to make up for it.

@Ernie
I’m reluctantly happy to help shoulder the burden BUT (and it’s a big but) not for some sort of jobs creation scheme in the public sector for departments and quangos that don’t do anything.

Do you agree there is a percentage of jobs in the public sector that if they were gone tomorrow no one would miss? Someone must know where they are. Probably middle management. Large private sector businesses target this layer first. Their front line does not get affected and the senior management might have to work a bit harder!

@ al

Don,t really understand how I could have parachuted into a debate when my first post was at 4 pm but anyway I will try to deal with your rather obtuse comment.

I don,t have a problem with DE s figures and never said I did, in fact I do not know how you came to this conclusion from my previous post.

But anyway considering DE was responding to Michael Burke who is advocating increased taxes already a proven disaster I believe that public sector pay has to be reduced, but if you read my original post you will see that this cannot be achieved without some sort of debt forgiveness package.

Deflating an economy is not easy without a currency devaluation but if you are to attempt the impossible you must deflate all aspects of the economy including personal debt.

Now maybe you can debate my original point and maybe your most revered others can do the same.

@Michael Taft
“well, yes, exactly. As I said, the deflationary measures depress the economy now and depress the economy going further. ”
Ah now, I know you don’t think I said that.

In case I wasn’t clear, what effect do you think increased levels of debt borrowed to fund current spending will have on future economic growth?
(when interest rates rise and the debt needs to be paid back).

I reckoned about 10% of GNP is the current track we are on. For interest payments alone. That’s with cuts of 4bn this year and for the next three years. Add in the repayments of the additional debt the deficit incurred (from Dreaded_Estate above) and that is 15 bn repayment a year over five years (i.e. the same amount of time as it took to incur the debt). That is 10% of GNP a year.

So we’re talking about spending 21% of GNP on debt servicing/repayment by 2015. At current interest rates. Based on GNP not declining further (but admittedly not increasing either). With 12 bn in cuts in public expenditure in the next 3 years. With tax increases and growth making up the other 8 bn in the structural deficit.

And you want to delay this adjustment? Do you expect to have left the country before the 2015-2020 period when we should pay this all back?

@Bond. Eoin Bond

You wrote: The only reason that seems plausible for allowing public sector expenditure increases between 2004-2008 was that there was shedloads of tax receipts to pay for them.

Those shedloads of transactional tax receipts were used to reduce personal income tax rates far below what was prudent. That’s how FF bought elections, not by paying off the public sector (who don’t vote for them anyway). Towards2016 didn’t even keep pace with inflation. We also have a corporate tax rate that is far below that of any other nation in Europe.

@Stuart Blythman

Of course I accept that there are large portions of the PS that are useless. For example, huge administrative bureaucracies with well-remunerated bureaucrats have been put in place in health and third-level education, to take only two (oh, irony of ironies: these people were brought in to make the PS “lean and mean” like the private sector). You could slash jobs and salaries in those areas and few in the PS would have a problem with it.

@Ernie
“Of course I accept that there are large portions of the PS that are useless”

Do you have any insight into why the Government/unions don’t agree to do this as the way forward as opposed to hitting everyone in the public sector? We would avoid these strikes, reduce the divisiveness of this debate and save the money quickly without affecting services. Seems pretty obvious to me.

@Ernie
“You could slash jobs and salaries in those areas and few in the PS would have a problem with it.”

You’d really want to listen more to what ‘private sector’ people are criticising and want cut. These are precisely the areas that are under fire. Well, those and ‘bogus’ allowances (by all means have tax deductions for certain costs, but they should be the same across public and private sector). This is why people talk about quangos (which duplicate and overlap with existing civil service functions). This is why people aim at the HSE. Teachers mostly get up peoples’ noses because they fill so many seats in the Dail…

Apologies MB
@MB should read Mike Burke
I corrected this a few posts after the post you responed to.

I agree with you on debt deflation and did float it in my crude english a few weeks ago.

But if this was to gain capital and be discussed openly now, would it affect the survival of the banks and the success of Nama.
Perhaps the reason why Govt doesnt want to nationalise is so that it can ignore calls for debt deflation.

If the Govt goes ahead with the pay cut, then it is almost inevitable that debt deflation becomes part of the mix.

Al

@ Ernie

thats not an answer to my point, its simply a criticism against FF’s economic policy. FF both increased public sector pay AND numbers, as well as reducing tax rates. I’ll agree to row back the latter if you agree to row back the former (and with the levies we’re half way there already on the tax front). The point is we’ll still be goosed because the transactional taxes are NOT coming back, and income tax increases (which would obviously further reduce public sector take home pay) are not going to come near to closing the gap. As i explained above, and which you dodged, transactional tax reciepts lead to public sector expenditure increases. No transactional taxes, no public sector expenditure increases. Simple as that, they weren’t tracking the economy, they were tracking a bubble. Time to burst it.

It’s a bit of a sweeping statement that there are Departments etc. that do nothing. As somebody who worked in the private sector up to 4 years ago and now works in the public sector I can say with my hand on my heart that there are people in both sectors that work really hard and people who don’t. There are also people on unemployment benefit that have no intention of ever working and people who are trying everything possible to get a job.

I wish it were possible for everybody to be more united and to get rid of the divide among groups which allows our Government to basically cover up the fact they are doing a CRAP job…….

Indeed if we could pinpoint where the waste is then we might start to save money.

We have a small Defence Forces, which have a excellent reputation. However their primary role is aid to the civil power, ie back up the Gardai.

So why do we have a Garda Emergency Response Unit? The ERU cost the state money in training, weapons, equipment etc.

But we are already paying for all this with the Army Ranger Wing. So we are paying for two elite units when we only require one.

The Garda ERU should be done away with, the Defence forces should withdraw from Chad and assist Gardai in controlling housing estates which are governed by the drug barons.

This will lead to savings for the taxpayer by…
1) ERU does not have to be funded anymore.
2) Garda overtime can be reduced with the Defence forces operating a counterinsurgency role in lawless housing estates, protecting the good people in these estates and letting the lawless know they are not king of the jungle.
3) With crime in these areas under control, then there will be further savings, i.e. less people going to prison etc.

But no… we are such a rich nation we can afford to have two elite units and send our troops abroad while we spend on Garda overtime in lawless housing estates.

Of course there would be no chance of the Dept of Justice and the Dept of Defence putting their squabbles aside, deciding to work together and save the country money.

This is just one small example of duplication of effort where the Tax payer pays twice.

Not particularly wanting to put a cat amongst the pigeons or go off topic but it seems to me that bank employees are being protected. All the banks are losing money. They are being bailed out by the public purse and guarantee yet there isn’t a whisper of seeking “efficiencies” or cutting payroll.

Are they now quasi public servants favoured by the Government?

Jesus, Why don,t you all grow some balls, you want public sector number cuts rather than wage cuts.

Social welfare recipients rather than earners and tax payers.

This is the problem with public sector workers their only loyalty is to themselves. They would rather their workmate lost his/her job than they recieve a pay cut.

Their Union leaders are of the same opinion. Shaft the newbloods and maintain the system.

The uselessness is not imported it is endemic.We cannot afford this protected entity and it needs to adapt to survive. Do you really think your new paymasters in the EU care about your now defunct agreement with your old paymasters in Fianna Fail.

Your Union leaders are negotiating with a puppet Government. The strings are being pulled in Berlin.

@ al

Thank you, I thought you might have missed the earlier post.

Yes I think it would affect NAMA. No bad thing.

One thing is certain from this fiasco this country is bankrupt. Government has decided to save Banks and sacrifice citizens, my belief is Banks will fail despite artificial sustenance.

Banking system nor country can surrvive without the participation of the populace. If populace cannot afford to participate both will fail.

@M.B.
Makes a change from them being pulled in Boston, eh?

Do we have a single politician that could tell the difference? Is there any person in the Dail that has earned a living genuinely in the private sector? That would know that the demands of their new master are different to those of their old?

The Irish public service is by and large honest.There is nowhere near the levels of corruption which exist in the public services of toher democracies such as India.

If wages are cut to the bone and demonisation continues then a self fulfilling prophesy of mindnumbing inefficiency and petty corruption will follow.For instance you want your application fast tracked that will cost a backhander.If you want to escape a speeding ticket a lowly paid and demoralised guard will oblige for a fee.

There is a premium inbuilt into PS pay to avoid corruption.

@ Eoin Bond

No, we don’t have to keep borrowing ever larger amounts to fund activity. The very large multiplier attached to government investment (Benetrix&Lane, ESRI, Eichengreen et al, IMF researchers, EU’s QUEST model, etc., etc.) mean that with properly targeted investment it is possible to grow your way out of the deficit and thereby increasing revenues and reducing the numbers requiring welfare payments (as well as increasing the GDP denominator).

@ Al

DE’s projections simply add €3bn to every year’s deficit. The rationale for €3bn, (not €4bn) is not explained. But more importantly they fail to address the central question, namely, what is the effect of the cuts on the key variables I have highlighted? Ronan L says this is a fair question. All I want is a fair answer.

No-one can seriously suggest there is no effect. It is therefore incumbent on proponents of cuts (who are many, and some very vociferous on this thread) to detail what the effects might be. Otherwise there is no rationale for advocating them, merely an irrational clamour.

Absent a detailed exposition of how the cuts would translate into actual deficit-reduction, the field, in terms of analysis, is left free to the opponents of cuts entirely like Michael Taft and others.

Surely someone can demolish his argument? The proposals have been out there a long time now. Surely someone in favour of the cuts has got a detailed explanation for their economic effects?

@M.B.
“Karl made very valid points in his article but none more relevant than the issue of the debt accrued in the last 5 years especially.

How can you ask workers, private and public to accept recession wages while carrying boom time debt. These mortgages were given based on earnings at least remaining the same. Stress testing applied to interest rate increases as wage reductions were never an issue.”

1. But what about the pensioners – as Frank Galton observed. They have no boom time debt but some are earning more on their pension than they did when they were working! Calling the pay cut a pension to levy to protect the pensioners cost us money and was totally unnecessary.
2. As for stress testing – its not a stress test if it assumes your income and outgoings remain the same. A stress test looks at what might happen if your income is cut or if your outgoings rise (e.g. via an interest rate rise). It’s not a calculation of what you can pay assuming that everything goes right. A stress test tests stress!

@Michael Burke
I only added €3bn to the deficit in 2010 for not cutting because I accept that there will be decreases in tax revenue due to the €4bn spending cuts.

The reason for the cuts/taxes is because if they aren’t implemented the debt will become unsustainable.

@Michael Burke
I would also like a detailed analysis of the effects of cuts/taxes on the economy. But these would need to be compared to the costs of letting the national debt increase without the cuts/taxes.

@sean o’
You’ve got to be kidding me.
http://www.vfreshers.com/tamil-nadu-public-service-commission-recruitment-govt-officer-jobs/
Take the top wage for assistant section officer. 11,000 INR. That’s 158 euro. Per month.

The cost of living is low in India, but it isn’t that low. The system only works if you pay a ‘fee’ for each service. The fees are generally known. They don’t come as a shock. You pay a bit each month to make sure your phone line stays connected. You pay a bit each month to make sure the power stays on. You pay a bit each month to make sure you have water (though usually, you drill your own well).

Now, a java programmer can expect to earn 4-5 times that on leaving college (50,000 INR/month).

So applying similar scales to Ireland. A college graduate java programmer can expect a max of 20k euro. So, let’s cut civil service clerical grades to 4k to be on the same ratio.

That’s the sort of difference you are talking about.

@Michael Burke
“It is therefore incumbent on proponents of cuts (who are many, and some very vociferous on this thread) to detail what the effects might be.”
No it isn’t.

Borrowing has a known cost into the future. It is actually incumbent on those who want to borrow to explain why borrowing will not cost us in the future (why we are not just borrowing future growth to ease current pain).

Do you have children?

yogmanhew.

You may or may not be right regarding Indian cost of living.As I said its not just a cost of living thing .I included the continued demonisation off the PS as a reason corruption may take hold and once it does it will be impossible to cleanse it from the system..

I saw on tv last week a gaurd being interviewed who stated he would be prepared to go out on blue flu again.The fact a member of the State security services would defy the chain of command in such a public manner tells me that they dont care anymore .It also tells me that guard felt he would not suffer discipinary action from senior gardai.

Blu flu is a form of corruption.

@ sarah

As to your first point do you want to tax pensioners on money they earned or do you want to tax them on their pensions.

Their pensions would reduce if public sector pay was reduced. You don,t seem clear on your reference.

My point on stress testing was not on what it should be but what it was. Wage reductions were not an issue when Banks handed out 100% mortgages, intererst rates were.

This is a fault of Banks not consumer.

@ sean o

maybe im taking you up wrong on this, but basically you’re saying that because we have an already semi-corrupt but acceptable public sector, we can’t cut their pay or else they’ll go hyper-corrupt? If thats the case then pay cuts are not the answer. Wholesale job cuts are.

@yoganmahew Exactly

It is depression that so few seem to really understand this depression is all about debt… Everything else is a prisoner of debt, unemployment, personal consumption, tax revenues, asset prices, business confidence etc.

The entire global and domestic agenda is consumed with either parking debt, various accounting scams to bury debt or how to pass the parcel to the next sucker (usually the taxpayer). Or how to net out your debts and get enough cash together to keep going….

We are living in very very dangerous times and those debts will be called in at some future date. Nothing can be surer.

All the talk of %’s of GDP being spent on X or Y is a distraction. For people to be advocating taking on more public debt at the moment is reprehensible. I suspect those advocating it know full well it is not an investment, it is borrowing from the future to pay for yesterdays mistakes…

But, to those advocating it, put up or shut up…. come up with proposals to minimize the risk of national bankrupcy, with personal consequences should your ‘investment strategy’ prove wrong…

e.g. why not pay a % of PS wages as IOU’s or options which can be redeemed if the finances stabilize?
e.g. why not have all TD’s and PS pensions now defined contribution and based on the performance of NAMA? Or the nations finances? Why the hell not have some accountability…

I’m not looking to punish, I’m looking to cut out the spin and waffle that is coming from all sides….

Mechanisms must be found to deliver extraordinary value for money in every cent that is spent from now on. Pretend its your money, what would you do?

it’s important to remember that what the Government is proposing to cut is the labour costs of the Public Service -not the public sector which has been the subject of much economic analysis in recent weeks. Confusing these two overlapping but different groups makes a nonsense of much public debate.

@ Garry
You ask “Why the hell not have some accountability…” Well, it is because we don’t do accountability in Ireland. Simple as that. Politicians get tribunals, banks get nama, unemployed get excuses. I am convinced, that, the only thing that will change our distorted sense of reality, is when we become persona non grata on the international money markets. Then we just might get some reform.

@ Dreaded Estate

Thank you for clarifying that. You assume that €4bn in cuts will in effect become €3bn in savings. This has much greater force of logic than the PBO, which simply lops the whole of the €4bn off the deficit.

But can I ask how you arrived at that? I think that is important, because Michael Taft has produced a far lower estimate of the actual savings and the discrepancy between the two estimates is decisive as to the merits of the policy.

@ DE & yoganmahew

The contention from opponents of cuts is that reflation allows BOTH the economy to recover more quickly and to shrink the deficit more rapidly. So the charges of irresponsibility regarding the spiralling debt are entirely misplaced. Fiscal contraction actually keeps the deficit higher, for longer. It does do precisely because it prolongs and exacerbates the causes of the deficit, lower taxation revenues and higher welfare payments.

D_D and yoganmahew – as I don’t support the proposition of postponing ‘cuts/taxes’ until the middle/late next decade, I’ll let those that do answer that question. As I oppose deflationary cuts now, I don’t see the gain in lengthening out those deflationary cuts over years. As for taxation, we can make a start immediately by targeting high-income, high wealth/property assets. This is not a ‘pot of gold’ argument, rather it is an argument that another round of general tax increases will hit consumer spending / domestic demand.

A useful base-line for the years ahead is published in the Pre-Budget Outlook. It projects that were ‘nothing’ done (that is, fiscally neutral budgets), the deficit will fall to somewhere between 8.5 and 9 percent by 2014 (I’ve extrapolated, hopefully fairly, for the last year as the base-line only goes up to 2013). That this is, as the DoF has admitted, a ‘static’ projection, suggests that the deficit may, on its own, fall further but let’s stay with the static projection. This suggests two courses:

The Government’s deflationary course: this will depress the static base-line, cut GNP more than what it would be otherwise, and embed the deficit into lower growth. Or,

A reflationary approach: this seeks to boost under-lying activity by investing into boosting our productivity through physical and social infrastructural investments. This will lower ‘real wages’ while allowing for nominal rises (making us more competitive while at the same time giving a boost to consumption and Exchequer finances) in addition to creating jobs which will have a positive fiscal mutlipier.

If the second were done in tandem with tax-based consolidation measures (which the ESRI simulations suggest are less deflationary and have a higher a revenue content) introduced ‘with the grain’ of economic growth – introduced in line with rising aggregate wages/profits – we could see an earlier ending of the cyclical deficit and reductions in the structural deficit that do not undermine the base-line.

The issue of the higher cost of borrowing is real and substantial. The recent Friends First review suggests that interest rates will increase by 50 percent by end-2010 and treble by end-2011. If we are in low-growth territory by the time that happens then we are in for a rough ride. Growth can help shield us from the worst effects of these inevitable debt service costs rises. But deflationary measures that only embed the deficit into the economy resulting in low-growth will surely continue to weight us down.

@Greg
I think you might be right, the issue of bank employees should probably have its own thread! But if it helps assuage your concerns for the moment, weekly earnings in financial services are 13% lower than a year ago (at least by the CSO’s Q2 stats), compared to 3.2% higher in the public services (ex health).

@Michael Burke
“The contention from opponents of cuts is that reflation allows BOTH the economy to recover more quickly and to shrink the deficit more rapidly. ”
That might work in theory, but how does it work in practice? How does increasing the deficit by 18 bn (by taking an extra year to make the adjustment) make it less onerous?

Personally, even with the planned cuts or with any variety of sums you care to mention, I see the future for Ireland as a highly indebted rich country. Move over Japan and Italy, there’s a new kid on the block.

@MB

I mean that if the government had been honest and called the pay cut a pay cut instead of a pension levy then the pensions of the retired public servants would have been cut too, thus substantially increasing the savings. e.g. the 11 still living retired Sec. Gen. of Finance are apparently costing us 1m per year. So that’s just one grade for one department. But Cowen specifically said he called the pay cut a pension levy to protect the pensioners. Why? They don’t fit into the narrative of the poor young public servant saddled with a huge mortgage based on a particular salary level. They (the pensioners) based their financial plans on pre-benchmarking final salaries.

I find it ironic and very telling that those who consider themselves to be ‘on the left’ and argue passionately for more state involvement and a bigger public service are now effectively in talks with the government about ways to make the public sector smaller instead of admitting that celtic tiger era standards of living are no longer feasable for their members. Union leaders are certainly not shirking on their duty to do what they are paid to: put their members’ interests above the national interest. Fine, that’s what they are highly paid to do. But I wish they would stop telling us from one side of their mouth that they are about protecting services when out of the other they are doing precisely the opposite. But then the Union leaders like to have it both ways – they contributed to the fiscal crisis by fighting for unsustainable and inflationary increases in public spending while at the same time pushing to take 50% of people out of the tax net. Now all of a sudden they had nothing to do with it all. Partnership, according to Jack O’Connor, never exisited. It was a media creation. Brilliant. Stalin would be proud of such a thorough re-write of the history books.

@ yoganmahew

I don’t propose to increase the deficit by €18bn. I propose to shrink the deficit by something like that amount via reflation.

I agree with you, a permanently high-debt economy would be huge impediment to ever returning to strong growth. But reflation is the quicker, surer way out of that.

A €1.3bn cut to public sector pay is reduced as a saving by the following:

* Income tax not paid on the €1.3bn
* Consumption taxes not paid on most of the remainder
* Income and consumption taxes not paid on those sectors of the economy where the remainder cannot be spent
* Corporation taxes not paid on the same, plus
* Increased eligibility for welfare payments

The net result is both a fractional reduction in the deficit and a lower level of GDP, which is the basis for servicing the debt. That is to saw off the branch you are sitting on.

The alternative, reflation, has those effects working in the opposite direction. And, in the case of government investment they are super-effective as the multipliers are much higher.

@Michael Burke

You are 100% correct and I admire your tenacity , but unfortunately this site does not want to hear an alternative view. I recently had a post removed because I posted a satirical comment on the TINA concensus!

@Michael Burke
Pardon me, that should have been increase the debt, not the deficit (per Dreaded_Estate’s figures – delay for one year of adjustment = 18 bn more on the national debt). That’s 12% of GNP to pay back, never mind the interest.

This would want to be some reflation. Do you really think it possible to create 12% extra GNP, to balance the budget and another 12% to pay back the borrowings that have been made?

“And, in the case of government investment they are super-effective as the multipliers are much higher.”
Actually, the recent evidence (that I’m sure I saw in this site) is that government multipliers are lower than private sector and that when debt servicing costs and repayments are taken into account are negative.

I just don’t see where you are going to get that reflation from? Short of another FDI boom. Which is not going to happen if marginal tax rates keep rising. 54% is pretty steep even by comparison with other countries.

@ Michael Burke

has the deficit of a small, open economy, with no option of currency devaluation, ever been cut via increased borrowing or taxation? I believe the textbooks would tell us that expenditure cuts have always been more successful in this situation, despite the deflationary drawbacks to this option.

We’re not Japan, the UK or the US. We do not have reserve currency status, and so we can’t just assume that people will continue to lend us ever increasing amounts of money without any meaningful change to the costs of borrowing that debt. Even in Japan/US/UK, where they can print their own money, there is talk that investors may be running out of patience with their fiscal profligacy.

@ Michael Burke

Michael,

I’m not convinced by reflation arguments. What would be the object of the debt driven reflation? Residential housing? Commercial real estate?

We have had several inflating boosts to the economy over the last quarter of a decade.

EU farming and structural funds, with framing now entirely dependent on the EU cheque in the post. FDI investment, now subject to fierce competition. And the property boom.

All inflating episodes were based on external capital. I think the party’s over.

I for one cannot see any opportunity for another episode and I don’t think building windmills will pass muster.

The sad fact is that much of the previous growth was wasted and at the same time the size of the State grew out of proportion to potential indigenous growth.

I would like to think that borrow and spend would work but I don’t think it will. I think it would be kicking the can down the road, much like NAMA.

It seems to me that Ireland must go through a deflation in order to become more competitive. One could argue whether being “competitive” against China, India or Brazil is a good thing. But short of tearing up WTO treaties there seems to me to be no other way.

Reading through the contributions here, it may be helpful to step back a bit from the immediate arguments and consider the context in which the €1.3bn reduction in public pay is being proposed.

The objectives of the overall 4bn adjustment in Budget 2010 are to (a) stabilise the borrowing requirement, (b) meet commitment to the EC on stabilising debt ratios by 2014, (c) send a signal to the international market that we’re serious about tackling our fiscal problems (and therefore still a decent enough risk for the enormous amounts we may need to continue to borrow to maintain public services and wages for several years yet to come.)

As things stand, a further adjustment of €3bn will be required in Budget 2011, even if at that point economic growth has taken hold. What may also be reliably anticipated is that by end -2010 ECB interest rates will have increased from their current near zero level and inflation will have again started to rise.

Cuts in social welfare, savings on departmental programmes and expenditures, shaving approximately €1bn off capital expenditure through costs’ economies and delay or cancellation of planned projects, and some fiddling around with tax bands plus increases in excise duties on the old reliables, will need to deliver in excess of 2bn of the 4bn target. The carbon tax may generate a further €600m in a full year. The proposed 1.3bn pay adjustment will thus round it all off.

Nobody’s arguing with the unions’ point that taking 1.3bn out of the pockets of public servants will have a deflationary impact on the economy. That’s a short term given. But failing to make the adjustment now – and bear in mind that the unions also vociferously oppose any cuts in social welfare – implies a far smaller Budget correction of about 2.4bn. Apart from the likelihood that the EC would join in the howls of “You can’t be Serious” derision emanating from the international markets, this ‘Don’t Cut, Delay’ formula implies:

• Borrowing more to stay afloat in 2010 than in 2009, instead of maintaining the borrowing requirement for current spending purposes at roughly the same level
• Accelerating the increase in the national debt, and therefore the interest payments due on that debt, to an extent that would create a significant drag on any economic growth that resumes in the meantime by absorbing increased revenue from taxation to service the interest payments
• Increasing the spending deficit, since interest payments on accumulating national debt must take precedence over any other spending commitments including public service pay and pensions
• Ultimately, either declaring national bankruptcy or being forced into making adjustments that will make the current proposed cuts and the Budget 2011 adjustment – if we even got that far – look like a warm-up act
• Attempting to achieve these actions in an environment where interest rates and inflation have gone up, which makes the whole thing politically impossible and might conceivably lead to social breakdown on a scale that doesn’t bear thinking about.

The unions have long since lost the economic argument. But there is, also, a perception issue.

Publicly, their leadership are increasingly perceived as interested only in preserving their own position – and not really caring all that much about their members who are the bottom of the pay pyramid, or the 200,000 or so who have lost their livelihoods this year already, however vociferously they may protest to the contrary. Their argument that the government won’t talk seriously to them has little credibility given that it was they who walked away from the table last January.

The main result of yesterday’s action has been a further loss of public sympathy with their cause. Pre-emptive strikes, whether military or industrial, are a recipe for political failure and ignominy. A further ‘day of action’ on December 3rd? They can’t be serious, can they?

It strikes me that there are two main areas of dispute.

1. Amount of savings required

The unions think we should go easier on the cuts now. Labour previously supported this with the analogy that there was a danger the medeicne could kill the patient. Labour now seem to accept we need €4bn in savings [can this be confirmed?].

The unions are on their own here with the majority of politicians, economic commentators and media commentators agreed that we have to make the cuts. If we were bigger and had our own currency then that might not be necessary.

2. The unions want more tax increases and less cuts in expenditure.

There is less consensus on this point although there is some economic commentary to support the view that cuts in expenditure are greater for the economy:
http://www.irisheconomy.ie/index.php/2009/11/17/large-changes-in-fiscal-policy-taxes-versus-spending/

This is the issue that is causing the real divide between public sector workers and private sector workers. Some public sector union spokesmen have said that the private sector have not taken cuts which statment has enraged many private sector workers. The private sector workers also see the public sector unions as acting out of naked self interest with a pre-emptive strike. Add to that the fact that the public sector unions have been involved in the partnership process while the vast majority of private sector workers and private sector employers were not represented in that process.

I think that most people think that lower paid people should take the least cuts. This is in the interests of equity and because these people tend to spend all their money. However the union leaders have simply hidden behind these people. The unions leaders have not indicated any willingness for average and higher earners to take greater cuts to save the clerical staff from cuts.

I keep referring to union leaders because any public sector workers with whom I have spoken are ready and willing to take a pay cut.

I would also like to echo Sarah Carey’s point that it is disappointing that unions are not co-operating with the Government in identifying areas where redundancies should be made. The fact that the unions are so powerful (against workers) in the public sector is preventing the kind of engagement and leadership on the part of public/civil servants which we so badly need. What would we think if our leaders went on strike and demanded better pay? That is effectively what is happening given that technocrats wield the bulk of power in the modern system of government.

@ Vincent

TINA was the watchword for Margaret Thatcher, which is fitting, I think. Susan George counterposed TATA, there are thousands of alternatives.

@ yoganmahew

We just lost 12.4% of GNP in 6 months, so restoring it over 6 years is not a tall order, with the right policy settings. And I fervently hope €18bn isn’t still over 12% of GNP in 6 years’ time. I’m assumng there will have been some growth over that period, on almost any policy setting.

In a post above I refered to a host of reseach papers, some recent and international, others historic and specifically relating to Ireland, which all show the highest multiplier is attached to government investment, frequently in the order of 2.5.

@ Eoin

Belgium, currently.

Belgium has an import/GDP ratio over 80% just like Ireland. It also has the next biggest bank bailout in the Euro area (92% of GDP, although still overshadowed by Ireland’s 232% of GDP) with a centre-right coalition government. And a gross govt. debt/GDP ratio at end 2008 of 89.8% compared to Ireland’s 44.1% (EU Cssn. Euro Area Report 2009, p.208)

Its response to the crisis was fiscal reflation, government investment and reduced consumption taxes. When harried by the EU Commission to make deficit-reduction efforts, they increased taxes on the beneficiaries of the bailout, banks and insurers, as well as energy producers.

Belgium came out of recession in Q3 with 0.5% GDP growth, after a fall of 0.1% in Q2 and is now -3.5% y-o-y . As a result, most forecasts now expect the public deficit to begin narrowing next year.

@ Dreaded Estate

Sincere apologies, I overlooked your post of 11.12pm and therefore did not repond to it.

Michael Taft has provided both a detailed analysis of the effects of cuts/taxes on the economy and compared these to the costs of letting the national debt increase without the cuts/taxes.

It is here.

http://notesonthefront.typepad.com/politicaleconomy/2009/11/economic-lessons-from-the-tao-te-ching—-the-sage-does-no-thing-but-leaves-no-thing-undone—-so-wrote-lao-tsu-in-wh.html

@Veronica

Oh, we’re serious alright.

Look, this isn’t about the PS refusing to make sacrifices. It’s about the PS refusing to be alone in making sacrifices. By all accounts what has happened in the private sector is large numbers of redundancies and widespread pay freezes accompanied by some pay increases and some pay reductions. The PS has already taken a 7.5% across the board pay cut.

The minister has gone on record as saying that this year’s entire €4 billion adjustment must come out of the expenditure side (Commission on Taxation report be damned). This means, effectively, that the only people being asked to make a sacrifice now are PS workers and those on social welfare. Those in the private sector who have not lost their jobs and who have not experienced pay cuts and who may even have experienced pay increases are being asked, if reports about the minister’s thinking are accurate, to sacrifice exactly nothing.

There is nothing the least bit “democratic” about any of this. Just as there is nothing democratic about, say, 51% of the population deciding to deny all rights to the remaining 49%, there is nothing democratic about the entirety of the working non-public-sector deciding that they’re really rather that someone else make the sacrifices and not them. It’s extraordinarily ugly and this is why PS workers feel aggrieved.

The fair way for sacrifices to be made is for everyone to make them commensurate with their abilities. And the way to do that is through the taxation system. It makes no difference to a PS worker if their take home is cut by 10% via the general taxation system or via a new pension levy. But it makes a huge difference to the perceived fairness of the cut as the latter is something only applied (as a special surtax for the crime of serving the public) on the PS.

As for the economic argument, well, frequently no actual economic argument is presented. We’re simply told that there is no room for increasing taxation and the Commission on Taxation report is simply shelved with no explanation or argument whatever.

Is there really no scope for increasing taxation? From the OECD:

From OECD in Figures 2009:

Total tax receipts as a percentage of GDP (2006):

Denmark 49.1
Sweden 49.1
Belgium 44.5
France 44.2
Norway 43.9
Finland 43.5
Italy 42.1
Austria 41.7
Iceland 41.5
Netherlands 39.3
United Kingdom 37.1
Hungary 37.1
Czech Republic 36.9
New Zealand 36.7
Spain 36.6
Luxembourg 35.9
Portugal 35.7
Germany 35.6
Poland 33.5
Canada 33.3
Ireland 31.9
Greece 31.3
Australia 30.6
Slovak Republic 29.8
Switzerland 29.6
United States 28.0
Japan 27.9
Korea 26.8
Turkey 24.5
Mexico 20.6
EU average 39.8
OECD average 35.9

Disposable Income of Average Single Worker as % of Gross Pay (2006):

Mexico 95.0
Korea 89.4
Ireland 85.3
Japan 80.6
Spain 79.5
New Zealand 78.9
Switzerland 78.3
Slovak Republic 77.6
Czech Republic 77.6
Portugal 77.5
Canada 76.1
Australia 76.0
United States 75.6
Iceland 74.6
Greece 74.4
Luxembourg 73.4
United Kingdom 73.1
Italy 71.5
France 71.0
Norway 70.9
Turkey 69.6
Finland 69.4
Sweden 69.1
Poland 67.8
Austria 66.8
Hungary 64.7
Netherlands 63.7
Denmark 59.1
Belgium 58.1
Germany 56.3
EU average 69.9
OECD average 73.4

Disposable Income of Average Married Worker with 2 Children as % of Gross Pay (2006):

Ireland 108.6
Luxembourg 100.5
Czech Republic 99.8
New Zealand 96.9
Slovak Republic 96.3
Mexico 95.0
Iceland 93.1
Korea 90.9
Switzerland 90.9
Portugal 88.9
United States 88.6
Australia 87.7
Canada 87.2
Spain 86.7
Japan 86.4
Italy 84.3
France 82.9
Austria 80.9
United Kingdom 79.6
Norway 79.3
Hungary 79.2
Belgium 77.9
Sweden 77.2
Finland 76.9
Germany 75.4
Greece 72.8
Netherlands 71.7
Denmark 70.9
Poland 69.6
Turkey 69.6
EU average 82.4
OECD average 84.9

Highest rate of Corporate Income Tax (2006):

Japan 39.5
United States 39.3
Germany 38.9
Canada 36.1
Spain 35.0
France 34.4
Belgium 34.0
New Zealand 33.0
Italy 33.0
Luxembourg 30.4
Australia 30.0
United Kingdom 30.0
Netherlands 29.6
Mexico 29.0
Greece 29.0
Norway 28.0
Sweden 28.0
Denmark 28.0
Korea 27.5
Portugal 27.5
Finland 26.0
Austria 25.0
Czech Republic 24.0
Switzerland 21.3
Turkey 20.0
Slovak Republic 19.0
Poland 19.0
Iceland 18.0
Hungary 17.3
Ireland 12.5
EU average 29.4
OECD average 28.1

Total General Government Expenditure as a % of GDP (2008; Ireland’s figure is from 2007):

Sweden 53.1
France 52.7
Denmark 51.7
Belgium 50.0
Hungary 49.8
Austria 48.7
Italy 48.7
Finland 48.4
United Kingdom 47.7
Portugal 45.9
Netherlands 45.5
Greece 44.9
Germany 43.9
Iceland 43.2
Poland 43.1
Czech Republic 42.4
Luxembourg 40.7
Spain 40.5
Norway 39.9
New Zealand 39.7
Canada 39.1
United States 37.3
Japan 36.0
Ireland 35.7
Slovak Republic 34.9
Australia 34.1
Switzerland 33.7
Korea 28.7

@Michael
“We just lost 12.4% of GNP in 6 months, so restoring it over 6 years is not a tall order, with the right policy settings.”
You don’t believe there was a property bubble with it’s ancillary debt bubble and a debt-fuelled spending binge then?

I’m with the lessons of other property crashes. That GNP is permanently lost. We will reach a base some time next year that we can build from. If we get to the current level of GNP in six years, or even last year’s level, I’ll be very happy. Our growth rate in the years ahead is likely to be in the low single digits with the drag of existing debt levels (both private and now public).

Belgium didn’t have a property bubble in addition to a banking collapse. We need solutions that accept that the bubble level of tax income isn’t going to return. That transaction taxes will be banjaxed in the years ahead as people pay down crippling levels of debt. That the levels of debt have brought forward spending and used it up.

So, do tell (as has been asked above) where would you like the next bubble to be?

reply to Bond:

The PS is mostly corrupt free.It is in many areas inefficient , a different thing.
I have stated I believe there is a premium in pay ( and pension) in the civil service to prevent corruption.If the margin between welfare and PS pay narrows enough the incentive to take backhanders will rise.
The consequence of being caught is dismissal which would not be so bad if you went on welfare.
The implied threat of mass firings if wage cuts are not accepted would also be welcome as lower paid public servants might perceive their material situation to be better off if they were on welfare.

Its stated over and over again that the private sector are baring the brunt of the recession.This is a fact but is not reflective of the truth .

The CSO has reported last week that 70% of private sector have not sustained pay cuts.They may be referring to core pay and not have accounted for bonuses ,overtime etc.However overtime etc has been cut from the Public sector so both are on the same level here.

The 30% of cuts in private sector are I believe in the rip off end of the Irish economy,the construction trade and the retail trade.
As the CSO has pointed the large numbers of people unemployed from these sectors are poorly educated and in the case of the construction trade mostly young men in their 20’s.
These young men were pulling in large wage packets so the anger they express is understandable.They are unemployable as they have little in the way of skills.

Most of the productive parts of the economy are the foreign multinationals which account for over 90% of our exports.They pay good salaries ,mostly above the average industrial wage and many continue to pay increases and bonuses.
It is the failure of the domestic Irish business community to develop higher value added operations selling their goods overseas that is the cause of so many Irish people feeling embittered through unemployment .Thes Irish businesses went for the fast easy buck and ripped everyone off that they could.
The small firms association are schills for gombeen Irish business men.

Tax receipts from business,CGT ,VAT etc outweigh by a very significant amount what is paid through income tax on employment
It is said often that the workers in private industry are paying the wages of the public service.If the mass of private sector workers are paid the 20 % discount that Public sector workers receive and that over half the workers in the state do not pay tax at all then this is factually incorrect.

What is true is that there far too many overpaid senior civil servants,quangos etc. who are not productive.There are some senior public servants who are worth high salaries.

My own personal feeling is that the IMF would be best solution as it cooncentrate peoples ire on who are the real culprits,namely FF ,their cronies and the banks.Three or four years of misery with hope would be better than a lifelong decline under the FF jackbboot.

@ Michael Burke

Belgium is running deficits in the range of 5.0-5.5% of GDP this year and next. We’re running around 12%+ or so. That’s a difference of a rather substantial magnitude, and one that has not been lost on investors given the movement in relative yields over the last year.

I think we’ll agree that there comes a time when the marginal impact of each additional euro borrowed starts to disappear as the cost of borrowing increases. Running medium term deficits well above 10% and borrowing at between 4-5% (or more if we decide to row back on the proposed spending cuts) would enter this point in my view.

@Zhou,

My own party’s position is ‘yes’, the need for the 4bn adjustment is accepted, but the need for any pay or social welfare cuts is not accepted.

Instead, the nation’s billionaires to stump up €1bn; immediate closing off of tax breaks/allowances will realise another 1bn or so, and the sons and daughters of a species called Ansbacherman must line up to have their pockets lightened also. Politically, the position is essentially: we are in favour of doing what’s necessary (because we’d be laughed out of court if we weren’t) , but we will oppose every single proposal that is put forward to effect the necessary adjustment. We’re setting the ‘tests’ by which this will be judged and framing those tests in a way that means failure to meet them is inevitable. But that’s the idea, because it will allow Labour to be on both sides at once – in favour of the €4bn adjustment but virulently and opposed to any measures that might seek to realise that adjustment. (Same populist stunt as pulled on the Bank Guarantee issue. And yes, there are times when I really despair!)

At least that’s the best I can make of the largely rhetorical ‘All Jump Together’ speech from Joan Burton in the Dail last week; extracts of which are below, so you can make whatever you like of it yourself:

“The Labour Party accepts a deficit reduction target of €4 billion as long as the actual measures do not cause even further contraction in the economy. Leaving Party politics aside, there is both an ethical and an economic dimension to this. On the ethical side, this is about fairness. On the economic side, it is a question of minimizing the deflationary impact of the budget.

Indeed, I am deeply worried about the deflationary impact of the Minister’s proposals. It seems the principal target of the cuts will be the low paid, social welfare and health.The impact of cuts on the spending power of the least well off will be far more deflationary than, for instance, effecting €1bn in savings through closing property tax shelters and other tax loopholes principally availed of by the super-rich.

We want to cut the deficit percentage. Spending cuts are part of the mix but cannot be the sole component of the Budget Day package……….

…………..

I can say without equivocation in this House that my party will face the obligation to meet the deficit target…. But we will agree nothing until everything is agreed and that everything has to be a balanced mix that can command the confidence of the whole society.

So don’t come along to me to ask do I agree with this or that cut. I agree to nothing unless it is part of a fair mix. I will agree to an awful lot if it is.You bite the bullet (or the garlic) on fair taxes at the top and I will bite some others……

If we are to jump together then tax reform and tax justice is a core part of the equation……

I am convinced that the wealthiest sector in Ireland who own a wholly disproportionate share of our nation’s wealth can readily stump up at least a billion of the €4 billion sought in 2010.

The McCarthy Report came out on July 16th. In each chapter there are suggestions about agencies, about administrative cuts, about savings which individually are of no great consequence but collectively add up to a great deal.

…… Yes there are big spend Departments but there are also 10 other Departments where efficiencies could deliver a good slice of savings, as much as €500 million in total.

Curiously the Minister has baulked at publishing the report on Higher Pay Grades. Some of these salary levels have grown excessively in recent years and are no longer justified…..

That is why we advocate a cap. That applies to the Taoiseach, the President, to Ministers, to senior grades in the public service generally. The combined savings is worth the effort in itself……

It is just impossible to ask for cuts in pay generally until it is accepted that those at the top show serious intent in reducing salary levels that have been allowed to drift up through the tyranny of percentage increases that gave most to those already at the highest levels.

I repeat that we accept the case to reduce the headline deficit by € 4 billion. That will involve uncomfortable cuts and I don’t shirk from those in any way as long as you accept the basic principles I mentioned… that we all jump together and nothing is agreed till everything is agreed.”

@ sarah

Thank you for the clarification and I agree. turns out we are of the same opinion.

@ all

As I have already said. Blaming each other for our woes is a waste of time.

Arguing about pay cuts or increased taxes is pure folly. We can afford niether.

Until our personal debt situation is resolved our national debt situation will deteriorate and we will remain bankrupt.

Maybe Iceland got lucky afterall.

@ Michael,

I may have the wrong end of the stick here. Apologies if I do.

As I’ve said I don’t see any opportunity to reflate the economy. What would be reflated?

Also I don’t see anyone arguing that cutting State spending would not be deflationary in the short term. In a world of “free” trade and free capital flows we appear to have no choice but to deflate in the short term. I don’t like it but that seems to be the case.

What sector of the economy would provide future growth to repay the borrowing?

Maybe (well it’s quite possible) I don’t follow your argument but it seems that you are arguing for more borrowing simply to generate tax revenue. Without indigenous (sectoral & private) growth that is all borrowing will achieve. Sure we can trade services amongst each other and that will increase measured economic activity but the debt will continue to rise.

Where is the growth going to come from?

@ Sean O

here’s the picture of the public sector you’re painting (whether deliberately or not):

need a pay premium to prevent corruption, any lowering of pay likely to increase corruption, and any threat of dismissal on foot of corruption is unlikely to worry them as they can go on welfare.

So the private sector doesnt appear to be too corrupt and is angry about losing their jobs, but the public sector is both corrupt and apathetic about losing their jobs and receiving welfare?

I stand by my previous suggestion to enforce mass layoffs in the public sector, and now also want to throw in a major rejig of welfare entitlements to make sure there is no barrier to seeking work opportunities.

@ ernie

Keep fighting the good fight. Eventually you will convince yourself that increased border shopping on the day of public sector strikes was a coincidence.

@Veronica

“The Labour Party accepts a deficit reduction target of €4 billion as long as the actual measures do not cause even further contraction in the economy.”

Is there a magical way to reduce the deficit without contracting the economy?

Declaring that monopoly money will henceforth be considered legal tender, perhaps?

@ Eoin & yoganmahew

I was asked to provide an example of a SOE without the option of devaluing, which has reflated to recovery (and deficit-reduction) and Belgium fits the bill. It is not an exact parallel. There can be no exact parallel between any two economies, but the Belgian experience shows what is possible. It is reducing its deficit by reflation. And multipliers are increased the more credit is constrained, as in Ireland currently.

There can be no return to the Irish property (or any other) bubble of the last few years, but there is a possibility for government investment, especially in infrastructure which has very significant multipliers attached.

@ Eoin

A widening of the Irish/Belgian yield spread is a function of their relative trends in growth and prospects for deficit reduction, (the relative deficit sizes were a known a year ago, Ireland’s got worse). But that’s just another argument in favour of Belgian reflation. Reflate (like Belgium) and lower your debt servicing costs (as well as your deficit), or adopt fiscal contraction (as Ireland has already done) and watch your deficit and your relative debt costs rise.

@Veronica

Thanks for that.

At least the international financial markets can take comfort that Labour accept the 4bn savings are needed.

It is disillusioning to see Joan Burton is only in favour of reducing the deficit by €4bn “as long as the actual measures do not cause even further contraction in the economy.“. That is intellectually indefensible imho. Of course any measures in relation to taxation or public sector expenditure will cause further contraction. However, sovereign default will cause the most severe contraction of all!!

@Eoin
“has the deficit of a small, open economy, with no option of currency devaluation, ever been cut via increased borrowing or taxation?”
“Even in Japan/US/UK, where they can print their own money, there is talk that investors may be running out of patience with their fiscal profligacy.”
NAMA borrows €54 Bn against property loans on a crashing property market. That is 108 times worse than say the net €0.5 Bn we are arguing over the borrowing of next year. When you account for the multiplier it’s tiny. The elite are spinning us again to hide NAMA.
http://www.tribune.ie/article/2009/sep/13/the-greatest-gamble-in-history-of-economy/
From a publication by Brendan Dowling of DKM referenced by Philip Lane on Sep 11, 2009.
“While exporters may have benefited from productivity
and unit wage cost gains in 2009 this has been achieved
mainly by reductions in employment and only partially
by actual cuts in nominal wages”.
This is exporters who are under pressure from the currency and even they aren’t cutting wages. As The Irish Times opinion poll showed for private sector workers:
“The vast majority (69 per cent) say they have not had their pay cut or working hours (76 per cent) reduced in the past year.”
The private sector workers who have taken paycuts are in the bubble occupations e.g. bankers, builders, auctioneers, solicitors. The cause of their paycuts is banker/developer/politician greed. Or they are in retail where NAMA & the banks are behind the failure to reform leasing by the government (The Pheonix) or landlords to cut rents (retailers representatives). The idea that the public sector are not cutting employee wage rates but the private sector are is the REVERSE of the truth. I believe it is deliberately misleading nonsense started by the usual suspects.

@Ernie,

Full time workers in the public sector have not lost any jobs through redundances; at least 160,000 private sectors employees have lost their jobs and another 40/50,000 jobs may have also been effectively lost to self-employed people who can’t sign on to the Live Register. Total loss of income is the ultimate pay cut.

Restoring economic competitiveness is part and parcel of the objective of lowering pay rates in both the private and public sectors of employment. There is expert opinion that suggests reducing public service pay rates will go some way towards achieving that objective and also lead to reductions in private sector pay demands in the process, thereby improving overall competitiveness. (Philip Lane recently had a thread that discusses this). There is evidence, also, that rates of pay across the public service have moved out of line with benchmark private sector rates and that amongst elite professional groups, – doctors, teachers, politicians for example – are significantly out of line with their professional coutnerparts in comparable EU countries. Then there’s that other little problem of the amount of borrowing that’s required just to keep the ship of State afloat, and its relationship to €20bn in the public service pay bill.

Believe me, I’d be out dancing in the streets if I thought, or if someone produced, a credible alternative to what is being proposed. What I do hope is that civil servants at the lowest grades will be exempted from any general pay cuts and I also agree that it’s going to be horrendously difficult for the remaining grades whose take home pay is modest by any standards and whose household income may already be affected by exorbitant personal debts from ‘bubble’ mortgages or the loss of employment by a previously employed private sector worker.

All I’m arguing is that it is preferable for any pay cuts to be imposed now, if there is no alternative to meeting the 4bn target; rather than wait around for a deterioration in the public finances that would require even more swingeing and indiscrimate pay cuts in an environment of rising inflation and increased interest rates.

@Myself
Usual clarification, The Irish Times figures were for all workers and the public sector took a paycut so they are excluded.

@Proposition Joe & Zhou,

Totally agree with your point on economic contraction. LP position is not just intellectually bankrupt, it is morally bankrupt, I regret to say; but if it plays well with the voting public don’t expect any change in the neartime…

@Michael Burke

You are comparing chalk and cheese using Belgium as an example.

The Belgian deficit was cyclical while the Irish deficit is almost completely structural.

The solutions for either situation is completely different.

@Veronica
A medium term solution to private sector unemployment can only come from private sector wage cuts. But suggest this to help the unemployed and private sector workers go nuts. I believe that they actually care less about unemployment than public sector workers do, even though only private sector workers can solve this problem in the medium term. Public sector wage cuts will have a much slower effect by improving competitiveness.

A government which will be presiding over unemployment of 500,000 next year is in no position to use the mass unemployment it has caused to morally blackmail anyone.

@E43 Billion,

Check out Philip Lane’s post of 17 November last and follow the link. Interesting paper that should fuel some thought.

This issue is not about publlic sector vs. private sector divisiveness relying on anecdotal evidence and impressions to support specious contentions. Nor do we live in a morality play; we live in a society. We either fix our problems or we won’t have a society worth having anymore.

@E43Billion,
Those private sector companies (the majority) which need to tighten their cost base or reduce their capacity to regain or retain competitiveness will do so – or disappear. When you include reduced working hours, unpaid leave, paid cuts and hundreds of thousands laid off, the private sector has dramatically reduced its costs. That much is painfully clear. To argue that somehow private sector workers are out there resisting wage cuts and therefore hurting recruitment is untenable right now. I know a lot of private sector people who have gladly accepted pay cuts in lieu of lay offs. But nowhere do I know any that resisted and said ok, lay us off we are against cuts.

To say that private sector workers care less about unemployment not really meaningful since it cannot be measured. But one thing is clear: it is private sector workers, not public, who themselves face unemployment if the costs in their companies cannot otherwise be managed – by pay cuts or otherwise. This is a prospect which simply doesn’t face the vast bulk of public sector workers.

I think you should mod your web site so that the latest comments appear at the top rather than the bottom. Who’s gonna read my belated wisdom if they they have to scroll down for 30s!

@ E43bn

“But suggest this to help the unemployed and private sector workers go nuts. I believe that they actually care less about unemployment than public sector workers do”

You’re spouting the same old tosh as usual. Deal with the facts at hand. I, and others on here, have repeatedly said that re-apportioning cash from public sector cuts into private sector job creation/protection would be a great idea. You keep forgetting these inconvenient facts, just like you keep forgetting that almost all of the recent public sector pay and staff increases were funded and justified almost completely by bubble economy transactional taxes which are gone forever.

For clarity, im a banker and work in the private sector. What do you do E43bn?

@Veronica

You wrote:

Full time workers in the public sector have not lost any jobs through redundances; at least 160,000 private sectors employees have lost their jobs and another 40/50,000 jobs may have also been effectively lost to self-employed people who can’t sign on to the Live Register. Total loss of income is the ultimate pay cut.

Yes it is the ultimate pay cut. In part what we are arguing about is who should pay to help these people. You seem to be saying that because these people came from the private sector, those others in the private sector who haven’t lost their jobs and haven’t suffered pay cuts have all somehow sacrificed by proxy and have therefore suffered enough. Therefore, you conclude, the public sector should bear the full brunt of helping to pay for the unfortunates who have lost their jobs.

I also reject the idea that nobody in the PS has lost a job.

The data about who in the PS here is earning more than European counterparts has been systematically distorted as part of the propaganda campaign. Irish teachers for example are roughly in the middle of the pack if one looks at pay per contact hour as the OECD does. Also, none of these claims, to my knowledge, take into account the effect of the Pensions Levy.

@ Tomaltach

Belgian pre-crisis (2002/06) general govt. expenditure as % of GDP was 50.1% and revenues were 49.6%. For reference, Ireland’s expenditures were 33.6% and revenues 34.9% over the same period.

In general, high tax/high spend economies tend to weather sharp recessions better as automatic stabilisers play a bigger positive role (IMF). The worst-hit economies in the current downturn have been those adopting the the Anglo-Saxon model of low taxes and low spending, among them the US, Britain, and Ireland.

@ Greg

Apologies if I haven’t been very clear.

The proposition is that cuts are deflationary and will not yield the targeted savings. It seems that some advocates of cuts accept this, but still we await a detailed analysis of the impact from them, and have only Michael Taft’s. I would have thought that this would be a useful exercise in any event. In their logic €4bn might not be anywhere near enough.

One suggestion is that cuts of €4bn will yield savings of €3bn, but this seems to take account only of the shortfall in income taxes, not all the other deflationary impacts. With an Exchequer borrowing requiremet of €26bn this year (PBO), cuts of some far higher magnitude would be required, at least €34.7bn on that logic, and in reality far higher. Even the lower number is equivalent to 60% of all current expenditure and highlights the madness of attempting to cut your way out of a recession.

The alternative, put in place by Belgium (and most of the EU, plus US, Japan, China and Britain) is reflation. Now, it’s possible to quibble (at least) with the forms the reflation has in some cases taken, and therefore the relative effectiveness. But it all reflation.

@ Tomaltach
“The Belgian deficit was cyclical while the Irish deficit is almost completely structural.”

The Belgian cyclically adjusted structural budget deficit averaged over 2.1% of GDP in the years 1992-2006, whereas Ireland had an average cyclically-adjusted surplus of just over 0.4% of GDP (EU Cssn, Euro Area Report 2009, Table. 40)

@Michael Burke
The Belgian cyclically adjusted structural budget deficit averaged over 2.1% of GDP in the years 1992-2006, whereas Ireland had an average cyclically-adjusted surplus of just over 0.4% of GDP (EU Cssn, Euro Area Report 2009, Table. 40)

I presume you wanted to direct that at me rather than Tomaltach.

1992 is ancient history at this stage. How is the average structural deficit from 1992 to 2006 in any way relevant?

You need to look at the current structural deficit not historical.
Out of our 12% deficit I would estimate that 8-10% is structural. It ain’t going away without being cut/taxed away or a new bubble.

Reply to Eoin:

I stated that a premium is likely inbuilt to prevent corruption.There is no ‘need’ as you say for this premium . Lower wages and see what happens .Corruption may not occur.But if it does conditions for everyone will deteriorate.
My point is that corruption is likely to follow lower wages.

As regards the lowering of welfare payments I totally agree with your sentiment . According to An Bord Snip a couple with two children would receive in excess of 37,000 euros tax free on social welfare.
The average wage in the Public service is often qouted to be in excess of 50,000 euros .The more appropriate question to pose is what percentage of public and private sector workers are earning less than 37,000 euros net pay to support a househould equivalent of the SW family above.
I think the figure would be quite high.
If more people on wages below 37,000 euros net pay were aware of the above I am sure mass layoffs would be welcome.

If layoffs on the scale you recommend are to be implemented then thats why I stated we should welcome in the IMF.They would be seen as independent.

1 We have the unions on record that private sector wages should guide public sector wages (from previous benchmarking processes)

2 We have, what is at this stage, almost uncontroverted, damning and rigourous evidence that public sector wages are significantly above private sector wages even before you account for pension entitlements and security of position.

I would suggest that the argument for public sector pay cuts is unanswerable.

Moreover, we need to address how and why we allowed public sector wages to rise above levels in the private sector, so that we ensure that, over the long term, the descrepencies between the two are effectively removed.

I think opponents of such a long term adjustment need to state which of the above two propositions that they don’t agree with and, importantly, engage fully in the debate as to why they don’t agree.

Why not first deal with some unpalatable facts:

1. According to the Comptroller & Auditor General – – a civil servant himself – – the typical Irish public staff member: Joe/Josephine Average – – took 11 days sick leave in 2007, almost double the level in the mid 1980’s.

That is more than 2 weeks additional leave on top of paid holidays.

75% of Clerical Officers called in sick.

Is that an issue to be ignored or should it be seriously addressed?

2. David Madden has raised the issue of the methodology used in comparing roles in the public and private sectors.

There is no ideal solution but when the average award of 9%, including the hike in pensions, was not justified publicly by the benchmarking body, why should subsequent research by Jim O’Leary and other academics at Maynooth, the ESRI and CSO – – all part of the public sector – – be conveniently ignored by the unions?

Why was this special payment called “benchmarking”?

3. Maybe the National Consumer Agency is not typical of public service quangos but consider this: a body that was established in response to what was called “rip-off Ireland”, has a board of 14 for a 20+ staff and the chief executive last year earned more than the chairman of the US Federal Reserve.

It cannot provide a simple price comparison service but can give a Fianna Fáil linked PR agency a contract for €200K for issuing press releases.

4. Ireland is effectively a satellite of US multinationals and executives of two of the biggest – – Intel and Microsoft – – have said in recent times that the only remaining advantage in remaining in Ireland is the corporate tax rate.

Costs are out of line and an unpalatable truth is that we Irish have no trading tradition – – so vacuous sloganeering on the “smart economy” and “green tech” cannot hide this reality or produce miracle exports.

We will depend on US multinationals in coming decades.

Have a look at the table on Eurozone unit labour costs at the bottom of this page:

http://www.ecb.int/press/key/date/2008/html/sp080317.en.html

5. We decided to join the EMS even though gombeenism was always a feature of our politics.

However, there is no palatable exit.

The likes of Iceland and Argentina have their own significant commodity and goods trade, while our destiny depends on Intel, Pfizer etc.

http://www.finfacts.ie/irishfinancenews/article_1018459.shtml

6. The pensions levy was a pay cut but what’s the defence for linking the pension of a 90-year old with the pay of a person in the last job before retirement?

Brian Lenihan said last February, that the total cost of a State pension for an Irish public sector worker, hired after 2004, was 26.1 per cent of pay, and the employee paid on average 4.8 per cent of the cost, before the introduction of the Government’s controversial pension levy.

The majority of Irish private sector workers DO NOT even have a basic occupational pension – – never mind even the ones who are part of a scheme, without any guaranteed payout.

@Ernie Ball

Can you detail the OECD data you refer to on teacher salaries?

@Ernie

“You seem to be saying that because these people came from the private sector, those others in the private sector who haven’t lost their jobs and haven’t suffered pay cuts have all somehow sacrificed by proxy and have therefore suffered enough.”

Funny you should mention this sacrifice by proxy.

The public sector unions have gone one step further and added the non-existent colleagues that haven’t been recruited in the past year to the litany of pain suffered by their members.

Now you may think it tenuous that private sector workers point to the trauma of losing colleagues and feeling a resulting sense of insecurity.

But its a rock solid point compared to counting in one’s “sacrifice score-sheet” the imaginary colleagues that never were.

The argument that we should pay more to public sector unions in order to avoid public sector corruption seems weak.

First, its a very expensive method of reducing corruption.

Second, there are other countries who pay less and have less corruption.

@ Christy

the argument isn’t just ‘weak’, its a solid argument for mass privatisation or outsourcing of large parts of the public sector.

sorry for double post

Christy’s general recession busting policy!

1 Whenever there is a recession cut public sector pay by 10% – (tax on job security)

2 Use the funds saved for temporary increase in governmnet investment – say 2 year projects that we have prepared and can take off the shelf when needed

@ Ernie Ball,

Tomaltach provided a succinct account of what life is like in the private sector.

How you arrived at the conlcusion that I’m suggesting the public sector should ‘bear the brunt’ of helping to pay for the private sector and self-employed people who have lost their income as a direct result of the recession is quite beyond me, since my argument is the more broadly based one about fixing the fiscal problem before it becomes impossible to deal with without much more serious implications for public sector workers than a percentage cut in nominal wages or the abolition of a few pay-related allowances.

@E43BILLION

I think thee is a general consensus on the blog that bringing NAMA into other debates is unhelpful except where directly relevant

@ Ronal L and others re scale of adjustment in the private sector at the extensive margin. My colleagues and I are currently doing some work on employment restructuring and job losses in the Dublin City Region (DCR) and nationally. Between Q3 2007 and Q2 2009 we estimate the extent of private sector job losses to be of the order of 200,000 to 240,000 nationally (of which about 79,000 are job losses in the DCR).. Moreover, we estimate that at least one third of these losses are structural losses and will not “re-appear” when and if there is a cyclical upturn. On the issue of the scale of adjustment – if we assume annual average private sector earnings of €33,300 (based on CSOs National Employment Survey 2007) – the reduction in the wage bill of the private sector nationally is of the order of €7.3 billion on an annual basis (based on employment reduction of 220,000). Assuming public sector employment as approximately 20% of total employment at present then the proportionate adjustment – on intensive basis – would be of the order of a minimum of €1.8 billion on an annual basis. Note these figures do not take into account any wage reductions among workers currently in employment in the private sector.

@Michael Burke & Yoganmahew

I think the research Yoganmahew mentions might have been covered in this blog entry / Sunday Times article by Constantin Gurdgiev

http://trueeconomics.blogspot.com/2009/11/economics-22112009-news-flash-our-taxes.html

Given that there was a six mile tail back in Newry yesterday, and that Irish retailers are substituting Irish suppliers for British ones, are spending cuts becoming less deflationary? Has the fall in Sterling left us uncompetitive vis a vis our nearest neighbour?

According to this article by Michael Hennigan of FinFacts, indigenous Irish companies contribute about 10% of our exports and 50% of these go to the UK. I’m not sure that protecting current spending from cuts will aid the competitiveness of firms.

http://www.finfacts.ie/irishfinancenews/article_1018459.shtml

If we want to reflate, perhaps we should be concentrating on cutting employers PRSI, commercial rates, electricity costs etc and not defending superior pay and conditions for workers with safe jobs and gold-plated pensions?

@ Eoin & DE

The reason the EU chose to go up to 2006 was to capture the entire period before the crisis.

The European Cssn also has estimates for all the cyclically adjusted budget deficits for the current year. Selected ones as follows: Belgium 4.6% of GDP, Ireland 9.6%, Greece 12.6%, Spain 10.0%, France 7.0% and Britain 10.5% (also Table. 40).

Aside from Greece (and no-one seems to know what the previous govt. there was doing, perhaps including themselves) every other country apart from Ireland has engaged in some measure of reflation. That includes Spain, whose reflationary package amounted to 2.3% of GDP.

Now there are clearly huge discrepancies in the IMF versus the EU estimates which is perhaps related to the difficulty of identifying and measures the ‘structural deficit’. I could add that all these august institutions’ estimates of what is supposed to be cyclically-adjusted series correlate remarkably with the cycle itself. And the ‘structural deficits’ seem to appear in the recession, like umbrella-sellers in the rain, and disapear just as quickly in the recovery.

But there you have it. On one official measure, Spain’s structural deficit is greater than Ireland’s, but that didn’t stop the Spanish reflating either.

Why won’t the Irish government adopt reflation? It can’t be the import bill (matched by Belgium) and it can’t be the ‘structural deficit’ (matched by Spain and others) and it can’t be that the devaluation route is closed off (15 others in the same boat).

@Proposition Joe

The public sector unions have gone one step further and added the non-existent colleagues that haven’t been recruited in the past year to the litany of pain suffered by their members.

The private sector claim is absurd on its face. The public sector claim (if indeed I can believe that such a claim has been made; if it has, I haven’t heard it and you’ve provided no evidence beyond your say so) is slightly less absurd. Presumably in those private sector concerns where workers have been made redundant it is because there is less work to do. In the public sector, where workers have left and not been replaced because of the hiring freeze, there is still just as much work to do (and sometimes more) but fewer hands to do it.

Nevertheless, we can agree that such claims to have sacrificed by proxy have no place in this discussion. Why, then, am I constantly confronted with the fact that “some have taken a 100% pay cut” as an attempt to justify the further claim that public sector workers–and only public sector workers–have to take a further pay cut? The fact that this argument is usually made by those who still have jobs, haven’t by and large had their pay cut and pay low rates of tax compared to most citizens of European states makes the argument as galling as it is inane.

@Ernie Ball

The basic issue is why are public sector workers paid more?

Public sector wages should be guided by comparable wages in the private sector. This is something even the trade unions accept. However, the evidence averwhelmingly shows that they rae paid significantly more.

My question is why?

There appears to be a huge amount of discussion of comparing rates of pay between public sector against private sector etc. In addition comparisons are being made between Irish public sector and their counterparts in other European countries.

Firstly I think there are two wrongs here.

Over the last few years a huge amount of time has been spent on micromanagement of salary scales between the various parties. Is this level of micromanagement really practical? Some time ago the private sector was “ahead”, so efforts were made to bring the public sector up to a benchmark level. Now we are in the reverse situation.

Can we really afford the time and effort to micromanage the salaries of everybody in the entire country? “Oh this year you were earning more than Jack, so I will tax you more and give Jack a pay rise”, followed by a few months later, well it looks like Jack has done too well, so I will tax Jack more and bring your earnings up a bit”

I recognize Ireland is desperately short of cash, hence savings must be made. However we got ourselves into a terrible mess with benchmarking when things were on the way up. But are we creating a greater mess by trying to micromanage public sector salaries now that things are on the way down?

If the cost of living in this country was not so high then it would benefit everybody. A lower cost of living would be there for public and private sector workers. Hence this would lower the burden on the private sector who have already taken salary reductions and are still struggling. It would also make make the argument of reducing public sector pay much more easier to enforce.

In addition we are now compounding the issue by throwing into the mix comparisons between Ireland and other countries. While it is important to ensure Ireland is competitive internationally we cannot allow ourselves to get into a micromanagement role of trying to keep Ireland in the same relative position by constantly making adjustments.

We should return to basic economics, get the living and business costs down. Then salary cuts will be much easier for all.

This country has unfortunately committed economic suicide over the last 10 years. Energy costs have got to come down, upward only rent reviews should be outlawed, commercial rates reduced, VAT reduced, or have several Vat rates for different products, food should have a zero vat rate.

In addition various policies have had a negative effect on the revenue raised in certain areas. For example older larger engined cars have effective being put off the road by penal road tax rates and cost of fuel etc. This does have environmental benefits as newer smaller cars are more efficient etc etc. However the down side is that if everybody switches to a smaller car then there is a loss to the exchequer etc. Hence this money lost will have to be raised elsewhere. Indeed there was a article about this very fact in the SBP (If my memory serves me correctly) at the speed of change from larger cars to smaller cars.

The public have become very very sensitive to price/cost etc. Hence switching to smaller cars, shopping over the border etc.

Another area is property. With the policy of taxation on a loss for private landlords (75% of Mortgage interest offset) we are discouraging people to buy property. At a time when we have a oversupply of property, which needs to be shifted, only a fool would buy private property now. Indeed if the LP gets into Govt then further draconian policies will follow for private landlords which will result in the total death of the property market.

While I blame FF for a lot of the mess the total lack of any sense from the opposition parties has not helped the situation.

“if indeed I can believe that such a claim has been made; if it has, I haven’t heard it and you’ve provided no evidence beyond your say so”

Well, doubting Ernie, did you see the full page ICTU adverts in the newspapers yesterday?

Reply to Christy:

I made no argument that we should pay more to public sector unions in order to avoid public sector corruption .
I stated that reducing wages will narrow the gap between social welfare rates and what is paid to those in low paid Public sector employment.
Engaging in corrupt activities (such as backhanders) will in effect be incentivised as dismissal when detected which would result in social welfare payments that are as good and maybe better (in real terms as they are nt taxed) than the wages received as a PS worker.

I have worked in both public and private sectors .I worked in one production type job in the private sector which at the time was extremely busy.Orders were fast tracked for an extra fee ( a premium).This is market forces.

In the PS every job is treated with the same priority and is not linked to one person paying more than another for the exact same service.Someone who takes a payment to fast track a job over others in that environment is corrupt.
I have had practical experience of being offered money (bribes) for profferring preferential treatment when I worked in the PS and even had one guy stuff a wad of notes into my inside jacket pocket.
In every case I refused and reported the incident to my superiors.

What is a bribe in the PS is regarded as a natural response to market forces in private business.
If you impose pure market forces on the public sector then equally you need to be happy with the results.I can guarantee they will be unsatisfactory to most people.

@ E43bn

sorry, this is a NAMA thread right? Eh, actually, no its not.

At the risk of repeating myself (actually no ‘risk’, as i’ve answered all of these questions before and offered to prove them to a site moderator, but again, pesky ‘facts’ like these are meaningless in your eyes…):

Not telling you what bank i work for. It doesn’t benefit from NAMA, and i won’t benefit from NAMA (outside of NAMA stabilising the economy and financial sector in general). I have never “represented” anyone in anyway involved with NAMA or a political party, and the closest i’ve been to the current government was when Michael Woods called round to the house to pop in a leaflet. I’ve voted for FF, FG, PD’s and the Greens in recent elections. I also like long walks in the park and the smell of freshly cut grass. Oops, too much info…

My basic question was whether you were in the public sector or not, or what industry you might generally be in. Its a fairly basic and reasonable question, as everyones point of view has some relation to their own circumstances, but one i wouldnt have taken an issue with if you didn’t wish to answer it. However, as per usual, you have gone off the deep end in your search for the “NAMA conspiracy”. As previously suggested, seek help.

There is no “ideal solution” to the Irish banking problems. Nationalising them aint gonna suddenly make everything ok, and defaulting on large amounts of debt sure as hell aint gonna help to fund a deficit thats going to run up 50bn or so between now and the end of 2012. A bit of realism and acceptance that some bad tasting moral hazard medicine is required, are going to form part of the solution. Whether we like it or not we need a privately funded, owned, and operated banking sector to try and eventually reflate this economy once we have found a bottom. Destroying whats left of that private capital, most of it priceless external capital, is as counter productive as it is idelogueist. In every other country private capital is being enticed to the table, not being threatened with annihalation.

My five line solution to the Irish banking problems: split IRNW, merge good part with EBS/PTSB, wind down bad part, inject government capital into new entity, take 30% ownership. Take 50% ownership stakes in AIB and BOI, inject new capital, spin off non core assets, look for international partners/buyers in a 2-3 years. Split Anglo into good and bad, manage down the bad part, resurrect the good part under a new brand, focusing on SME lending. Eventually look for a situation 5 yrs down the road where less than 50% of the Irish banking sector is Irish “owned”. Use NAMA to prolong the property and capital loss adjustment to something closer to a decade rather than 18 months, let every mortgagee try and save & reflate themselves out of debt, or at least wait for a better personal bankruptcy process to be brought in to deal with the deluge that is teetering on the brink of it right now.

For all that is good and holy, i am not going to turn this into another (!) NAMA debate thread, and i wont be replying to any other NAMA related invectives therein. At this point it seems like im giving a screaming child some more sweets when we’ve always been taught that the opposite is the best course of action, but im simply not in the mood to keep up with your nonsensical and completely off topic rambles.

@ Michael Burke

So on reflation, are you saying, we should pile up the national debt for 3-4 years but the international recovery will not be plain sailing and as others have suggested, unless there is another property bubble, there will be no manna from heavan.

All the developed countries will be trying the reduce debt over the coming decade.

So we maintain a high cost base and remain uncompetitive within the common currency area?

Any ideas on how serious reform could help?

@Sporthog

“Can we really afford the time and effort to micromanage the salaries of everybody in the entire country?”

First, we are spending vast sums on public sector wages. Although I dont have figures I would suspect that the cost of analysing them is insignificant in this context.

Second, what is generally proposed is a reasonably broad cut across the public sector. Not much time or effort wasted there.

“We should return to basic economics, get the living and business costs down. Then salary cuts will be much easier for all.”

A key issue is that higher public sector wages are initimately linked to the costs you speak of. For sure, there are other important issues in addition to this, but to simply leave wages to one side…

@ Michael

Thanks for that.

I don’t disagree that gross cuts in public payroll will not achieve an equal cut in the deficit. Taxes on the public payroll must be taken into account. I think it is the job of the DoF to clarify net “savings”.

I agree also that there is a multiplier effect. Again the DoF should, at the very least, provide their estimate of the multiplier. I didn’t follow the thread on the multiplier so I’m speaking in ignorance here, but it strikes that an economy with very high levels of personal debt and a “fearful” psychology will have a low multiplier.

I don’t know anything about Belgium. However it would seem that the “stimulus” package in the US is not universally recognised as having provided a medium term solution. USA debt is growing to unsustainable levels.

They do however have the advantage of the reserve currency and if one is to believe some in the US blogosphere the Fed and Wall St are acting in unison to manipulate the yield on Treasuries.

Some above have pointed out that the bulk of our deficit is structural not cyclical. This is difficult to argue with.

I’m afraid I take an even dimmer view. I think there has been a global structural shift. We stand little chance of attracting FDI in the manner in which we have previously done. Global trade agreements have left the farming sector structurally damaged (from a local perspective). EU structural funds have or will dry up.

We don’t make cars, we don’t make flat screen TVs, we don’t make fridges or washing machines. We have lost our competitiveness in the field of manufacturing pcs.

We do have good pharma and medical devices and no doubt other areas of which I am unaware.

But I’m still left with the same problem. What sector of the economy will grow to repay the debt and at the same time sustain the current level of government expenditure? It cannot be the public sector because by definition money has to be borrowed to grow it or maintain its nominal (in money terms) output.

I do think that there is scope for income tax increases at the upper level (say €100k) and that an Alternative Minimum Tax Rate could achieve a positive outcome for the State.

The USA has such a tax so it can hardly be called anti enterprise.

Those who would say that the best brains and the wealth would leave are (in my opinion) talking their own book.

Lawyers practicing at the Four Courts cannot leave. Surgeons employed by the State cannot leave. Senior Civil Servants cannot leave. Highly paid politicians cannot leave.

An AMT gets over the problem of all of the tax breaks that have years yet to run.

Yes some like Denis O’Brien would leave. But they will anyway.

Some economists would have to do the sums. I won’t be holding my breath for the Minister of Finance to instruct the DoF.

@Michael Hennigan

OECD Education at a Glance 2008, p. 453.

You can download the data here:

http://dx.doi.org/10.1787/402280862627

On table D3.1 you’ll find data for teachers with 15 years’ experience. Salaries are given per net contact hour (teaching time) in USD using PPPs. Separate figures are given for primary teachers, lower secondary teachers and upper secondary teachers. If we simply take the average of the three, the EU19 average is 60 USD per contact hour. Ireland’s figure is 62 USD, below Luxembourg, Denmark, Korea, Germany Finland, Belgium and the Netherlands.

But that doesn’t stop the Sunday Independent from ranting every week about how Irish teachers are the best paid in the entire world. That honour in fact goes to the Luxembourgeois, who pay their teachers twice what we do per contact hour.

@Christy
NAMA is a huge amount of government borrowing. We are all discussing the deficit. Just because the government won’t call this borrowing and won’t include it in this year’s deficit doesn’t mean we should go along with them. As Karl Whelan has appointed out many times the country owes the NAMA debt in the same way as the national debt.

@Eoin
I am in the private sector. No interest business or personal
in NAMA. No connection to any political party and No business or personal connection to the public sector. Writing in a personal capacity not on behalf of anyone else.

@Mack
That’s the one, thank you.

“If we want to reflate, perhaps we should be concentrating on cutting employers PRSI, commercial rates, electricity costs etc and not defending superior pay and conditions for workers with safe jobs and gold-plated pensions?”
I couldn’t agree more.

@Greg
You wrote: “However it would seem that the “stimulus” package in the US is not universally recognised as having provided a medium term solution.”

I guess you missed this.

Headline: New Consensus Views Stimulus as Worthy Step.

Be sure to look at the multimedia graphics available here.

@ Greg,

About increased taxation measures above 100K.

I would agree with your comments about those who can’t really leave the country and those who can.

However it is the next generation who are leaving school and 3rd level now. We want to encourage those people to stay in this country and use their skills to create wealth and business.

If the next generation see Ireland as a place which offers poor value for taxes paid then we are only encouraging them to leave.

Raising taxes will help in the short term, but it will have a greater long term negative impact on the country. Basically tactical vrs strategic tax planning.

But if the tactical option was taken for the short term, what guarantee could be given that penal taxes on salaries over 100k would be only a temporary measure for a few years to help the country out?

I don’t believe the DOF would do this. Like the health levy which was supposed to be a temporary measure to aid the HSE it is now going to become a permanent feature of our taxation (as per CofTaxation report).

There is an old saying “Eaten bread is soon forgotten”.

What we need is reform. Like a alcoholic or drug user the only time change will occur in this country is when we hit rock bottom.

The fact that we are still able to borrow means we have not hit rock bottom yet.

@Ernie Ball

thanks for the links

Worth reminding ourselves that taxcuts are generallly less effective than spending increases at stimulating demand. Makes you think whther there should be more tax hikes and less spending cuts here.

@ Sporthog

“However it is the next generation who are leaving school and 3rd level now. We want to encourage those people to stay in this country and use their skills to create wealth and business.”

I don’t want to discourage enterprise or hard work. But, how many graduates of the last decade earn more than €100k?

“Raising taxes will help in the short term, but it will have a greater long term negative impact on the country. Basically tactical vrs strategic tax planning.”

If the long term is an issue put a sunset clause on the AMT and have that clause apply to the freeze in public sector basic pay. That way the rich (in income terms) have the same concerns as public sector workers which is a sustainable level of the use of the public purse.

It’s not up to the DoF but I agree that politicians can’t be trusted.

“What we need is reform. Like a alcoholic or drug user the only time change will occur in this country is when we hit rock bottom.”

We need a new social contract and a new constitution the corner stone of which should be that no sector in the economy nor group in society should be allowed a death grip around the throat of either the Sate or its Citizens.

There are two problems with that.

One, its politics not economics and this is not the appropriate forum.

Two, the chances of those you control changes to the Constitution allowing anything that radical are next to nothing.

@ Ernie Ball

Primary 15 years is $55K Ireland; Sweden $36K; Finland 45K; Denmark $40K; Switzerland $64K.

Salary per hour of net contact time (teaching); it’s not clear from this data how total hours worked compare – – including sports time, preparation etc

What is clear from the data is that Irish teacher earnings are among the highest in the OECD – – lower income tax rates has also been a big comparative advantage.

@All
Just a reminder that because Brian Lenihan says something doesn’t mean it is actually true. He is a politician. So when he says we need to bring down our borrowing it is not shocking to point to NAMA and say we are not bringing borrowing down at all. When he says he doesn’t want to repeat the mistakes of the eighties it doesn’t mean he is not going to repeat the mistakes of the eighties. He is just saying it e.g, he has been minister since May 08. A year and a half later we are still talking about expenditure cuts. The McCarthy report was published on July 16. For no apparent reason nothing was to be done until it was published. Nothing has been done since it was published. The Commission on Taxation reported on Sept 7. For no apparent reason nothing was to be done before it reported.
Since it reported there is talk of a carbon tax but it may be phased in etc.

What will happen in this budget? Judging by previous experience not all that much and we may be doing this all again next April. NAMA is THE initiative of this government. It is more than 13 times the savings of €4 Bn he is saying he will make.

@ Michael Hennigan

“are you saying, we should pile up the national debt for 3-4 years but the international recovery will not be plain sailing and as others have suggested, unless there is another property bubble, there will be no manna from heavan.

All the developed countries will be trying the reduce debt over the coming decade.”

The reflationary alternative is targeted at reducing the debt, by means of growing the economy. Consider what a govt. investment multiplier of 2.5 means. Under recessionary conditions only a fraction of the initial outlay has to return to the Exchequer (both in terms of taxation revenues and lower welfare payments) in order for the reflation to be self-financing, slightly more returns and it reduces the deficit by itself, even before second order effects are considered (and third, and so on). There are too the exemplary effects of government investment on private consumption and investment decisions.

There are surely negative effects on private sector investment and consumption decisions from a continual drip-feed of fiscal contraction.

Nearly all (other) developed countries are trying to reduce their deficits currently by medium-term reflationary methods. With greater immediate success than Ireland’s unique contractionary experiment.

@Michael Burke

“Consider what a govt. investment multiplier of 2.5 means”

Can you prove this?

Also what is the multiplier for tax cuts?

@ Ernie Ball

“Headline: New Consensus Views Stimulus as Worthy Step.”

The headline does not seem to reflect the content in the article. There seem to be calls for more spending. The first package was not enough.

I wouldn’t suggest that Governments spending money (or reducing taxes) has no effect on an economy. That would be silly. The question is, how effective will it be.

The graphics look impressive but with respect the last quarter of 2009 and the full year of 2010 haven’t happened yet. One of the three companies providing their view is Moody’s. Given the failure of the ratings agencies to do the most basic of things expected of them I will admit I take their “views” with a grain of salt.

There also must be a difference between a targeted stimulus package with measurable employment outcomes and not reducing public payroll.

Not reducing public payroll is not stimulus. It would have a deflationary effect but it is not stimulus.

In passing, I have noticed that some union leaders say that the introduction of the pension levy (yes a pay cut) contributed to the collapse in tax revenues. No doubt it did. But it is far more likely that the collapse of the credit bubble had a great deal more to do with it.

@ Ernie Ball

“Not reducing public payroll is not stimulus. It would have a deflationary effect but it is not stimulus.”

That should have read;

“Not reducing public payroll is not stimulus. It would avoid a deflationary effect but it is not stimulus.”

In some countries they control the public servants by targeting a few dispensable groups. In negotiations those groups are pushed into striking and once they are on the picket line negotiations slow to a crawl for at least 90 days and indefinitely if needed. The concept of “designated employees” is also useful, they are essential employees and if they go out they are “fined” one weeks pay for each day off the job. Of course political backbone is required to carry the strategy to a successful conclusion.

@Greg –

I suspect it’s an unknown, but it would be interesting to see whatever evidence there is..

The Constantin Gurdgiev article I posted up a link for above argues the multiplier is negative in Ireland for government spending.

@Michael Hennigan

You write: “Primary 15 years is $55K Ireland; Sweden $36K; Finland 45K; Denmark $40K; Switzerland $64K.”

You’re comparing tops of the scales not pay after 15 years. I don’t know why you think that’s the salient figure to look at. If you looked at the bottom of the scales you’d find that starting primary teacher salaries in Ireland are just above the EU19 and OECD averages and below Luxembourg, Switzerland, Germany, Denmark, the US, Spain, Netherlands, Norway, Australia, Korea, Scotland and England. In both lower and upper secondary, starting salaries are below the OECD and EU19 averages. If you looked at annual salary after 15 years, you’d find that Ireland’s salaries for primary and lower secondary teachers are on the high side while they are closer to average in upper secondary. But relative to GDP per capita Ireland’s salaries are below the OECD average at all levels.

I don’t see how one concludes from this that Irish teachers are wildly overpaid, let alone the highest paid teachers in the cosmos.

Contact hours is a suitable proxy for preparation although not for total hours worked.

Finally, the total annual teaching hours of Irish teachers are well above OECD and EU19 averages. Surely you’re not suggesting we just look at the salary and not the hours spent teaching, are you? If so, I’d like you to hire me. I’ll work for a mere €15,000 per annum (one hour per month).

@ Mack

I thought it would be close to 1 given personal debt and the fear factor.

Must have alook at your link.

@ Greg,

Maybe I did not make myself clear. I would agree with you about graduates making 100k. Obviously there arn’t any.

However I was trying to make the point that in the long term we want successful people making in excess of 100k salary. Obviously for a person who has left 3rd level or even a 2nd level school graduate it will take time for them to get their business plan rolling.

But there must be an incentive for people to take on risks, generate wealth and value for society by building up a business or inventing new innovations etc. If the incentive is taken away by penal tax rates then we are only encouraging these people to leave.

For example, a friend of mine who is in his mid 30’s is a qualified building services engineer. He worked his way up from Certificate level, to Diploma, to Degree over several years. Despite the fact that he is well educated he would be financially better off today if he never completed the Leaving Cert and just drew down the Dole for the last 18 years. Not much of a incentive is there. And unfortunately he is not the only one.

@ Mack

Not engouraging for stimulus promotors then.

“For a small open economy, like Ireland, the study found cumulative total fiscal multiplier starts with a negative (yes, a negative) -0.05 effect on economic growth and in the long run (over 6 years) reaches a negative -0.07. In no time does the average cumulative multiplier exceed 0.4%.”

I’ll have to read the link from start to finish.

Greg

I think your idea about a tax increase for the wealthy with an unambiguous commitment to scrap it in a specified time frame (perhaps two years) is worth exploring.

Probably lots of problems with it if you drill down into the detail but it could achieve a pressing short term fiscal requirement while hopefully not making it worthwhile for high earners to decamp to London, New York etc.

Given how progressive the Irish tax system already is, I think people are underestimating the risks to national solvency of a new Flight of the Earls.

@ Sporthog

“If the incentive is taken away by penal tax rates then we are only encouraging these people to leave.”

The object of an AMT is not to penalise the successful it is to ensure that those who are successful at tax avoidance pay at least a minimum level of tax.

From what you have said your friend would not be affected by an AMT.

It would seem that society does not place the economic value of qualified building services engineers much above the long term unemployed. If true, and I have no reason to doubt the anecdote, that is a sad state of affairs.

An AMT would not change that.

Nor would it change the fact that much of the investment in third level education over the last decade will be lost either to emigration or underutilisation.

First of all thank you to all the contributors on this site. It makes for very enlightening and good reading.

I thought I would ask a few questions:

There is talk about using fiscal stimulus, but with a deficit of 20B+ is that not one of the biggest stimulus in the world?

Personally I believe that increasing expenditure can stimulate the economy, but over the past 6 years living in Ireland, I am wondering if the rules are slightly different here. It seems that most of the increase in PS spending has gone straight to wages(which may have fuelled property bubble further?) and not any increased acitvity. Has there been any resaerch which compares the multiplier factor for PS spending in Ireland compared to other countries

I saw some newsclips on the different channels yesterday and I heard some peculiar statements:

1: A teacher stated that he made 51k a year, but that his take home pay was 950 every two weeks. That does not make sense, unless he is in a completely different tax jurisdiction (maybe Denmark) I am slightly disappointed why media does not challenge people when they make these claims to make their situation seem worse than it really is.

2: 55k workers on less than 30k, 75k workers on wages between 30-40k. 250k workers on less than 60k (which I guess means that there are 120k workers between 40-60k, and another 100k or so on 60k+ These wages were then referred as relatively low paid. Am I the only one who finds this slightly insulting towards all people who are happily working on these wages.

When I tell my friends in Norway how much the difference is in wages compared to their own wages, they simply cannot believe it, when you then include the relatively low tax and look at take home pay the difference gets even bigger. Is it time Ireland started considering paying PS wages comparable to similar economies and finances? Looking a bit from the outside it seems somewhat delusional.

Quite a bit off topic so I will stop here

@ Concubhar O’Caolai

“I think people are underestimating the risks to national solvency of a new Flight of the Earls.”

It is of course equally possible that people are overestimating it.

As an aside this is now the time to apply Capital Gains Tax to principle private residences. A tapering relief could be allowed for Stamp Duty paid in the last decade. The Stamp could be reduced to 2.5% for all transactions which might enliven the property market.

@ronan L & @greg: while a ‘no firing policy’ isn’t public, it was likely part of the re-capitalisation scheme, hence bank workers are protected, if they were genuine about wanting to get back to profitability they would have closed branches and sacked thousands by now.

@PS

I agree. The median salary in Ireland is circa €25k, to describe salaries twice that as ‘low paid’ is ludricous (and lazy journalism).

@ pera

“A teacher stated that he made 51k a year, but that his take home pay was 950 every two weeks.”

I heard that too. But to be fair to Vincent Browne he was doing a vox (or more correctly public service) pop.

In general you are right. The broadcast and much of the print media seem not to care much for the accuracy of the numbers they bandy about.

I heard today, yet again, that the State has a 25% stake in AIB and BoI. It simply isn’t true. It has preference shares with 25% voting rights in certain restricted circumstances.

@Pera

Above comment was for you mistakenly directed to @PS

@Greg

I think Pera means Prime Time last night. A teacher gave a dodgy fortnightly income (more likely gross weekly) and probably their monthly mortgage (without mentioning the frequency for the mortgage)

@ Greg

not against the CGT on private residence in principle, but the obvious flash point would come from the older demographic who could be in the same house for 30-40 years and were either thinking about trading down or selling the house to pay for nursing homes etc. Given the near riot that ensued at merely losing some of their medical card entitlements, i shudder to think what would take place if CGT on private residences was brought in.

@ pera

“2: 55k workers on less than 30k, 75k workers on wages between 30-40k. 250k workers on less than 60k (which I guess means that there are 120k workers between 40-60k, and another 100k or so on 60k+ These wages were then referred as relatively low paid. Am I the only one who finds this slightly insulting towards all people who are happily working on these wages.”

While there are no doubt some in the Public Service on low wages these figures make no sense to me.

If the 55 are on an average €25, and if the 75 are on an average €35, and if 120 (the balance of the 250) are on an average €50, the entire payroll cost for 250k people is €10bn.

If you allow €2bn for public sector pensions that leaves €8bn for 100,000 people.

I don’t believe it. I think these figures were provided by the unions and not questioned by the media, particularly Vincent Browne.

I think the figures refer to basic pay only and exclude overtime and a labyrinth of allowances.

@Mack
“I agree. The median salary in Ireland is circa €25k, to describe salaries twice that as ‘low paid’ is ludricous (and lazy journalism).”
Yup. It’s astounding that this is promulgated and accepted by all sides.

Just in case I have it wrong, the median salary is the one in which half the taxable units earn above that amount and half below it. The figure is from 2006. It may be lower now given some of the decline in earnings.

The ‘tax-the-rich’ crowd will be baying for blood when they find out that >50k is rich and it might even be >40k at this stage. In 2006, 28.29% of taxable units had a taxable income above 40k,
19.72% above 50k
14.07% above 60k

These figures are probably significantly down also (given the drop in PAYE, PRSI, self-employed income tax over the last two years).

So what constitutes the ‘rich’ segment of society? 15%? 20%? 30%?

Traditionally, it would have been 1/3 low tax, 1/3 average tax, 1/3 high tax, but the progressive tax system sort of throws that into a cocked hat.

@ Bond. Eoin Bond

“but the obvious flash point would come from the older demographic who could be in the same house for 30-40 years and were either thinking about trading down or selling the house to pay for nursing homes etc.”

That is one demographic I am thinking of.

Without being to morbid about it. If Granny has been living in a four bedroom house in (say) Dublin 8, which was bought for £5,000 and is now “worth” €500,000, the State could pick up €100k on Granny selling the house on going into a nursing home. The tax liability could be deferred until Granny dies. If she needs the €100,000 for nursing home or care costs in the meantime then fair enough, the State gets nothing.

If Granny dies in the house she won’t care about the CGT liability. As there is no mortgage Granny’s heirs will still share €400,000. If they believe that they are more entitled to the €100,000 than school children and the unemployed they have no sense of social justice and if things keep going as they are might end up meeting it.

“# Frank Galton Says:
November 24th, 2009 at 5:56 pm

Since the pension levy is effectively a pay cut, why was it not done as a pay cut? Because FF was still playing electoral politics. If it was done as a pay cut, they would have had to cut the retiree pension benefits that are linked to current pay levels, and that would be a lot more people mad at the government.”

Not quite. If you can cast your mind back to the decision to implement the pension levy, the public sector pay agreement (agreed in the previous september) was still in force and was discarded at the same time as the pension levy was brought in. The Government (as employer) met the unions for a week to discuss reforms, but only revealed their intention in the late evening of the final day of talks -a complete farce. Of course, unilaterally walking away from an agreed pay agreement and implementing unilateral cuts usually means a trip to the labour court, but because Public sector pensions are defined benefit schemes (i.e. it’s paid out of current funds without a discreet pension fund structure) the government avoided this by simply applying a pension levy instead, which is paid directly into the exhequer. As the employer in this case is the government, they were able to pass legislation (Financial Emergency Measures in the Public Interest Act 2009) which made this all legal. A private sector employer would not have been able to do this.

@ Greg

no so much worried about 95 year old grannies as 65 year retirees wanting to move out of Dublin or simply to a smaller house. The relatively middle class ones kicked up an unholy fuss with a medical card worth a couple of grand, so i can only guess how they’d react to a couple of hundred grand being charged on them. You’d also have the issue about how to deal with any home equity withdrawals used in the last few years. Like i said, not against your idea in principle, actually quite fair and broad based, but just think the politics of it will prevent it ever gaining traction. The younger generation might like the opportunity to take negative equity-related CGT offsets with them into the future i suppose!

It seems to me, that most private sector cuts have not been in the form of pay cuts or in lay offs -but mostly in reduced hours. That seems the most sensible option for most businesses, and reasonably fair. It also means they will be able to scale up again quickly when things turn around. I think that reduced hours, or unpaid leave would be a fair approach to take to public sector workers too -budget savings, some time-off in return for the pay cut and maintaining the possibility of scaling public services back up when things improve.

@ Bond. Eoin Bond

They would be paying a Stamp of (say) 2.5%.

I would assume that they are making a lifestyle choice. Also, they are unlikely to a mortgage.

Senior home equity loans could be handled by deferment of CGT until death (at a favourable interest rate).

Like I said, don’t want to get to morbid. But the State has to get off Stamp Duty as a source of revenue. Now is the time to replace it with CGT on residences.

@ tommy tighe

“Financial Emergency Measures in the Public Interest Act 2009”

Yeah. They’re so full of Public Interest sometimes it takes my breath away.

This is a side point, but worth making: The pensions levy is effectively a pay cut, unless you are close to retirement. For people close to retirement, there is a big difference.

If your salary is reduced by 10% one year before retirement, then your salary for that year and your pension thereafter are both reduced. If there is a pensions levy at 10% then your effective salary for the last year is reduced but your pension is not affected.

Lots of arguments on the rights and wrongs of it eg: Pensions are accrued rights, which should be protected. The pensions levy will hit junior staff harder, over the long term, than their bosses who are close to retirement.

@Greg
“Now is the time to replace it with CGT on residences.”

CGT is still a transaction based tax just like stamp duty. No transactions, no tax. A property tax would be more sensible for smoothing income from property.

On death there is capital acquistions tax for the beneficiaries which will include any gain on the house. You could reduce the exemption threshold for children if you want a higher tax take. Don’t think this one is going to go very far in sorting out the mess.

@ Stuart Blythman

Let me see if I understand you correctly and correct me if I am wrong.

“No transaction, no tax.”

I think you are incorrect in conflating a transaction tax with capital gains or losses.

If (as a smoker) I buy a packet of 20 from my local I pay a transaction tax. I as the purchaser give the retailer the tax. The retailer then forwards the tax (he/she has not paid it, I have) to the State.

That is a transaction. One in which I have no possibility of avoiding unless I wish to evade (a criminal activity) the tax by buying the pack of 20 on the street or shopping for my smokes in Newry (a legal avoiding enterprise a smoker cannot refuse).

That Stuart is transaction. It is as you correctly point out just like the Stamp.

A tax on capital gain is an entirely different matter. Certainly (State) revenue on a capital gain requires a transaction, but it also requires a capital gain.

I cannot think of any tax revenue that the State accrues without a transaction occurring.

PAYE? PRSI? VAT? EXCISE? DEATH? AIR? (Yes the State has managed to convince you that the air you breathe is subject to a Carbon Tax).

Let me be absolutely clear Stuart the State requires a transaction to take any tax. Without a transaction there is no tax. If the State cannot observe (the transaction) it cannot tax.

Of course the collection of a capital gains tax requires a transaction. It also requires a gain.

(As an aside, any Fascist or Communist State can collect tax without transaction. It’s called confiscation).

“On death there is capital acquistions tax for the beneficiaries which will include any gain on the house.”

You are incorrect. CAT does not charge the gain (on the house) it takes tax on the transaction of the dead to the living. It is an asset based tax transaction. Any losses on the assets (the house) are not taken into account in assessing the CAT.

A child of the deceased is entitled to a “tax free” amount of more than €500,000. For a family of five that would be €2,500,000 tax free.

If Granny left a house to her five children with a value of €2.5m the State wouldn’t get a penny even if Granny bought the house for €25,000. Did Granny earn that money. No. The State has provided the circumstances in which Granny’s house is worth €2,500,000. Granny and her children didn’t contribute to the Granny’s capital gain.

“Don’t think this one is going to go very far in sorting out the mess.”

I don’t think this will “sort out the mess” either Stuart. I doubt if Granny would think it would. She had enough sense to know not to get into the mess. Her children are the ones who created it. Granny won’t mind if the State takes 20% of the value of her house when she’s dead. She’s disgusted with the selfish spawn she bore. It’s her grandchildren and great grand children she is concerned about.

The point is Stuart, the State has to get away from the Stamp.

@ casimir

“The pensions levy is effectively a pay cut, unless you are close to retirement”

You worked it out then casimir.

When the Celtic Tiger got old and wasn’t able to hunt it ate its young.

@Greg
“The point is Stuart, the State has to get away from the Stamp”

That’s where we agree. My point on CGT is the amount you collect will depend on how many transactions there are which is the same as Stamp. A straight property tax comes in each year regardless.

With CGT Granny or anyone else for that matter can choose not to trade down or up. I presume the tax will not just be aimed at senior citizens. So I bought my house for €60k, it is worth say €400k (maybe less now). I think of buying a house for €600k. If I sell my house for €400k, I pay 22% (maybe higher soon) on €340k, roughly €70k. That’s higher than the current stamp duty and I decide nah I’m not doing that and stay put. The government collects no tax. The same holds true as years go by and I decide to trade down to a house/apartment costing €300k. It’ll cost me €70k on the figures above and I decide stuff that and stay put. The government collects no tax.

With a straight property tax no transaction is required in the current tax year just the original one where you bought the house which could be 20 years ago. It will raise a lot of money and will be fairly certain year on year. The first couple of years will require a fair bit of administration but it will settle down after that.

My point on CAT is you can reduce the threshold to nil if you want and collect tax on the full value. But now property tax is based on people dying which I assume is a fairly constant number but it won’t collect as much as a property tax.

@ Stuart/Greg

CGT on principle private residence seems a non runner politically, and also practicality-wise on anyone with even a modest amount of equity in their home. As such, it could be better dealt with via CAT changes.

@Eoin
Yeah, the great CAT massacre of a few years ago when the exemption limits were vastly raised ranks up there with much of the ‘sock-puppet for the rich’ bad decisions that have been made.

@ Mack & Greg

In an early post on this thread I cited a variety of sources for the proposition that the highest multiplier is attached to government investment and that this has been estimated as high as 2.5.

The DoF did provide its previous estimates of the multipliers (PBO p.20) of 1.1, but admitted that these had been completely wrong in the recession and that a 13% decline in output had led to a 32% decline in tax revenues (a ratio of 2.46). Yet its method for ‘analysing’ the cuts is to remove a sum from government spending and, hey presto! it’s a saving. No wonder the Budget ‘fixes’ don’t work.

This is the same govt. that stands alone under the banner of fiscal contraction while the rest of the world flocked to reflation.

Sorry Michael Burke, under NAMA I think its 4 Billion allocated to funding finishing out of projects, plus a very considerable sum in rolling up of interest… I wonder what the multiplier will be there….suspect it will be strongly negative…. it does actually matter what the money is spent on, so come up with something solid….

Your argument is with NAMA…. the banksters have replaced the public sector unions as the preferred Social Partners, and theres 54Billion of reflation being wasted there, the money isnt there to waste more anywhere else.

You’ve been dumped.

@ Stuart

Have both. A local government tax, property based perhaps. The CGT would go to central government.

I think you’re right about people not trading up or down. Maybe not a bad thing Stuart. We might as a society stop trading our homes as if they were investments. Could be good for building communities not bubbles. Anyway you could allow transaction costs against the gain.

It’s probably worth considering that those trading up during the boom did so in the face of significant Stamp. It didn’t stop them, because they had large gains with which to pay the Stamp.

In your example I would suggest that the “price” of the house you buy would be reduced. If you have less of a gain with which to trade up so does everyone else in your position.

@Greg
“In your example I would suggest that the “price” of the house you buy would be reduced”

I think you’re right. My personal view is houses are still overpriced driven up by low interest rates and over generous credit and irrational expectations of capital gains. Not sure if it’s a popular viewpoint but time will tell.

The people you really want to get for windfall profits are those who sold land and sites in the period around 2005-2007. They creamed it and unless they reinvested in property speculation are the ones who really gained from the property boom along with the few developers who got out at the right time. Maybe we will have to wait till they die but they might have shifted offshore by then.

@Michael Burke

That would be these papers – “(Benetrix&Lane, ESRI, Eichengreen et al, IMF researchers, EU’s QUEST model, etc., etc.)”? I’ll try and hunt them out?

To get more info on this (as a layman trying to understand it).

If the multiplier from government spending is 2.5, would that not imply a theoretical maximum for government spending of 40% of GNP (2.5 * 40 = 100)? As raising spending at that point by borrowing would increase GNP proportionally, so as to maintain that ratio (and as spending increases the relative impact of other economic activity would trend towards 0%)?

How do we square that with gross spending at 55% of GNP? As Constantin Gurdgiev argues that would also imply that limitless spending could be financed by limitless deficits?

Is it fair to say that the multiplier is variable depending on the context & conditions? If so, isn’t this the core of the debate we need to have to determine whether or not reflation is possible?

@ Stuart

I think houses vastly overpriced. They are being manipulated by the government in a desperate effort to forestall repossessions. The sight of redcoats dragging starving children from their homes wouldn’t go down well with the peasants. So we’ll let them pretend that they have not bankrupted themselves by buying a property at 10 times their salary over 40 years. Easy done. Just write a strongly worded letter to the banks telling them not to repossess properties for 12 months.

No mention of the compounding effect of interest. Let the peasants dig a bigger hole for themselves.

The banks, well known for their social conscience, will recognise their civic duty and comply. Of course it will also allow the banks to pretend that the residential mortgages on their books are actually worth par.

Market values will return. A debtors revolt is not out of the question.

@Michael Burke

Doing a bit of research on this, according to this article on FinFacts capital investment fell 34.1% in the year to April, while consumer spending fell 9.1% while net exports over imports actually rose.

http://www.finfacts.ie/irishfinancenews/article_1017047.shtml

Would that imply that any reflation should be centred on the government Capital Investment program and encouraging businesses to invest with tax breaks rather than on maintaining current spending? (Especially seeing as much of current spending is in turn being spent outside of the state by it’s recipents? Reducing current spending will reduce imports and contribute to a rising GDP?)

@ Mack

Below are all the references I mentioned.

The multipliers (or estimates of them) will differ because of objective circumstaces of each economy and over time, while the subjective estimates will differ depending on the assumptions contained in the model.

An important distinction: The 2.5 applies to government investment, not all government spending, where the multipler is held to be lower. But if the 2.5 were applicable to all govt. spending the relative weight of the state would decline, as the non-state economy would be growing faster 1: 2.5.

Nearly all models suggests the following; multipliers operate most effectively when there is an output gap, when access to credit is constrained and when there is a monetary accommodation. All of these conditions currently apply.

http://www.tcd.ie/iiis/pages/publications/discussionpapers/IIISDP281.php

http://www.imf.org/external/pubs/ft/spn/2009/spn0903.pdf

http://www.nber.org/papers/w15524

ec.europa.eu/economy_finance/…/publication12918_en.pdf

http://www.esri.ie/publications/search_for_a_working_pape/search_results/index.iew/index.xml?id=2756

@Michael Burke
“The 2.5 applies to government investment, not all government spending, where the multipler is held to be lower.”
So what you are saying is that we should borrow to fund infrastructure, not current spending?
Can’t argue with that 🙂

So, how do we cut current spending and direct our borrowings to more productive capital investment. HSE managers digging ditches? Clerical officers driving diggers?

Perhaps there might be a use for FAS yet… put the economy on a war footing and use the existing permanent staff to rebuild the country…

@Michael Burke and Yoganmahew

That (capital investment) looks to be the area where there is grounds for consensus. We need to get people working again, and given the heavy layoffs in construction we probably have a lot of skilled workers who could work on infrastructure projects (at less cost to the state than a couple of years back).

Is there political will on the left and right, to put the needs of the outsiders / unemployed) above the desires of those with safe jobs to maintain income levels?

@ Mack

It would be heartening to believe that there was an emerging consensus on the beneficial effects of government investment. However, this seems set to be an area where the government will actually cut spending in the next Budget, according to the PBO.

And, if the task at hand is to reflate the economy, then cutting public sector pay and/or jobs makes no sense; that is contractionary. It is akin to trying to fill a bucket of water after you have punched a big hole in the bottom of it.

@Michael Burke –

“And, if the task at hand is to reflate the economy, then cutting public sector pay and/or jobs makes no sense”

Ya see. This is where you loose people.

That’s simply not the case. We are borrowing huge amounts of money, private sector workers are having their income slashed and are facing redundancies. With a limited spend and a goal of limiting borrowing it makes sense to prioritize investment that will create jobs over maintaining the income levels of those with safe jobs.

By choosing to defend the insiders pay and conditions in an economy with deflation, the progressives have lost the chance to build consensus around stimulus programs that will create jobs. In effect the left are choosing to protect the priveleged at the expense of the weak.

By default, it appears, (Irish) mankind will be crucified on a cross of Euros.

Debt deflation it is for the outsiders as the grand Wizards seem determined to protect the Wicked Witches of the East (Bankers) and West (Public Sector) at the expense of everyone else.

http://news.bbc.co.uk/2/hi/uk_news/magazine/7933175.stm

@Mack
Indeed, it appears that capital spending will bear the brunt of the adjustment. Income 32 bn, spending 73.4 bn including 10ish bn of capital spending. Savings to be made? 12 bn over three years. Will capital spending be wound down in addition to this or as part of it?

What has become of worship for the market? Most of the functions carried on by the public sector can be privatized. Take New Zealand. The loss is of loyalty to the government, but in a country like Ireland the more whistleblowers we have the better?

The time is now, for it is a shame to waste a crisis. The public service actually has plans for this. But by destroying the illusion (or worse, the reality) that a TD can get a job for someone, TDs etc do not like the loss of control and the greater transparency obtained!

Governments distort all markets and as we have seen they are not very good at making the distortions palatable to the majority. They end up giving more than just crumbs to their cronies.

The less effedct that they have on the economy, the better. Use the web!

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