There has been extensive discussion on this blog and elsewhere as to the cyclical/structural split in the Irish deficit, likely to be 14 -15% of GNP this year, and roughly the same in 2010 if the December 9 budget achieves the €4 billion adjustment to which the government is committed.
A portion of the deficit will be eliminated as the tax/GNP ratio is restored in a recovery, whenever it comes. But most commentators seem to be agreed that the structural component dominates, and will endure indefinitely at well above anything the Stability and Growth Pact, or lenders, will permit.
So permanent measures are needed to deal with this permanent component of the deficit. I don’t wish to start a debate about how big this component is – let’s pretend we all agree that it is, say, 9% of GNP. Government revenue needs to be raised, or spending reduced, by 9% of GNP over a period of years through specific, and permanent, policy actions.
This evening’s news reports suggest that a portion of the public payroll adjustment is to be achieved through a manouvre involving unpaid leave for public servants, which would achieve a cash saving in 2010. Twenty days out of c. 220, if that is the formula, would yield a big cut, perhaps most of the entire €1.3 billion being sought from this expenditure heading. But to qualify as a contribution to eliminating the 9% of GNP structural deficit, it would need to be forever. And if it is compulsory, and forever, it is a pay cut. An awkward pay cut to implement and monitor, and entailing a commensurate reduction in employee time input, to which there must be output costs.
If it is compulsory, but only for 2010, it is of no value in the context of fiscal consolidation. The government might as well place a temporary surcharge for a year on some item of tax revenue, and it all has to be done again, from scratch, the following year.
Winston Churchill remarked once:
‘It is not always enough to do our best. Sometimes we have to do what’s required.’