In the absence of reliable information on the details of the proposed deal, an overall evaluation is not feasible. However, there are several key issues to consider in interpreting the deal that wasn’t.
At one level, it is remarkable that the broad parameters of the required fiscal adjustment seems to have been accepted on all sides, such that there was a common overall objective. This should not be taken for granted and is a tribute to the social partnership process – it is possible to envisage ‘alternative universes’ in which the union movement adopted a more rigid attitude and failed to take into account the overall macroeconomic and budgetary situation. This also provides hope that a deal may be feasible in the future.
However, there are some fundamental problems with the union position. The main point of resistance seems to be that the hourly rate of standard pay (or pay per ‘unit of effort’) should not fall. Under this approach, beyond the savings from proposed changes to normal working hours that should lead to considerable savings in overtime payments, the balance of the required adjustment has to take the form of a reduction in aggregate work hours. The decline in aggregate work hours can be achieved through some mix of unpaid leave (the focus of the plan for 2010), the continuation of the recruitment embargo and the various other schemes that have provided incentives for individual public sector workers to reduce the level of work hours.
On RTE radio today, Mr Begg justified the use of ‘short time’ working by citing its prevalence in private sector adjustment in Ireland and elsewhere. However, there are some major differences. First, ‘short time’ working and partial capacity utilisation in the private sector is typically deployed in response to a decline in demand for the output of the industry or firm in question – it makes no sense to continue a high level of production if there has been a substantial downward shift in demand, since over-supply will just drive down prices and/or reduce profitability.
In contrast, there is no such downward shift in demand for public services in Ireland (indeed, if anything, there is chronic under-supply of public services in many lines of activity). Accordingly, it is not appropriate to deploy ‘short time’ working as a general adjustment measure in the public sector.
Second, the level of public services can be better protected by achieving a decline in the hourly rate of pay – the more can be done in terms of a downwards shift in the pay rate, the more aggregate work hours can be delivered. In this way, in combination with extensive public sector reform, the prospects for transformation of the public sector would be enhanced by a decline in the pay level.
Another argument that has been applied in opposition to a pay cut in the public sector is that pay cuts are not so prevalent in the private sector. However, many of the real and nominal rigidities that deter pay cuts in the private sector are the result of the highly-decentralised pay process in the private sector, leading to an inefficient response to macroeconomic shocks. Indeed, that is a core rationale for activist monetary and fiscal policies – the decentralised market outcome leads to excessively high unemployment in response to adverse shocks.
These conditions do not hold in the public sector, especially under coordinated pay bargaining – the union movement and the government should be able to internalise the overall macroeconomic environment and recognise that a pay cut can be the efficient response to negative macroeconomic developments and offer a superior outcome to the alternative of undesirable reductions in aggregate work hours.
Moreover, the distributional impact of pay cuts is more attractive than the alternative by allowing the maintenance of a higher level of public sector employment, rather than shifting the burden of adjustment onto those public sector workers whose contracts expire and those will be frustrated in their plans to pursue public sector careers by a recruitment embargo.
As I have repeatedly written about, the necessity of downward wage flexiblity is essential for small member countries of a monetary union. Negative macroeconomic shocks will often require a real devaluation in order to restore full employment: inside a low-inflation monetary union, this can be achieved at lowest cost in terms of unemployment through a reduction in wage levels. The idea that wages can only be adjusted upwards is not sustainable under EMU.
It is also important to appreciate that a resistance to wage cuts during the current crisis will also carry long-term costs for future pay settlements in the public sector. In particular, a forward-looking government should be very reluctant to grant significant pay increases in the future if there is no ‘escape clause’ by which wage gains can be clawed back in the event of a large-scale negative shock.
Finally, the focus here on public sector pay should not deflect attention from wider policy issues. In relation to attaining real devaluation, a deal with the public sector unions that enables improved productivity in the public sector constitutes another source of a decline in the equilibrium real exchange rate. In addition, the government can do much to foster wage reductions in industries in which it exerts considerable control. Similarly, it can go further in reducing fee levels in those professions that rely heavily on the public sector as a source of demand. More broadly, tackling monopoly power across sheltered sectors of the economy will further help to engineer widespread reductions in prices and wages.
In relation to fiscal adjustment, the public sector paybill represents only one dimension of the overall adjustment. Other spending categories face considerable cuts, while the tax/GNP ratio will have to rise considerably in the coming years.
The scale and multi-dimensional nature of the economic and fiscal crisis does call for a collective effort in its resolution. As such, social partnership still has a lot to offer – however, an insistence on the ‘nominal fetish’ of no reductions in the rate of pay is not helpful.
52 replies on “The Public Sector Pay Non-Deal”
I think you are overstating the degree to which the unions accepted the need for fiscal adjustment. The essence of their proposal is: no cuts in base pay, and overall deficit adjustment to Maastricht spread out till 2017. In other words, they think that the shock is either temporary, or that some other benign event will show up in the next few years that will offset the need for any further adjustment. And in one sense, who can blame them? The Eurozone (low interest rates) and the property boom bailed them out when Celtic Tiger Mark I had lost steam by 2001. The rest is history.
@Philip Lane
“However, many of the real and nominal rigidities that deter pay cuts in the private sector are the result of the highly-decentralised pay process in the private sector, leading to an inefficient response to macroeconomic shocks.”
This is true. But I would have thought that the partnership process provided a mechanism to reduce wages – public and private – across a vast segment of the economy. You yourself acknowledge the realism shown by trade union negotiators. This in turn would have reduced wages in non-unionised businesses quite quickly. The protected sectors could have been tackled simultaneously.
I am deeply sceptical of the notion that unilateral paycuts in the public sector would trigger off paycuts in the private sector – especially if it is maintained that the public sector is overpaid. Surely then the private sector workers will just shrug and say “well, now they’re slightly less overpaid, but that’s no reason to cut my wages.” I can’t remember Margaret Thatcher ever doing this and you couldn’t have accused her of being too in favour of the public sector or not radical enough to try it.
First the government introduced a spontaneous pension levy – but everyone knew it was a paycut. Now they want to cut public sector pay again. Originally proponents of this idea said private sector wages generally were falling – they weren’t for the reason you highlighted. Then they said that public sector pay was too high, especially at the low levels (in code, you’re particularly undeserving so be grateful for what you have but we probably won’t cut you as much). But the trade unions disputed this. So finally they say, well, you have job security – but we had full employment and FF/developers wrecked it. FF TDs should face a special 90% levy reflecting the amount of job insecurity and misery they have caused everyone else.
The whole idea sounds more like the sort of free market policy that turned Russia into a basket case. Our country was already in the hands of crony capitalists. Now, we have resolved not to pay our public servants, and public servants only, their agreed wages, while giving €65 Bn to developers and bank investors. We’re getting closer to Moscow than Berlin all the time.
It is time advocates realised that multiple unilateral public sector paycuts are a terrible idea. Like NAMA, which many supporters also advocate, they won’t work and will cause massive economic damage. Their worst result so far has been to completely alienate the public sector’s unions and workers when they were offering to negotiate far reaching changes. They have also allowed FF/Developers to escape the blame for destroying us and put it all on public sector workers, as well as leaving consumer confidence in the gutter. They have allowed them to kill all hope with NAMA, whose predicted losses of €65Bn (Morgan Kelly) are looking more certain by the day. Finally, they have poisoned the national bloodstream and divided the country for years to come.
It is now time for advocates of the flawed policies of NAMA and unilateral public sector wage cuts to admit they were wrong, apologise unreservedly and ask wiser people like Kevin O’Rourke and Morgan Kelly how we can all agree to lower our wage costs and repair our banks at minimal cost.
@E65bn
I don’t understand why you make the point that ‘the partnership process provided a mechanism to reduce wages – public and private – across a vast segment of the economy’. It reads as if this is a desirable outcome when of course it isn’t. Even those who believe private sector wage cuts are required to restore competitiveness would argue (I hope) that such wage cuts would be in targeted potentially vulnerable sectors rather than across the board.
However your post reads as if you’re treating the entire private sector as a single monolith, the ying to the public sector’s yang. Wages should be a matter for individual companies and should never have been part of ‘partnership’ in the first place. If companies are uncompetitive and wage cuts are seen as part of the solution then that’s a matter for that company and its employees. It’s no business of government (with the obvious caveats) and it’s irrelevant to what’s happening in the public sector
@ Philip
“At one level, it is remarkable that the broad parameters of the required fiscal adjustment seems to have been accepted on all sides, such that there was a common overall objective”
They accepted that the government had a problem. I should hope so. They should have been delighted that it was only 1.3bn of adjustment that was being sought. However, it quickly became apparent that the strategy was, do anything rather than concede any reduction in pay.
There are plenty of commentators who say, what is required is a 20% cut in public sector pay and a substantial cut in numbers also. Many people in the private sector agree and hence were enraged by Cowen and the unions wish to fudge.
I was at the “Fiscal Adjustment and Re-balancing the Irish Economy” November 26th in the Royal Irish Academy. I was amazed to hear Mr. Blair Horan of the CPSU say that, when they asked Bertie Ahern for 600m in 2000 they were handed 1.2 bn instead. The following year they did not make the same “mistake” and asked for “the one” they got 1bn. I was thinking, is this what Jack O’Connor calls “a negotiation?” You ask for something and are handed double, it defies logic, small wonder that people saw social partnership as cosy partnership.
I studied and specialised in Industrial relations at the N.I.H.E Limerick many years ago, but even I was shocked at the laxity of this profligate approach.
Peter McLoon has said that there was a “transformational” offer on the table and that it was a pity it was rejected as this was what had been recommended by the OECD in their vision of the public services. He said, what was on offer were unspecified changes in work practices combined with unspecified efficiencies and flexibilities and that these would contribute to massive savings after 2010. All very vague.
What was benchmarking all about? I thought at least some of these restrictive work practices would have been purged from the system then. Of course they were not, and McLoon is admitting this by saying, massive savings can be made. It begs the question why not make them? What are they waiting for? The country to really go bust. He is surely aware that unfunded accrued liabilities for pensions alone are in the region of 108bn according to the Comptroller and Auditor-General (2009). The unions seem to take an extreme view that these kind of problems have nothing to do with them, social partnership is only a one way street.
Meanwhile, in the economy outside of the public sector, jobs losses have risen at an alarming rate. From Q1 2008 to Q2 2009 alone 216,000 jobs have been lost according to Colm McCarthy figures quoted at the same event. Small wonder then, that there was such a sharp and swift reaction. It appeared that far from the “pain being shared”, that it most definitely was not being shared. Meanwhile, Capital programs have been slashed. The 10bn to complete NAMA projects will be used to fund the failed and ill-conceived bubble projects and will only serve to increase the supply side of the equation. Can anyone name one NAMA project that needs to be completed for the national good? No government funding then for Metros’ Dart underground or School building projects on an appropriate scale. The Dart underground should be started immediately even if it is to be built and funded completely from private sources which is entirely possible.
@E65Bn plus economic costs & NO extra lending
“multiple unilateral public sector paycuts are a terrible idea.”
I fully realise the difficulties these cuts are causing. People with mortgages, all sorts of commitments entered into on the assumption of income levels. I have many friends in the public sector, including my two sisters that teach in primary schools who keep me informed. The cuts certainly are not pleasant but many feel that, salaries on the way up were unilateral decisions given the symbiotic relationship of government and unions. In fact, some people myself included, felt that it was decidedly undemocratic. I disagree with union negotiations being carried out at Leinster House. There are numerous buildings available even Liberty Hall. NAMA is definitely in the undemocratic category and could well spell economic suicide. You are 100% right, it will be the most divisive force in Ireland for as long as it exists. Lenihan in designating all banks systemic forgot that it should have been the State first and banks second. Anglo, certainly was not systemic as Morgen Kelly pointed out again and again. The situation is still very fluid.
I am not sure if non-economists have a “license to post” on this site, but FWIW I am not much convinced by PL’s post above.
The post appears to suggest that the unions negotiations with the government were over an employment/ wage trade-off in the public sector, so that current workers gain while those on contract or at the start of their careers lose out. But that is not the case. The unions were negotiating within the framework of the government’s employment embargo and neither the government nor the union’s proposals would have ended that embargo. There will be no continuation of contracts or new careers authorised under the 6% pay cut regime which may arrive on Wednesday. The policy analysis should I think focus on the advantages or disadvantages of the two alternatives actually under consideration.
Once we restrict ourselves to those two alternatives, it’s far from clear that the unions’ proposal – management reforms which would save real money (like the 8-8 day in the hospitals, and what have you) with a 4.6% pay cut in year one ‘refunded’ by extra days of leave in years 2-4 – is worse than the government’s. It should have several advantages even to the most hard-hearted cuts-and-adjustment-orientated finance ministry wallah.
First, the 12 days leave would have applied across the board, allowing cuts to the income of low paid workers in the public service, where the pay premium for the public sector is highest, something that may be extremely difficult for the ministry of finance to do unilaterally. Second, the money savings options from overtime etc changes will be difficult to implement unilaterally, and should therefore be pocketed when offered. They can also both save money and contribute to lowering the real exchange rate, as PL recognises. If I had been in the Taoiseach’s office, my advice would have been to take these now, come back with the unilateral cuts the following year after the new system was in place. Third, the post above demonstrates no understanding of the advantages – including in terms of actual adjustment and Ireland’s reputation if you like that expression – of avoiding a massive wave of strikes. All we need is a few days of strikes and we’ll have the ‘short time’ outcome anyway. In these times when the government wants to cut social spending and public sector spending, and for several years to come, having the unions committed to an agreement with the government offers the advantages of divide et impera at a difficult time.
In short, one can accept the thrust of PL’s policy objectives but still see that the relative advantages of the unions’ proposals and the government’s likely approach are much more finely balanced that PL suggests above.
“In contrast, there is no such downward shift in demand for public services in Ireland.”
There is surely a decline in some areas, e.g.:
– Capital Taxes, Stamp Duty and Excise sections of the Revenue Commissioners;
– Planning and Development departments of Local Authorities;
– HSE administration posts.
There should also be a decline where online services have been used to reduce workloads.
Should departments and sections which have increased productivity be rewarded now by Govt favouring a reduction in hours rather than a reduction in pay?
I heard David Begg saying that a huge opportunity to improve the Public Service had been lost. I always assumed that all workers, public or private, were dedicated to improving the efficiency and quality of output of their organisation, or that they at least had to pretend to be so dedicated! I was surprised by the unions admitting that some workers may have been unco-operative to date in transforming public services. I knew it was going on but I hoped that conscientious PS workers saw it as a dirty secret.
However, if it is the case that there is no reward for increasing efficiency and all sectors of the PS benefit equally (as demanded by unions) notwithstanding that some have way outperformed others, then one can understand why there is a reluctance to co-operate with reform without up-front rewards. Perhaps now is the taime to reward some sections of the PS for exceptional improvements in delivery of services.
“Another argument that has been applied in opposition to a pay cut in the public sector is that pay cuts are not so prevalent in the private sector.”
Just how reliable is this data and are we really comparing like with like? Many public service operations are analagous to professional services organisations or managerial roles. It is hard to credit that such private sector workers have not taken cuts. Should all manufacturing and industry wages be discounted?
Also, is the non-payment or reduction in bonuses which make up a large portion of certain private sector remuneration counted in these statistics? “Bonus” is a misnomer which means pay related to performance of the company and the individual.
What is beyond doubt is that many self-employed people are not accounted for in the statistics. Certainly it is far easier to get appointments for consultants and medical therapists in certain areas. One can only assume that their income has reduced.
I suggest that revenue should be provided with job categories for PAYE workers and self-employed people so that this information is available in the aggregate in future. If pay reductions are an important feature in EMU then we need the information and information systems to monitor this.
I also think that it should be noted that there are legal impediments to reducing pay in the private sector. A private sector worker has the right to demand redundancy rather than accept a pay-cut even if the majority of workers of the same grade have opted to accept the deal. This is, in effect, an statuory upwards only pay clause for private sector workers. It is no wonder that private sector employers opt to make swathes of people redundant. The cost is definite and people can be dealt with uniformly.
@ Philip Lane
What is the best estimate of the impact on GDP of a €1.3bn cut in public sector pay? Given the unavoidable negative effects on taxation receipts and (in all likelihood), net social welfare payments too, what is the likely outturn then for the Exchequer deficit?
@ Micheal Burke
It seems there is consenus that our multiplier is pretty low
Also, some people make a lot of the fact that alot of the reduction in pay is simply lost tax revenue – and use this as an argument that the cuts werent worth while – but they often don’t keep this line of thought going when they argue that the effect on PS wages will be substantial
“..the government can do much to foster wage reductions in industries in which it exerts considerable control. Similarly, it can go further in reducing fee levels in those professions that rely heavily on the public sector as a source of demand. More broadly, tackling monopoly power across sheltered sectors of the economy will further help to engineer widespread reductions in prices and wages.”
Many thanks, Philip, for consistently highlighting the potential to achieve price and cost reductions in these areas that would contribute significantly to the “internal devaluation” required – and to the public perception of a more equitable sharing of the burden of adjustment. I can understand why PS workers feel victimised as their total wage bill is up in neon lights – but this is similar to the fallacy of the drunk looking for his car keys under the lamp-post as this is where the light is.
I have frequently highlighted the potential to achieve price and cost reductions in gas and electricity, but I see very little evidence of similar effort to quantify the price and cost reductions in the other areas you mention.
Surely this is, at least, part of what microeconomists are for?
What is so glaring about this ongoing merry-go-round, is the absolute incompetence of the employer – – the Government.
Like the back-of-the envelope decentralisation fiasco, the employer appears to have a list of suggestions on change but no overall plan.
I’m in favour of consultation and discussion, but without a template of reform, you have no direction and the forces of conservatism unsurprisingly exploit such a farce.
More than half a billion euros was spent directly on e-government projects.
The consultancy firm Accenture, at one point had 80 support staff in the Revenue supporting the ROS system — they may still be there.
The Government likely hasn’t a notion as to how to implement reform.
One would think weeding through the 800 quangos and closing some, merging others could be done in say 2 months – – but apparently nothing has been done so far.
So the Competition Authority was to be merged with the National Consumer Agency – – how had can that be?
An agreement on redundancies would have to be made but leaving the issue drift for up to 2 years or maybe more, with board membership totals of up to 30 alone, it is pathetic.
Irishjobs.ie survey
61% took pay cut (70% of these had the pay cut imposed)
9% got increase
87% who usually got a bonus won’t be this year.
CSO Farm Incomes down 30% in 2009
Listened to Peter McLoone last night say the PS were making all the sacrifices. They need to change the PR approach – they’re just cheesing everybody else off with the martyr syndrome. No wonder there was a backlash.
A massive difference between the public and private sector when it comes to negotiating is employees know in the private sector if they dig their heels in or start strike action their jobs could all go. Haven’t noticed too many industrial disputes in the private sector recently.
@ philip
I am and always have been in full agreement with the analysis you give in your peace.
As a small business owner I have had to react hard and fast to reducing costs and price in my business.
I have always worried about the ever creeping rise in the cost of running a business in this country over the last 5 years in particular.
It was evident that although I turned over 18% more in 2006 than I did in 2004 my profits were 8% higher in 2004.
The rising cost of Energy, pay rates including minimum wage and local rates playing the biggest part in this anomoly.
Rising interest rates and oil prices in the years from 2006- 2008 eventually tipped the balance but it was Government controlled costs that left most businesses in the position of not beinf financially viable to cope with market problems.
We need lower wage rates across the board now and across all pay scales but the problem now is going to be how we do this fairly considering the amount of personal debt accrued by ordinary workers and businesses when higher wages were the norm.
Have the economists on this site any ideas on how the debt problem and the high Govt. costs can be tied into a package together with wage reductions?
Re: Stuart Blythman:
“Haven’t noticed too many industrial disputes in the private sector recently”
You could start with Coca Cola, Aer Lingus, Easons, Cadbury’s, Musgraves, Schering Plough, Irish Life and Permanent, Astella’s pharmaceutical, Element six in Shannon, Beckman Coulter, Boots, Ulster Bank and a whole lot more.
Only for the state sponsored concilliation services; LRC, Labour Court, Rights Commission and the NIB all of this industrial strife would very quickly evolve into industrial-stike action. There is just as much conflict in the private sector as there is the public.
Also, you quote Irishjobs survey.ie as a reliable source of information on private sector pay cuts. The recent CSO survey points to the contrary, it shows hourly labour costs have gone up but bonuses etc have come down. An IBEC survey found the same, as did a recent Irish Time behavioural survey.
____
Re: Philip
I found your article very interesting, and challenges a lot of my own pre-suppositions. Whatever one things about the rights and wrongs of the recent public sector negotiation, centralised wage bargaining or social partnership; the reality of EMU constraints has yet to be made explicit in policy debates. I think this article goes some way in making a rational debate on this public policy conundrum possible.
If it is the case that we have to accept downward wage flexibility as a reality of the EMU then it poses serious political questions about how to coordinate income, fiscal and industrial policy within the EMU. Can we expect small peripheral regional economies of the EMU to live by the same fiscal rules of large economies such as France and Germany? They can stimulate whereas we cannot. Does this not alter the rules of the game somewhat?
It also begs questions as to why labour market actors in Ireland (including IBEC and Government) did not internalise the full reality of the EMU. I think most thought they would not be faced with a crisis, given the assumed stability of monetarist economic policy. The resulting painful social process of deflation and wage cuts has yet to be really tested in any poltical economy within the EMU to date (nor is it appreciated by many media commentators) and we are about to live through the political outcome. Brian Lenihan correctly said that there would be riots in the street if many governments in the EU tried to cut wages.
I sense this political dimension to industrial relations and economic adjustment has yet to be fully realised by those in the public domain. Industrial action is now inevitable. Getting buy-in for a process of wage cuts may have been too much to ask, given that social partnership has always been premised on some distributional outcome. But, if anything can bring actors back to the table (and it wont happen again under the existing government) it will be job creation.
@Aidan R
Can you post links to the following surveys if you have the time:
“The recent CSO survey points to the contrary, it shows hourly labour costs have gone up but bonuses etc have come down. An IBEC survey found the same, as did a recent Irish Time behavioural survey.”
I have googled for these surveys.
On the CSO, I found this:
http://www.cso.ie/releasespublications/documents/earnings/current/earnlabcosts.pdf
I do not see where normal professional service firms, retailers, restaurateurs and publicans fit into this survey. I also could not see a breakdown as to what portion of total employment and total wages each sector referred to represents.
The IBEC survey is a small subset of employers in that it refers to a limited number of wealthy big businesses who roll with the unions in the collective bargaining process.
I could not find the Irish Times Data.
Can somebody please clarify this for me?
@aidan R
I am merely recommending to the public sector they drop the “we’re the only ones making sacrifices routine”. It only cheeses the majority of us off.
@zhou_enlai
The recent Irish Times/Behaviour and Attitudes survey found, if memory serves, that nearly 70% reported not having suffered either pay cuts or reduced hours and only 23% report having had their pay cut. Since this survey made no distinction between public sector and private sector and since the entire public sector has experienced a 7.5% pay cut, it stands to reason that the vast majority of private sector workers have experienced neither pay cuts nor reduced hours.
A good question is raised by this: given that the question of private sector pay cuts is one of the burning national questions of the moment, why has no newspaper or any other organisation bothered to commission a scientific survey? They wouldn’t be afraid of the answers, would they?
@Stuart
I’m afraid the public sector is the only one making sacrifices, whether it cheeses you off to hear it or not. Losing one’s job is a minor tragedy and it’s a loss, but it’s not a sacrifice. The relevant definition is: “an act of giving up something valued for the sake of something else regarded as more important or worthy : we must all be prepared to make sacrifices.”
If the more worthy goal is to improve the government’s fiscal situation, then the PS, by and large is the only part of society sacrificing (unwillingly) toward that goal. The private sector has seen job losses, but they are part of the problem to be overcome, not part of the solution to that problem. Those who still have jobs have seen small tax increases (which are also paid by the public sector, I hasten to add), but haven’t been called upon to make much of anything in the way of sacrifices. Instead, the public sector has been vilified and demonised as part of a propaganda campaign to make them take the pain and to make absolutely sure, despite the serious doubts one might have about the wisdom of the idea in light of recent events, that the answer to the question “Boston or Berlin?” is always an emphatic “Boston.”
@Philip Lane
“In addition, the government can do much to foster wage reductions in industries in which it exerts considerable control. Similarly, it can go further in reducing fee levels in those professions that rely heavily on the public sector as a source of demand. More broadly, tackling monopoly power across sheltered sectors of the economy will further help to engineer widespread reductions in prices and wages.”
These are important issues that you have consistently highlighted and you deserve great credit for doing so.
My comments about the resemblance of proponents of unilateral public sector paycuts to early 90s Russian shock treatment economists were harsh. I am also sure that you made the suggestion with complete sincerity and in reaction to data from the ESRI. For the record I genuinely don’t believe that they will have much discernible impact on wage rates across the economy, expecially in the short-run. The size of the cuts, which I expect will be relatively small on the lower paid especially, will save the government money but that’s about it. In order to achieve the economy-wide effects you suggest I would have thought much larger cuts would have been needed.
The government has misused this good faith proposal to divert public anger from themselves, to distract attention from their huge bailout of developers and to leave more of their pork barrel spending untouched.
Colm McCarthy proposed €4Bn in cuts. From newspaper reports only €3Bn are being made. “Dude, where are my cutbacks?” I believe that the quangos will not be culled. Nothing to do with opposition from trade unions or the staff – it could be done on a phased basis. All those board positions and contracts are just too tasty. Also, think of all the premises that would no longer be rented and who they’re rented from.
With this government, consideration of any measure always goes back to its impact on developers.
@Ernie
Okay Ernie add in
1. Those who have lost their job. Maybe not a sacrifice in the dictionary definition but they probably don’t see the PS as having a hard a time as them.
2. Private sector who have taken pay cuts. We don’t know the exact percentage but let’s say with bonuses gone it’s at least 30%+.
3. Those who lost jobs and taken others at lower pay (I know a couple of those).
4. Those who relied on bank dividends as a major part of their income. Gone.
5. People who fund their own pensions or on defined contribution ones. They’ve seen them drop dramatically. The PS are safe and even increase when they’re retired.
6. Self employed who have had to shut down their businesses or had them shut down for them and still have personal guarantees to banks or landlords.
7. Businesses now losing money and the owners wonder if they can ride out the storm as they live off savings. I know a few of these as well.
Anyway if you are representative of how the PS see themselves it’s no wonder there’s such a divide between PS and private sector. Keep up the poor us approach and you will have zero sympathy from the private sector and you do need some.
@Ernie Ball
I have to remind you, this government has not chosen Boston OR Berlin. It’s chosen Moscow.
@ Ernie Ball
“I’m afraid the public sector is the only one making sacrifices, whether it cheeses you off to hear it or not. Losing one’s job is a minor tragedy and it’s a loss, but it’s not a sacrifice.”
So, let me see if I have got this right? Losing ones job in the Private Sector is a minor tragedy but having ones salary cut in the Public Sector is a major one.
Then, let me commend all PS workers for your major sacrifices, while at the same time commiserating with all those in the Private Sector who have experienced such minor tragedies as loosing their jobs. Splendid.
@Ernie
I would say losing you livliehood and being i) unable to make the grocey payments ii) being worried about losing your home is a major tragedy.
For the record, I do not think that the Public sector worker should make a sacrifice. Rather in the current environment their pay levels should be reset to reflect i) international levels ii) private sector levels for similar work iii) a premium for job security and iv) the state’s ability to pay. 20% from end 2007 levels is not unwarranted.
@Stuart
You’re just not getting it. Items 1-7 are unfortunate, but they are not sacrifices.
The question for all Irish citizens right now is: what are you prepared to sacrifice right now for the good of the economy? The private sector response so far seems to have been: we are ready to sacrifice the wages of the public sector…
The PS already has zero sympathy in the private sector. A concerted and relentless media campaign has seen to that. We’re over it.
@Robert Browne
So, let me see if I have got this right? Losing ones job in the Private Sector is a minor tragedy but having ones salary cut in the Public Sector is a major one.
It’s a good line, but that’s not what I said. Losing one’s job in the private sector is a minor tragedy (minor because nobody dies, hopefully). Having one’s salary cut in the Public Sector isn’t a tragedy at all, but it is a sacrifice.
@jl
20% from end 2007 levels? On Wednesday, that will be done and more. 7.5% pensions levy, 6% in rumoured pay cuts plus the income levy and increased PRSI add up to about a 20% hit in the take home pay of the average public sector worker.
Can I take it that after Wednesday we’ll hear no more calls from any of the bloviators here for further PS pay cuts? Of course we won’t. We’ll hear the same old claptrap trotted out again and again because the Independent Media Group still won’t want their taxes increased….
Does the term “tyranny of the majority” mean anything to you?
@Ernie Ball
You always make some good arguments on the side of the public sector.
But it doesn’t what reasons you can come up with as to why public sector wages shouldn’t be cut, and I agree with many of them, but the reality is we don’t have the money to pay them.
There is no getting away from this argument IMO.
Even the most progressive tax system in the world isn’t going to get us €20bn in savings over the next few years. Therefore spending will have to be.
@Ernie,
just to clarify, I meant 20% gross. So we are about two thirds of the way there. Once more in 2011 should be about right. The next step is to start looking at overall numbers in the PS. Quangos anyone!!!
I do look forward to you standing in the next GE on a agenda of higher wages for the PS, higher taxes on everybody else and high business taxes.
Fair play to you if you win a majority.
@Ernie
What do you want the Private Sector to “sacrifice” as anything else that happens to us is just unfortunate. These unfortunate things do have an effect on our income, quite a dramatic one for some.
Seriously make some suggestions of what you would call a sacrifice. Because you’re right I don’t get it.
@ Ernie
“what are you prepared to sacrifice right now for the good of the economy?”
“the PS, by and large is the only part of society sacrificing (unwillingly) toward that goal”
Just for clarity, the PS have not endured any “sacrifices”. It’s not arguing over the semantics of it to point out that a sacrifice has to be a willing or voluntary gesture. An “(unwiling) sacrifice” is a contradiction in terms. The pension levy and the looming 6% pay cut were not made willingly or voluntarily. They were enforced upon the PS, and were met with industrial action by the unions. To use your own logic, they are an “unfortunate” result of the de/recession we are currently enduring. The voluntary redundancies being accepted in the public and private sectors are far more fitting of the term “sacrifices” (albeit with an upfront pay off, and one which is typcially much lower for the private sector btw) than anything the PS is currently enduring.
The private sector pay and job losses are, in your words, “unfortunate” events, but the public sector pay cuts are “sacrifices”? And you wonder why there’s so little sympathy for your position??
Why does what begins as a reasoned ,informed and intelligent debate on a on very serious issues concerning the future of this country i.e public sector reform, equitability of wage cuts and cutbacks in general and the responsibility of government and unions and all sections of society to come to an equitable agreement on a way forward out of this mess always deteriorate into a public sector v’s private sector row. It reminds me of the old adage that the first item on every commitee agenda in this country is the ” split “.
@ Ernie
Far from the PS “sacrificing” for the good of the nation, here is what Jack O’Connor had to say tonight: “There will be a campaign of resistance against pay cuts.” And Peter McLoone “warned of a long and sustained campaign of action”.
You know what the exact opposite of “to sacrifice is”, like the dictionary antonym? To refuse, which is exactly what the unions are doing right now in the face of the government’s decision.
@Ernie
7.5% pensions levy, 6% in rumoured pay cuts plus the income levy and increased PRSI add up to about a 20% hit in the take home pay of the average public sector worker.
Your arthimetic is poor.
The first two reductions you mention apply to gross pay, not take home. So once the tax saving is taken into account, they amount to a much smaller cut in take home pay.
Taking the annual salary increment in account also leads to overall decrease in take home pay of the order of 10%, or about half of what you claimed.
@school marm
The hardest hit sectors I would say are those that relate to construction or property development or the spending thereon. This has hit a huge variety of occupations, from bankers to brickies, from solicitors to the media.
The retail sector and others dependent on consumer spending have also been very hard hit. Given how hard the media has been hit through loss of property and job advertising it is natural they fell victim to the government assault on public sector pay.
But the evidence shows that for the rest of the private sector workforce the overwhelming number are unscathed. This is exactly as predicted by economic theory. If private sector wages were very flexible we would already have seen massive wages falls across the board followed by the elimination of unemployment. Mass unemployment is the evidence that refutes this. “Not everyone has been hit by the recession in the same way. In fact, most people – almost 70 per cent – say they haven’t had their pay cut or had their working hours reduced.”
Take out public sector workers and that means the overwhelming number in the private sector.
http://www.irishtimes.com/newspaper/ireland/2009/1121/1224259236344.html
We need to cut the wages of the rich in the public and private sectors significantly and everyone else’s by a sliding scale. See Kevin O’Rourke’s article in January 09 on this site. The social partners need to sit down together and cut wages across the board. We can do it, together.
It’s the only way.
@E65bn
Well, not quite. We are still in the early stages of the bust. At best we are in the middle. Small firms are closing down without a murmur. Medium-sized firms are drip-drip-drip. The death rattles of car industry and Dell are coughing through the economy.
The reason jobs get cut instead of wages? Fixed costs associated with employment are high, inefficiencies with part-time work are also high. So cut numbers, spread the work around to other workers. Pay them a bit more for the extra or pay them the same instead of a cut, but not nearly what has been cut in terms of hours of other people. So it looks grand if you just look at wages. Productive output of the economy per worker is up. Efficiency abounds.
Oh and not everyone has to take a pay cut. We need some people to earn more – those who export their goods and services. Not by pricing themselves out of the market, but by volume and quality of sales. If they happen to be rich, so be it. It doesn’t do us any good to discourage what might drag us out of the morass – genuine productive entrepreneurship.
@ Ernie
another point on your “the public sector is the sacrificial lamb of the global economic downturn” theory.
Fees paid to professionals undertaking work for the government (lawyers, architects, engineers etc) have already suffered a unilateral 8% cut in the fees they receive. This was done pretty much without any consultation or negotiation. They are now set to take a further 5% cut in fees in the budget this week from what i hear. This includes work on projects that are already underway. As such, they have basically suffered a 13% pay cut in the work they do for the government. Is this a sacrifice, or just simply “unfortunate”? Why have we yet to see any strikes or industrial action from this set of employees?
@Eoin Bond
I’ve read that professional fees in Ireland are very high – especially to the government. 13% off the tribunal fees is great – but look at the size of the other 87%. I wonder how far away we are from the professional fees charged in a Eurozone member like say Sweden.
FF/Developers property bust has hit professionals hard. The government should make it a priority to lower their fees by whatever it takes to eliminate unemployment among this sector. Given how high they were a cut of 50% would seem advisable. Competitiveness would improve hugely and the taxpayer would save millions too.
@ raymond
I agree. Can we return to the original debate. I know ernie has excited most of us but his is an opinion that is unchangeable.
Don,t get caught up in a debate that is unwinable in the mind of ernie.
Stick to Philips original topic of debate.
@ E65bn
“lower their fees by whatever it takes to eliminate unemployment among this sector”
That doesn’t make even a lick of sense. We’re talking about the fees set by the government for work done for the government. Its typically a set % fee based off an overall project value. Its all internal to the domestic economy. Its not a competitiveness issue. Unemployment is likely to increase as fees are reduced, unless you are asserting that the fees in and of themselves are what is stopping the government from commissioning more work?? Lower fees will likely increase unemployment in the sector, not create employment.
Also, Sweden is not a part of the Eurozone. Crazy name, crazy political geography, crazy economic logic. Whats next?
Correction:
“We’re talking about the fees set by the government for work done for the government.”
Not always “set by the government” but also often via a competitive tender process (for the likes of architects and engineers) open to both Irish and foreign candidates. Either way, the issue behind unemployment in this sector is not because of cost, but because of a complete lack of new projects, and now by a cut in fees (though this may be justified). The basic point is that this private sector work is being treated in exactly the same way by the government as they are now proposing for the public sector workers, ie unilateral cuts. However, for some reason we should consider this to be completely different to how the public sector unions are being treated. Interesting logic.
@ Christy
Thank you for a response, but I was hoping that there would be something a bit more substantial than reference to the consensus. The Pre-Budget Outlook makes the startling estimate that a €4bn cut is a €4bn saving, which the DoF describes as a ‘static’ presentation. Well, that’s one word for it. Surely, if cuts are being made it would be useful to know what the expected outcome is? And something a bit more sophisticated than the DoF approach.
@ Philip Lane or anyone
In a previous thread on this site I posed the same question as above. Ronan Lyons was kind enough to say that it was a good question. Perhaps not so good that it deserves to morph into two questions, but anyway, with the sure and certain hope of repeating myself, here goes:
“What is the best estimate of the impact on GDP of a €1.3bn cut in public sector pay? Given the unavoidable negative effects on taxation receipts and (in all likelihood), net social welfare payments too, what is the likely outturn then for the Exchequer deficit?”
The reason I ask is that Michael Taft, using the ESRI multipliers, has shown elsewhere that the cuts will amount to only fractional savings, if at all. I just wanted to know if any leading advocate of cuts has a refutation of that.
@Eoin
You’re right, Sweden isn’t in the Euro. We should use Germany as a comparison. It is a competitiveness issue. The lower our costs the more competitive we are – and they are part of our costs. The lower the price the more people will buy and the higher the number employed.
@Michael
“The reason I ask is that Michael Taft, using the ESRI multipliers, has shown elsewhere that the cuts will amount to only fractional savings, if at all”
I’m no economist but the reverse logic is therefore the government should take on all people who are unemployed and this will pay for itself by the extra tax take and reduced social welfare and improve services at the same time.
@ E65bn
we’re not talking about the government reducing the fees that professionals charge the rest of the economy, we’re only talking about the fees they charge for government work. As such, bringing the fees down will not increase employment unless you think that the government would be doing significantly more of this work were it not for the fees, a situation which is patently not the case given how much professional fees make up of, for example, the cost of building a new school or hospital. I’m no expert, but i believe professional fees would typcially make up, in total, 15% of the total cost of a project excluding land value, so probably less than 10% of the total cost of the project including land value. As such, it seems unlikely that a 1-2% difference in total cost is going to suddenly going to see a ton of projects greenlighted. By all means reduce fees if we dont feel we’re getting value for money or could do if cheaper by bringing in competition from abroad (which we can already do), but please don’t make some bizarre assertion that if we massively reduce professional fees for government work further we are suddenly going to create lots of employment.
@Eoin
“Crazy name…”
Prof Morgan Kelly says NAMA will lose:
€35 Bn lost on property loans acquired.
€25 Bn lost on interest on €59 Bn borrowed.
plus
€5 Bn wasted on finishing developments no one needs.
Total loss: E65Bn plus economic costs & NO extra lending!
NAMA and the blanket bank guarantee are solely due to FF/Developers rescuing themselves. In this case there is no other rational explanation: half the developers loans written off, then bought for €35 Bn too much from the banks and given to pet state agency who won’t pursue them for three years and are going out of their way to get the developers to work with them. It’s win, win, win for bankers, bank investors & FF/developers and it’s lose, lose and lose again for taxpayers.
This is what Mr Frank McDonald was told in April:
http://www.irishtimes.com/newspaper/ireland/2009/0411/1224244443488.html
“Bad debt agency may be scaffold for property developers”
Or, it may be a life boat. Clue: when you propose sending people to a scaffold they normally compain a lot more than developers did over NAMA.
The only complaint was from Owen O’Callaghan – who didn’t need it.
“DEVELOPERS WITH large loans from the banks are set to lose out big-time as a result of the Government’s decision to establish the National Asset Management Agency (Nama) to deal with the mountain of bad debt racked up in Ireland’s deflated property bubble.”
In retrospect a faint hope I’m afraid.
“Much would depend on the calibre of Nama’s top officials and frontline staff. “Hiring has already started for Nama’s managers, and you wouldn’t want some of those applying sitting beside you in a dark cinema. This type of person is remunerated by recoveries, so boot in.”
I read over the weekend that one of the developers who is cooperating is getting along fine.
“Most of them will be wiped out,” according to one developer, who agreed to speak on a confidential basis. “I think you’ll be finding a rush of Ryanair tickets for the developers to places they’ll be hard to find in. Otherwise, the wife and chisellers will be out on the street.”
The NAMA legislation means that the Ailesbury road piles are safe. The bank guarantee gave mega developers plenty of time to prepare for NAMA.
The article concludes:
“One way or the other, the game is up for developers and bankers who lost the run of themselves during the boom.
All we now need is a full and frank acknowledgement from the Government that it artificially inflated the bubble and thus made the bust more painful for everyone.”
So far, bankers are doing very well and bank investors doing even better.
Even in utterly insolvent institutions shareholders will get something. Still no word on the compensation for Anglo shareholders either – they’ll get something.
As for the developers, I expect them to do even better.
Finally, Mr. Frank Acknowledgement is still as much a stranger to the government as he ever was.
@Eoin
Re. Professional Fees
But using Philip’s logic if we cut professional fees (wages) from the government dramatically this will spark a reduction in professional fees across the economy. This will boost competitiveness and lower unemployment. Perhaps we need a downward benchmarking for professional fees to bring them into line with the rest of the Eurozone.
@E65bn
It will depend on supply & demand. If there is a surplus of professionals out there as a result of the downturn then competition will drive down fees. The government just has to use the tender process correctly.
Unfortunately even in a downturn there’s plenty of work for quite a few professionals – accountants have restructuring and liquidations, lawyers have all the law suits, the property people now have Nama.
But fees should still be coming down but it won’t be 50%.
@ Stuart Blythman
I think non-economists views are entirely valid, can be very useful, and generally add something to the debate.
Clearly, you’re ‘bending the stick’ a little as I don’t know of anyone who argues the State should directly employ all those laid off. But there is a role for INCREASED (sorry for the shout, I can’t do bold/underline etc. here) government spending in reflating the economy.
For these reasons:
*It is being adopted in virtually every other European economy (even Belgium, where they import over 80% of GDP, like Ireland), and beyond.
* Large multipliers are at work in the Irish contraction; a 13% decline in activity has led to a 32% decline in taxation revenues (Pre-Budget Outlook). They, or something like them can be made to work in an expansion
* Application of the ESRI multipliers by Michael Taft suggests little or no actual savings from the current austerity policy
* This analysis conforms to the real world- contractionary fiscal policies have already been implemented and look what happened, the govt. has repeatedly revised down its growth forcasts and revised up its deficit forecasts. There have been cuts, but no deficit-reduction.
* The EU Commission forecasts Ireland’s deficit will be stuck at 14.7% of GDP in 2010 and 2011, even (or especially) factoring in repeated contractionary fiscal measures here. By contrast, there is a declining path of deficits forecast even (or especially) for countries which have taken and continue to take reflationary measures. The forecasts could of course turn out to be wrong, but expected trend is significant.
One a wider point, I appreciate that people have lots of commitments, it’s not a priority to repond to every point of difference aired here, etc. But I am surprised that, for a second time on a thread here, I have asked one of the many (and sometimes very vocal) advocates of contractionary fiscal policy to enumerate the estimated impact of the government’s much-touted cuts of €1.3bn in public sector pay on the wider economy and, from that, on the deficit itself.
If any DoF official (anoymously, of course) would care to do so, that would be very helpful, as surely those numbers must be at their fingertips?
Alternatively, could any of the government advisers on these matters who contribute here please provide us with those same numbers? Surely no-one would advocate or pursue a policy without reckoning the consequences of it?
@ E65Bn plus economic costs & NO extra lending!
There’s no need for benchmarking on professional fees. Lift the veil of secrecy on them and it would likely do wonders for competition.
The public sector provides the professions with significant fee income.
The large public professional firms have a dream situation.
There is virtually no transparency on contracts because of the Victorian culture of secrecy on the government side, while the 19th century concept of limited liability has resulted in no obligation on these firms to publish their accounts – – even though the consultancy industry has become the outsourcing arm of the public sector.
The system is certainly not in the public interest and it benefits the insiders who have developed connections with ps managers and promotes informal cartels.
A public contract should not be a secret contract.
This is not about the economics and might apply to more threads than this one …. Michael Burke said:
“But there is a role for INCREASED (sorry for the shout, I can’t do bold/underline etc. here) government spending in reflating the economy.”
You could use *bold* or /italic/ or even _underline_ or -*/all three/*_.
bjg
@Michael Hennigan
A government serious about costs and unemployment would have acted on this already. We need transparency and lower fees now.
This is a link to an interesting article by N Acocella, G Di Bartolomeo, P Tirelli, (2009) the ‘Macro-Economic Effects of Social Pacts’.
It analyses the macro-economic interaction between trade unions, fiscal policy makers and the central bank in the context of the EMU.
It’s conclusions are similiar to the non-economic literature on social pacts and EMU which I am more familiar with.
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V8F-4WCTWK9-1&_user=103682&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1127431050&_rerunOrigin=scholar.google&_acct=C000007921&_version=1&_urlVersion=0&_userid=103682&md5=15101b53a1b2cd7473704ebee33d8355
Or PDF
http://150.146.3.132/986/01/WPaper__No_51.pdf
@Michael Burke
The deficit of c12% is already a stimulus. Debt is a fact, fiscal multipliers are an opinion.