Budget 2010: public sector pay cuts in context

Paul Sweeney14/12/2009

Paul Sweeney: As reported by the Financial Times, the Greek Prime Minster admitted on Friday December 11th that the Greek public sector has systemic corruption: “However he made it clear that Greece would not follow Ireland’s example and enforce drastic wage cuts”.

The viciousness of the attacks on the Irish public service in the run up to the Budget was such as to lead an observer to believe that it was corrupt and bloated (the adjective used with the words “public service” by certain commentators). In fact, of course, up until now the Irish public service has been relatively free of corruption and, as I show below, is scarcely bloated. The downsides of the second tranch of imposed pay cuts - in addition to deflation and a possibly delayed recovery - could potentially include, in the long term, creating some of the conditions favourable to corruption.

Regarding its 'bloated' size, the Irish public service is actually small and similar in size to that of the USA. The recent OECD report into its performance called for some improvements, but did not indicate that it was in any way bloated. There is always room for improvement in reforming public services. Similarly, there is plenty of room for reform of private sector governance – especially in banks and with regard to remuneration.

The campaign to soften up the public to accept pay cuts was remarkably successful - in the short run. The public were tuned into expecting pay cuts in the public sector.

It was argued that the public sector enjoyed massive “premia” over the private sector. The ESRI, which may have suffered some damage to its valuable reputation as an independent, learned institute, appeared to adopt a campaigning role, on behalf, it seemed, of the Government. It appeared to publish the same report over and over, asserting a huge premium. Yet, when the dust settled, a more sophisticated study by Callaghan and Foley of the CSO, read to the Statistical Society, narrowed the premium very considerably. Internationally, public sectors do pay more - in general - than the private sector (except Greece perhaps?).

Remarkably, this latter study got no publicity, whereas the reports by the ESRI got screaming headlines. If more and more people are now questioning the independence of ESRI, its important contributions, for decades, to evidence-based policy-making would be undermined. However, the institute was a victim of exaggerated reporting by certain campaigning journalists.

TINA - “there is no alternative” - was invoked to justify the cuts. We did need to make an “adjustment” of around €4bn. It was originally planned by Government that it would comprise cuts and taxes. In the end, the representatives of the very well-off won the battle. No taxes were to be raised, beyond even more taxes on consumption (carbon) which impact hardest on low-income groups.

Of course, there were many taxes which could have been raised. Among mainstream economists, only Garret Fitzgerald is making this vital point and he makes it well and regularly. Is he Ireland’s only Saltwater Economist? Are the others all Freshwater Economists?

The tax on higher earners utilising avoidance schemes could have raised €207m instead of a paltry €50m, if it was on earnings of over €100,000 (it is levied only on tax avoiders), and if it had included pension tax-avoidance schemes. A temporary levy of a mere 2% on corporate incomes would have raised €614m. A tighter tax on fugitives would have raised up to €65m in its first year, and increasing DIRT tax would get €125m, with other taxes raising much more again.

Instead of raising these taxes, this government took money off the blind. It took money off carers, and off those on the dole.

Before the Budget, it was said that if public service workers’ pay was not cut, then welfare would be cut. It was presented as either/or. Why then did public service pay get cut AND welfare also get cut?

And now the ground has been prepared. Private sector workers will have their pay cut. Overall, contrary to assertions by many campaigners, only about 15% of private sector workers have had cuts in their basic wage or salary. Many more have had reduced earnings due to less hours, cuts in bonuses and overtime. Only in the public sector have all workers had pay cuts. If the public sector workers have had pay cuts, why should private sector workers not have pay cuts too?

“When I become Minster for Finance, Ireland had the highest unit labour costs in the Eurozone”, Mr Lenihan said repeatedly on Budget day. This is untrue. Ireland has the second LOWEST unit labour costs in the Eurozone, after France (OECD). He has not corrected this yet. It is probable that he meant to say that the rise in unit labour costs in Ireland has been one of the highest (though not the highest) in recent years. All the erroneous claims around productivity and competitiveness are part of a broad campaign to get a competitive devaluation by pushing down wages.

Ireland has high consumer costs. We see this when we go abroad, and the data shows us second highest after Denmark. Cuts in wages will bring our price levels closer to the Euro average, but not in the way or with the speed the devaluationists want. The link between pay and price levels is not clear. Prices are determined externally, and much more by exchange rate movements. And why should only workers (so far - mainly public sector) take the pain. Have you asked your solicitor or GP for a cut in fees? You know what s/he will say!

The cut of €4bn is a massive deflationary cut of 2.5% GDP and 3% off GNP in 2010. If the carry-over of €3.5bn is added, the total deflationary cut is 5.6% (not 2.5% as Garret Fitzgerald said on Saturday). With these deflationary cuts, Ireland is in danger of sinking into a long decline.

Posted in: Politics

Tagged with: public sectorWage Cuts

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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