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October 01, 2009

Comments

Barry

So in sum, what we need to do is raise taxes not make cut backs?

Are you saying that civil servant on six figure salaries should not have their wages cut because to do so would be counter productive?

Its a hard sell Michael.

Michael Taft

Barry - no, that's not what I'm saying at all. And I specifically state that the tax increases the ESRI uses are not necessarily to be supported. I merely pose the two options to assess their impact on the economy. As for me - I go with the third option.

In regards to six-figure civil servants - there are very few of them. Throughout the entire public sector (of which civil servants make up a minority), there are only 3 percent who earn over €100,000. If these wages were cut by, say, 10% - it would produce a gross savings of approximately €150 to €170 million. But when tax clawbacks and multiplier effects are taken into account - it would probably produce a savings below €100 million.

It's not a matter of counter-productivity. There may be all sorts of reasons for cutting wages at the top (e.g. demonstration effect, re-investing it into direct state job creation, etc.).

But its effect on the borrowing requirement is pretty minimal - to say the least.

You might find this breakdown of public sector pay and numbers interesting:

https://www.kildarestreet.com/wrans/?id=2009-02-17.826.0

Marise

How many civil servants make six figure salaries? Mentioning the highest tier would suit a discussion of wage inequality more than this discussion of cuts.
tI sometimes wonder a particular cognitive dichotomy in these discussions. Consumption is 70% of GDP. Bean-counters look at expenditures for both private companies and the government,and see the large share that payroll represents. So cut payroll, yeah?

But 70% of GDP is consumption. What they don't seem to be able to see is that those same "liabilities" are also their consumers -- they are talked about as if they are two discreet sets of people. In Government's case, public sector employees will become dole recipients. At least when there are employees, the government is getting something directly for their money.

We must address the deficit, but timing is everything. It must not be done pro-cyclically. There is time. They talk about inflation rising, but moderate rates of inflation can help the consumer by lessening the debt. It disportionately affects creditors. Knowing where there bread is buttered, therefore, they speak like the deficit must be addressed NOW.

Michael Taft

Marise - we must have posted our comments at the same time. The figures I give above show there are relatively few civil or public servints earning six-figures.

The important point you make is that of 'timing'. Governments throughout the world are waiting for the economies to turn the corner before embarking on fiscal consolidation. However, the IMF has warned governments against acting prematurely - rightly pointing out that even when economies have turned the statistical GDP corner, they will still be in a fragile state. Were a government to act too quickly to consolidate, or withdraw stimulus too early, it could send the economy back into recession (similar to what happened in the American economy in 1937 when the government turned off the taps thinking it was safe, only to find the economy plummeting again).

In the Irish context, we can expect the economy to go into the GDP/GNP black. However, it will only be for a quarter or two and we will still be facing into increasing unemployment/falling employment. And this Government proposes to cut €4 billion - or nearly 3% of GNP - out of the economy?

Talk about bad timing.

Marise

Yes, it's been constantly pointed out how employment is a lagging indicator. We need a commitment from our government to ensure that employment has at least a couple of quarters of strong employment growth before addressing the deficit. I would prefer even more than that, as the increasing tax receipts and fall in the live register will address some of the deficit already at that point, giving a clearer picture of how much shortfall will be left to address.

Donagh

This paper seems to agree with your last point Michael.
https://ftp.iza.org/dp4455.pdf

Michael Taft

Thanks for bringing that to my attention, Donagh. It is always a pleasure to read a piece by Blanchflower and Bell - two of the better commentators on the economy today. I urge everyone to have a look at this.

John Baker

If the privileged are so concerned about the fiscal crisis why don't they put their money where their mouths are and call for a temporary tax rate of 90% on incomes over 100k? Anyone who left the country as a result would expose themselves as a traitor and their assets could be confiscated. Has anyone modeled that?

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