Now, I’m positive Professor O'Hagan doesn’t want any of this to happen. But what we want and what we get can sometimes be completely different things – especially when we ignore the effects of what we want on the real world. Therefore, for the sake of clarity, let’s start with this.
Cutting public sector wages is economically wrong, fiscally irrelevant, and will postpone the commencement of economic recovery.
Those calling for public sector wage cuts mean well, I’m sure. When Professor O'Hagan calls for 20 percent wage cuts, you can really feel those good intentions. But to paraphrase Colm McCarthy
‘The Government hasn’t run out of compassion, but it has run out of economic growth.’
Let’s go through the indicators to show that the last thing the economy needs is public sector wage cuts.
Our first stop is the ESRI, its fiscal multipliers and consumer spending. When they ran the numbers on the economic effects of cutting public sector wages by 5 percent they found that consumer spending really gets hit. In the first year they projected there would be nearly a 1 percent reduction in spending. That’s a reduction of around €670 million.
The collapse in consumer spending has been a major contributor to our recessionary free-fall for a very good reason – it makes up over half of our national income. Between 2008 and 2010, the ESRI estimates that consumer spending will fall by over 11 percent (compare this to the overall fall in the Eurozone of about 1 percent).
This will mean less turnover for business. Question: if you were an owner/manager of a business selling goods and services into the domestic economy – would you want to add, as Professor O'Hagan suggests, to this collapse in consumer spending? Or would you want to see more people with more money in their pockets (answers to be written on the back of a postcard and sent to ISME).
And it is inevitable that consumer spending will fall. The ESRI projects that, arising out of a 5 percent cut in public wages, overall wages in the economy will fall by nearly €1 billion.
Employment
This leads us to the second point – falling consumption results in falling employment. The ESRI estimates that in the first year, nearly 2,000 jobs could be lost (resulting in an increase in the Live Register, emigration or people falling out of the active labour force).
Professor O'Hagan poses the debate as one of public sector pay cuts vs. public sector job losses. This is, to my mind, wrong and misses the point entirely (the real debate is whether you reflate or deflate the economy). Still, you don’t have to agree to acknowledge the effect of public sector wages cuts: it will result in job as the effects of reduced consumer spending spread out through the economy. And those losses will not be in the public sector, they will be in the private sector.
Economic Growth and that Pain Thing
What does this mean for the economic growth? Remember, our paraphrased Mr. McCarthy - whatever about compassion, we’re running out of growth. Between the start and the end of this recession, the economy will have bled nearly €550 million a week. Cutting public sector wages will add to this effect – reducing the GNP by nearly €450 million in the first year.
Okay, maybe this is all worth it – y’know, that no-pain-no-gain thing. Maybe lengthening and deepening the recession, putting more enterprises up against the wall, throwing more people out of work (people in the private sector) is the price we must pay to bring our fiscal deficit under control. The problem with Professor Hagan’s proposal is that we get the pain for sure, but we don’t get any gain.
The ESRI estimates that cutting public sector wages will reduce Government expenditure by approximately €1 billion. However, when you factor in the lost tax revenue and the impact on reduced spending (less indirect taxes, less business taxes) and the job losses (higher government expenditure, less income tax/PRSI revenue), they estimate the net saving to the will be €667 million.
However, this figure was calculated before the increased levies in the April budget. An Saoi and I recalculated the after-tax revenue arising from a 5 percent public wage cut post-April and found the Exchequer would gain only €545 million. And this doesn’t take into effect the deflationary impact that such cuts would have on the economy.
So where does that leave us? To save €500 million or so, we have to cut growth by €450 million. We’re running to standstill. And the effect on the deficit? Fractional. The ESRI projects the borrowing requirement will fall by 0.3 percent. Using the post-April calculations, the reduction is less – closer to 0.2 percent. That’s a big hit to the economy for so little fiscal gain. This is the ultimate running-in-quicksand exercise.
But what abut the long game? Wouldn’t it be better to take that pain ‘upfront’? If we do, then we can put it behind us and get on with growing the economy? Is this the case? No, in fact the opposite is the case. It will dog us for years down the line.
The fourth year effect of public sector wage cuts is even worse. It drags down GNP, consumer spending and employment further, while the effect on the borrowing requirement becomes even more fractional. Pain ‘upfront’ equals more pain down the line; the deflationary effects stay with us like the reek of burnt toast.
Whenever people try to explain this natural economic process they are met with a torrent of indignation:
‘You’re defending people who make hundreds of thousands of Euros a year while the rest of us are being fleeced!!!’
Listen, if someone, some political party, some interest group wants to cut the wages of those at the very top of the pay scale, my attitude is, ‘Well, if you makes you feel good, do it. It won’t have any effect on the public sector pay bill or the borrowing requirement but sure, knock yourselves out.’
Those at the very top of the public sector pay scale – earning over €200,000 a year – are a rare species. They make up less than 1 percent of all public sector workers. At the other end, however, 50 percent (more after the pension levy) earn less than the average industrial wage; while 85 percent earn less than €60,000. Proposals to cut wages at the upper end have little to do with economics or even good book-keeping; it’s more to do with gesture politics.
Economic Recovery Postponed
The really frustrating thing is that we may be blowing an opportunity. I emphasise ‘may’. Davy Stockbrokers are one of the very few commentators predicting growth for next year. They predicate that growth on a resumption of consumer spending. They’re pretty much alone on this issue but their argument is that the fall in consumer spending has been matched by a similar rise in the savings ratio – an increase which they believe is unwarranted given our demographic spending patterns. They project a slow reduction in savings and, so, an increase in consumption.
I’m not so sure about this (An Saoi suggests there’s some odd things going on with our savings stats). And clearly a recovery based on spending can only go so far. Sustained recovery will be based on investment that creates jobs and raises productivity – an investment financed by our positive debt profile and low net debt ratio. However, such investment would take time to kick-in. In that gap we would need a ‘growth-bridge’. Consumer spending is one of those bridges.
There may be a small window to take advantage of increased consumer spending. As Eurozone recovery takes root, the ECB will start raising interest rates to ensure inflation doesn’t take root. This may rebound on consumer spending, as will energy price rises, the planned carbon tax and tax-based consolidation policies in the future (and let’s forget all that private debt to deleverage).
So if Davy is right, it may only be temporary. But that temporary could be crucial. But Professor O'Hagan would burn any potential bridges. It’s interesting to note that Davy’s projected increase in consumer spending is equivalent, according to the ESRI, to the fall in that spending if the Government proceeds with wage and job cuts in the public sector. Simply put, these cuts (combined with others the Government may be planning) will postpone the bottoming out of this recession.
That’s why we should support the public sector workers as they approach their days of industrial actions. Their actions might, just might, deter the Government from pursuing overly-deflationary measures, would help stabilise consumer spending and the jobs based on that spending. It may be a defensive action (much trade union action necessarily is) but it is a defence of the economy.
It’s not an economic alternative in and of itself, but it can point the way to that alternative, one based on reflating the economy through investment in our economic base.
And it would certainly be better than Professor O'Hagan’s deflationary vision of a low-growth, high-debt future.
"throw more people out of work"
Strange, as I read it, Prof O'Hagan was arguing for precisely the opposite.
His preference is for maintaining public sector numbers while cutting pay rates.
The unions' preference is for maintaining pay rates while cutting numbers.
Which approach leads to more jobs losses?
The deflationary impact of unemployment among trained teachers and nurses probably stumps equivalent pay cuts, as the gross pay-roll remains the same, but we lose the opportunity to make thousands of welfare-receiving survivors into salary-earning consumers.
I know you'd prefer neither pay-cuts nor job-cuts but that's exactly the trade-off the social partners are discussing in Government Buildings this week. And going by the leaked IMPACT memo, there was no need to drag the unions kicking-and-screaming to the idea of job cuts.
Posted by: Proposition Joe | November 10, 2009 at 05:39 PM
Hi Michael,
Would be interested in your views on why ICTU day of protest didn't mobilise more in terms of moving beyond public sector pay/jobs angle to all those being threatened by a reduction in social welfare, miniumum wage, home re-possession etc., as well as impact of service cuts on users. Noting here a comment attributed to Noam Chomsky over on Indymedia: "does the population understand what tomorrows (ICTU) demonstration is about? Impressions of the audience at the Pat Kenny discussion about the demonstration, they seemed very split about it. This can be harmful, happened to the anti-war protests in the 60's with split to maoist cults and weathermen which turned into a gift for Nixon. People can understand taking over a factory. It's pretty straightforward. All tactics need to be adopted to the circumstance."
Posted by: Yvonne | November 10, 2009 at 07:08 PM
Has anyone ran the numbers for a 20% public sector pay cut? Is it possible that a reduction in the public sector pay bill of that magnitude would result in greater net savings for the Exchequer after taking account of deflationary effects, etc.?
Posted by: Alfie | November 10, 2009 at 07:14 PM
It is pretty clear that we pay most of our public servants too much. Michael talks about 1% above 200k, as if that it is only above that level where we are paying too much. Right down to middle incomes we are paying too much - compared to private sector incomes and compared to our european neighbours.
True, there may be an economic disadvantage to righting this wrong now, and if I could be convinced that it was both better and possible to adjust later in the cycle I'd be happy to see it happen later.
But the private sector workers out there know how they compare, in terms of effort, skill, education, pay with people in the public sector. I would urge private sector workers in any doubt to log on to the INTO, GRA, Association of Higher Civil servants and all the other sites and do the sums. Then bear in mind the pensions, job security, and other conditions such as time off, sick days, etc. Then ask if you would like these rates to stay the same while YOU pay more tax. Make no mistake, for every euro the public service hold onto, it will be clawed back in tax. Whether the structural adjustment comes now or by 2014, it will come for we cannot continue to spend above the tax take on this scale.
Posted by: Tomaltach | November 11, 2009 at 09:05 AM
Association of HIGHER Civil Servants how are you!
Bovale Developments is developing another shopping centre. Take the money off them and give it to Our Lady's Hospital, Crumlin!
Posted by: D_D | November 12, 2009 at 06:28 PM
Yvonne - apolotgies for getting back so late on this. As to the success or otherwise of the ICTU strategy - I think it would have been helpful if the trade union movement could have reached a consensus on an analysis of our current economic and fiscal crisis and then presented that in a clear manner. The failure to do that has meant - as you have pointed out - that people don't quite know why they should be protesting against the Government's policies. Is it over the balance between spending cuts and tax increases? Is it because of wage reductions - private and public? Is it because of something more fundamental - that the idea of contraction during a recession is wrong in and of itself? These have not been fully debated within the movement and, therefore, there are considerable strategic and tactical gaps - gaps which employers and the Right have been able to exploit. An example of that is that ICTU's campaign has been protrayed as a 'public sector' thing - which it isn't. It's about all workers. Unfortunately, that has not come through.
Proposition Joe - I accept that's the trade-off being discussed. It's a dismal trade-off. We have neither 'too many' public sector workers (though, I'm will to accept that we may have too many in one section and not enough in the others - but I'd like to get concrete numbers and categories on that), nor are public sector workers paid too much - though I know you would dispute that. So we end up debate a more deflationary approach with a less deflationary approach - when we should be arguing for reflationary measures.
Tomaltach - you say that its pretty clear public sector workers are paid too much. But the recent CSO paper shows that male public sector workers enjoy a premium of 2.7 percent when Guards and defence forces are taken out of the equation. Women get a higher premium because there is less wage discrimination in the public sector. Now put that against the fact that Irish private sector wages are low in comparison with our EU peer group (between 12 and 18 percent below average).
As to interntional comparisons - do you know of any databases that present a comprehensive comparison of public sector wages?
Alfie - on a static basis, a cut of 20 percent in pubilc wages would reduce the borrowing requirement by 0.8 to 1.2 percent. However, it would reduce consumption by over 3 percent. In this respect, we could reach a tipping point - where the next Euro of consumer spending withdrawn has a greater cumulative effect. One of the factors in the recession is that private consumption has fallen at a rate of ten times the Eurozone average fall. That has had a devastating effect on businesses that rely on the domestic market (which is most). Do you really want to throw those dice? The small decline in the borrowing requirement might end up being a small increase depending on the dynamic of cutting consumer spending.
Posted by: Michael Taft | November 22, 2009 at 07:40 AM