Scraping the Bottom of a Broken Barrel

It’s open season on the Croke Park Agreement and public sector workers in particular.  It should be scrapped, torn-up, renegotiated, whatever – just cut wages.  Some of the arguments are Pythonesque.  Dr Eddie Molloy, in particular, tries to co-opt Jim Larkin into his proposals to cut workers’ wages (here and here).  I suppose now we’ll get someone co-opting William Martin Murphy into the argument for raising the corporate income tax.

Dr Eddie claims the Government should plead inability to pay, citing deterioration in the economy and public finances that were not foreseen at the time the agreement was made.  Strangely, he fails to connect the dots – or even admit there are dots to connect:

· Pension levy · Budget 2010 pay cut · reduction of public sector employment · real pay cuts under the Croke Park Agreement (after inflation) · economic and fiscal deterioration

We’ve had pay cuts, we’ve had downsizing and we are still in a mess.  One might expect a consultant to go back and see if there is some connection, a cause and effect, and ask that most fundamental question -Is what we’re doing producing the effect we desire.  Instead, Dr Eddie, seeing the tired old horse stumbling to the ground, demands that we whip harder.

If Dr Eddie can’t or won’t ask those fundamental questions, we can.  His contention that economic deterioration is making things harder is correct.  What would happen if we cut public sector pay by, let’s say, €1 billion (7 percent across the board cut)?

The impact on the domestic economy would be considerable.  In the first year alone, over half a billion Euros would be wiped out.  Over the three year period, nearly € 2 billion would be wiped out.  It is noteworthy that Dr Eddie, when describing the deteriorating situation, points out that:

‘ . . . growth projections for the economy have not materialised . . .’

Yet, he proposes a policy that will ensure that growth will fall even further.  Why would he do that?  This is a classic example of proposing a course of action without thinking through the impact.

I’m sure Dr Eddie would support proposals to increase employment.  After all, rising employment means more tax revenue, lower unemployment costs, and greater economic activity.  However, according to the ESRI, there will be private sector job losses if public sector wages are cut.  Keeping with the proposal to cut €1 billion in wages they estimate that up to 4,000 jobs will be lost by 2015 – but we should remember that this estimate comes from 2010 against a background of projected growth.  Given the deteriorating situation since then, we could expect this job loss figure to be higher.  Again, why would Dr Eddie propose a policy that will cut more jobs out of the economy?

How many businesses will go out of businesses arising from a public sector pay cut?  This is a difficult to quantify.  But we can measure the impact in consumer spending.

In 2013, €734 million in consumer spending will be lost by a cut in public sector wages.  This rises to nearly a billion Euros by 2015.  Over the three years, €2.5 billion will cut out of consumer spending.  This means less sales, turnover and revenue for business.  How many will go under?  Dr Eddie doesn’t refer to this, even though it is obvious that if you cut people’s disposable income, there will be a drop in consumer spending – especially with so many households grappling with debt.

Ok, so growth will be cut, private sector jobs will be lost, and consumer spending will fall, threatening more businesses.  But Dr Eddie, like so many others who demand we take ‘tough’ decisions, may say that this is the pain we must take to reduce the deficit.  This raises the question: how much deficit will be reduced by cutting public sector pay by €1 billion?  The answer is, not much.

In the first year, the borrowing requirement will fall by €677 million.  However, as the deflationary impact of the cuts become embedded in the economy, the reduction in the borrowing requirement falls to €479 million by 2015.  In other words, the ‘savings’ to the Exchequer is less than 50 percent of the headline cut.

Let’s put this into perspective.  Between 2012 and 2015 the Government is hoping to reduce the borrowing requirement by €11.9 billion.  Cutting public sector pay will reduce that amount by €479 million.  4 percent.  Dr Eddie’s proposal will have the effect of cutting the borrowing requirement by 4 percent of the amount needed.  Growth will be cut, private sector jobs will be lost, consumer spending will put domestic businesses under even more pressure – but at least we have reduced the borrowing requirement by 4 percent.  Is this ‘tough’ decision either efficient or effective?

But we don’t have to go through charts and graphs to figure this out.  Cutting people’s wages – whether private or public sector – during a domestic demand recession is not likely to turn out well.  We can get a better sense of this by looking at the range of income groups that will be hit.

Over 60 percent of public sector workers earn less than €50,000 a year – and this doesn’t take into account the impact of the pension levy.  There are less than 15 percent on higher incomes (above €70,000) and a minute 2 percent in six figures. 

To cut into low and average workers’ wages, regardless of who their employer is, is to invite all manner of problems – and not just those listed above.  Cutting wages could see a rise in social protection payments, in particular Family Income Supplement.  For instance, a worker on €28,000 with one child experiencing a 7 percent wage cut will end up costing the Department of Social Protection an additional €800 per year in FIS payments. 

Cutting wages could also see a rise in mortgage arrears, which will rebound on the Exchequer if this contributes to a growing destabilisation of bank finances, resulting in higher capitalisation payments or less credit in the economy.

These are just two instances of perverse consequences which will undermine deficit reduction – and which those who claim to be taking touch decisions just ignore or unaware of.

Ultimately, we’re back to the same old barrel, scraping and scraping until the barrel is unfit for purpose, leaking all over the productive economy.  We have had cuts in both public and private sector pay.  And, as they say, we are where we are.  The problem is that few people ask that fundamental question – why is it that after all the cuts of past, we still are here. 

Of course, if we did ask that might lead to new thinking – innovative, strategic thinking – that will ensure that what we are doing is producing the results we desire.  That might lead us away from the policies of cuts and austerity.

And we dare not to do that.  So, keep to the programme, steady-on, there is no alternative.  All we have to do is whip harder.

Comments

[Colum McCaffery]

The argument here is that the disgusting differentials within -between - public sector incomes has to be tolerated in order to maintain demand. There is also the defeatist belief that if pay in the public sector is examined, the only outcome would be a right wing victory for cuts across the board. Implied is the belief that there are too few rich public servants for a pay ceiling to make any effective saving but that very much depends on the definition of rich.

[Michael Taft]

Colum - we have this discussion before but I don't think it is quite accurate to say that this post is an argument for tolerating disgusting differentials. It merely looks at the impact of cutting public sector pay on certain key indicators. That's all. A programme for greater income and social equality is one that I am fully supportive of - as you are aware.

By the way, and not by way of defending any 'disgusting' differentials but you might interested in this paper and Graphs 3-6: http://www.tara.tcd.ie/bitstream/2262/41131/4/new%20o%27callaghan%20foley%20final%20amendment.pdf
If the distribution of income in the economy reflected the distribution in the public sector, it would be a more egalitarian society and the recession would not have been as deep.

[Colum McCaffery]

Michael, I know of course that you support greater equality. The difficulty I seem to have lately is that while almost all socialists and other progressives support reducing inequality of income, they usually hold something to be more important and so the stucture remains largely intact.

Your argument is for leaving the CP Agreement untouched because a reduction in the p.s. paybill would reduce demand. I'm not making little of the desirability of demand in the economy. My point is that income and pension ceilings in the public service - while certainly reducing demand - would have egalitarian effects. In a hierarchy of desirabilty I would place this modest egalitarian reform higher than maintaining demand. You would reverse that order.

I apologise if I divert your blog thread away from economics but here is the "ceiling argument" developed for a Labour Party audience: http://colummccaffery.wordpress.com/2012/05/08/prioritising-public-spending-and-reducing-income-inequality-in-the-public-sector-a-motion-which-failed-to-make-the-agenda-for-the-labour-party-conference-2012/

Thanks for the very interesting ref.

[de Charette]

‘Over 60 percent of public sector workers earn less than €50,000 a year – and this doesn’t take into account the impact of the pension levy. There are less than 15 percent on higher incomes (above €70,000) and a minute 2 percent in six figures.

To cut into low and average workers’ wages, regardless of who their employer is, is to invite all manner of problems’

Michael, are you trying to present €50k as low to average pay?

Can I remind you that the average wage in the private sector is around €33k, while its circa €36k overall.

So your €50k threshold below which a majority of public servants earn is a full 50% higher than the private sector average!

Only a tiny minority of public servants could be characterized as being low-paid when compared to that private sector average.

Similar spin in todays Irish Times:

‘Targeting clerical staff, caretakers, special needs assistants or home helps for further cuts would do nothing to aid the economy’

It seems the relatively small number of such ah-shucks jobs in the public sector are serving a dual role. Each SNA is not only struggling heroically to ensure a challenged child gets an education, they are also providing a convenient fig-leaf for several teachers on €70k.

[Michael Taft]

de Charette - thanks for that. Yes, €50,000 should be considered average pay - though at the higher end of average. According to the CSO's latest Earnings data, average annualised pay is €51k in the financial sector; €50K in the Information & Communication; €42K in the industrial sector. Of course, in many sector average pay is much lower. What we need to do is average up, not average down.

I will be doing some comparative work on these stats soon, so we can revisit this issue.

[de Charette]

With respect Michael, that public sector salaries are comparable to the other well-paid sectors you mention doesn’t make them average.

Rather it makes them well-paid, just like financial and ICT sectors.

Otherwise, you could make the argument that €50k is in fact very low-paid when compared to the Hollywood acting and Premier League football-playing sectors.

[Eamonn moran]

Hi Michael. I read most of your posts and find them very informative. However I had to wince at the following response you gave to de charette. "thanks for that. Yes, €50,000 should be considered average pay - though at the higher end of average."
50% above average is not average. The arguments of the left are weakened when they use the same statistical tricks as the right in order to make a point. Credibility is also lost.

[Eamonn moran]

Also by simlpy changing emphasis you could say that about 75% of the public sector earn more than the average industrial wage of €35,000. One more question do the public sector figures being used above include all the allowances?

[Michael Taft]

Eammon - standard measurement of 'average' (there are many) is that employed by the OECD and IMF. It puts the range between 0.66 and 1.66 of the average income. The average national weekly income (annualised from the latest CSO earnings)€35,800, leaving a range of 23,600 and 59,400. Average industrial earnings €41,800 leaving a range of 27,600 and €69,400.

One can use other benchmarks (median wage, full-time equivalent, etc.). But I think it is unfair to call reliance on a standard range used by international data agencies as 'statistical tricks'.