February 3rd Afternoon: The Recession Diaries

It was always going to come down to public sector pay.  There were lengthy discussion on taxation, public expenditure cuts. pension protection, job saving measures.  But the talks in Government buildings on the Strategic Framework document, which collapsed early this morning, was never going to come undone over these issues. It wasn't even going to crash over pay in general (the economy is doing that for us).  The flash point was always going to be the last item on the table - public sector pay.

In a way was eerie. The Strategic Framework document agreed last week established parameters within which more detailed discussions were to take place.  While, in principle, it was flawed given that the organising principle was to cut €2 billion out of the economy (on the same day the social partners agreed to this deflationary strategy, the US House of Representatives agreed the $800 billion plus stimulus package proposed by President Obama), there were potentially positive areas - pension protection, for instance, or progressive tax measures - which ICTU negotiators could exploit.  However, throughout the document, public sector pay was only mentioned once, in passing, in a half sentence.  Yet, the dogs in the street sheltering from the rain knew the only reason why there were any discussions at all was public sector pay.  That was the bottom line.  All the rest was negotiable.

Essentially ICTU couldn't agree the Government's proposals to levy pensions.  Not that they were against the proposal in principle - it's just that the scale was too much, 'onerous' as David Begg described it.  The Government hoped to raise €1.3 billion from the levy but Begg stated it would have impacted heavily on low-average income groups. 

The Government proposed a sliding levy from 3 to 10 percent on all income above €15,000 per year (there are a number of public sector workers on this amount owing to job sharing, part-timing, etc.).  For someone on the average industrial wage, they would have faced a gross levy of €2,250 - or nearly €45 per week.  There is no question that this loss of income would be onerous for average income workers.

But even after that levy, would the Government have really improved the fiscal situation by €1.3 billion?  No. It's a gross figure.  The levy would be tax deductible at the marginal rate. (So to be fair to the example above, the single average income earner would be down a net €1,327).    The net saving would be substantially less - my back of the envelope calculation puts it at €800 million.  It sounds like a lot but it amounts to 4 percent of the Government's projected annual deficit.  And this doesn't count the loss of spending tax revenue or the multiplier effect of reduced spending power.

The Government goes on about sharing pain.  Would this measure have shared pain?  Yes, but not in equal measures.  When we hit low-average income groups with levies (as was done with the income levy in the October budget) they compensate by cutting spending.  Indeed, some groups will have to choose between paying a utility bill and getting junior a new pair of shoes.  For higher income groups, levies, even if progressively graded, will result in reduced savings or more conspicuous spending.  It has the form of sharing the pain, but in the real world we live in, there's a world of difference.

And the ludicrous aspect of this particular levy on pensions it is deducted from tax.  Public servants in the top rate of tax can deduct 41 percent against their tax liability.  Lower income earners in the standard rate can only deduct 20 percent.  Isn't it great to share?

And the Government, asking average income to absorb pain, was not even able to make concessions on progressive taxation, or pension protection, or cutting inequitable expenditure whether direct or tax expenditure.  They demanded their take, but provided no give - especially any give that cut across their narrow ideological analysis.

So where does that leave us?  Watch out for the proverbial ton of bricks to come landing on ICTU, on trade unions and, especially, public sector trade unions.  Public servants will be treated like carriers of an economic plague.  It will be open season on anybody who draws their pay directly from the public purse.

The risk is that trade unions will bunker down, hoping the storm blows over tearing off only a few shingles of their shaky house.  It won't come out into the air to confront the argument, it will avoid it.  Understandable in some respects but a mistake nonetheless.  For the argument won't go away.  By trying to avoid it, the trade union movement will only marginalise itself, drawing back into even more defensive positions which, like a siege, will eventually crumble.

A frequent commentator on this blog, James, posed a challenge to the likes of me who oppose public sector pay cuts:

'Even if we were having a fiscal expansion rather than contraction it would not make sense to do this through increased wages (nor through tax cuts, for the same reasons). If the government cut the public sector pay & pensions bill by €2bn (hard to do I know) and spend that €2bn on capital spending the net result would be stimulatory.'

This is a legitimate point.  If a progressive government were to come into power tomorrow it would face a crisis on just about every front: fiscal, unemployment, collapsing pensions, falling living standards, an investment drought, a consumption collapse, increasing borrowing costs; all this being played out in an international downturn and a crisis in global finance.  Were it to launch a stimulus package - to upgrade our economic and social infrastructure, protect incomes, bring our indigenous enterprise sector up to scale, launch redundancy-avoidance measures and retaining programmes - it will have to ask the fundamental question:  how do we mobilise the capital and resources to do this.

I have suggested a number of strategies: increased borrowing, taxes on unproductive capital, reduction in tax expenditures and regressive direct expenditure, etc.  But let's be honest:  were such a government to come to the social partners and ask, 'How can you contribute to this mobilisation of resources?'' it would be vital that they respond positively, including trade unions.  The current pay deal (which will undoubtedly get suspended in the public sector) is not the end-all and be-all.  There are always progressive alternatives.

Can we devise wage/tax strategies that (a) enhance or at least maintain low-average incomes to facilitate consumption and confidence, and (b) reduce our very high wage / income inequality?  Yes,in both the public and private sectors.  That such a government would have to pursue such policies in the context of protecting private consumption makes it all the more complex but no less resolveable.  But what is needed, most of all, is confidence and direction.  To cut public sector incomes in such an ill-thought out way in pursuit of a deflationary strategy - well, that hardly inspires confidence. 

Ultimately, this is not a negotiating process.  It is a political one.  ICTU - and all of us - are trapped by the partners and government we have, by the prevailing consensus, by a debate where it is surrounded by hostile forces.  The question is not how much cuts ICTU is willing to concede.  The trade union movement desperately needs a project of its own - a programme that it can start challenging the deflationary consensus and win new allies.  What it desperately needs to do is change its partners, or at least one - the Government.

So the real question is - what are they going to do about it? 

 

 

Comments

[Yvonne]

Meanwhile a victorious Turlough O'Sullivan is unapologetic this evening in seeking an expansion of the Government's corporate welfare programme:
“'We will continue to engage with Government on active supports for enterprise,' Mr O’Sullivan said. These supports were as important, if not more important than public sector cuts, he said."

Just how much consensus is there I wonder and how much of it is being manufactured by soundbites such as his and a compliant (and possibly complicit) media?

I am surely not alone in seeing these measures as part of an overall attack on public service provision generally and specifically as part of a concerted effort to drive down pay and conditions for all.

The real question is what are we going to do about it?

[Libero]

Please keep up the good work. I can’t say I agree with all of your analysis; as one comment put it, your relaxed stance on national debt needs some heavy qualification. Still, your writings are a breath of fresh air in the new consensus of “deflation with dignity”. You are dead right to emphasise the destructive results of removing demand from the economy, and dead right to point out the hypocrisy of those who lauded the boomtime inflation of aggregate demand in the economy but now piously request with menaces that we all cut back in the national interest (and put gratuitous boots into the public sector at the same time).

Above all, you are right to point out the overwhelming unfairness of it all. The boys and girls who cashed out of the property bubble are now contemplating a comfortable retirement, even if creditor banks come sniffing for their outstanding development loans. There is no extra pain for them, even though Revenue has details of windfall profits from the bubble years. There isn’t even a hint that the government will assist banks in taking back billions owed by developers under personal guarantees, and which will instead have to be met by the taxpayer through recapitalisation. Instead, it’s up to the PAYE sector to bend over, as per usual. All the while, the government manages to find millions to spend, for the very first time, on schemes to buy new-build apartments in the name of social housing, and sub-prime Home Choice Loans.

[Michael Taft]

Thanks, Libero, for your comment. I hope that I haven't been too relaxed about the debt (not nearly as relaxed as the present crowd who allowed it to balloon the way it did due to events that were wholly predictable such as over-reliance on property tax revenue) - but I take your point. It's just that I believe that the fiscal crisis cannot be solved within an economic contraction and any attempt to do so risks perpetuating fiscal deficits and hammering the economy at the same time. We must, instead, address it once we have troughed out - and do so consistent with economic growth. A fine line, surely and at times I may not be wholly appreciative of that in my desire to fight off the fiscal reactionaries. There is clearly considerable room for revenue raising measures - especially on those that you rightly refer to. And by the way, 'deflation with dignity' is a great line - if I use it I will certainly credit you.