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July 20, 2009

Comments

WorldbyStorm

You've said something beautifully succinctly that was sort of only vaguely and imprecisely dawning on me. This is the worst that they can say about the PS? That after all the rhetoric in the SBP, the IT and elsewhere, when it comes down to it they're shaving (and incidentally in a manner I think is still highly destructive) only minimal bits here and there. Where is the waste? Where is the fat? I've been looking it at the other side, that the scope of these proposed cuts remains, despite the fact they'd cause massive dislocation across a range of areas, minor in the scale of our public expenditure, and one question remains unanswered, one I put to a GP person last week. How, given that the McCarthy Report figures are in that scale so relatively low is it seriously proposed that they will magic us to a better and more 'sustainable' level financially. The answer was a dubious 'well... it must be that it'll help with the interest on borrowing'. Right. Okay. So... he didn't know. And McCarthy himself does a not dissimilar trick in his constant reiteration of €400m per week and dark mutterings that it may not be possible to borrow on international markets in the future. Yet he never quantifies precisely how the proposals will in actuality improve our situation in a clear casual fashion. Odd that.

One other thought, an interesting letter in the Irish Times today which directly disputes the analysis of the Report by one who might know. If that's the level of detail and attention in the Report...well... :(

coc

That's an interesting post that reveals the idealogical blinkers of the Bord Snippers. I know it was outside the remit of the Report but there is one obvious element of the public sector that could yield big savings and that is payroll costs. A reverse benchmarking exercise is crucial. If 20% cuts in public sector payroll were to be achieved it would be better done by an average 20% paycut for everyone (which would translate to 25% or 30% for the fatcats), rather than 20% of staff being fired. But try explaining that to the Unions.

Yvonne

COC, unions are respresenting their members, workers who are trying to best for their families. You seem to have internalised the logic that the only way is down that workers must reduce the price of the labour, and that somehow this will translate to improved social circumstances for us all. If there's any useful benchmarking exercise to be undertaken at this point I suggest it is the overdue one between those at the top of organizations (public and private) and those at the bottom. There's an opportunity here to make this a more equal society but we're too busy pitching worker against worker in a world where 'objective and professional economists' see nothing immoral in proposing cuts to social welfare and to essential services that many in our society depend upon.

Carrigaline

I agree that the notion that there are billions of Euro of savings to be made from cutting public sector waste is a fallacy. When we look at the last budget, it is a matter of fact that social welfare, health and education make up 80% of government spending. To seek billions in savings, there is no course but to increase class sizes and waiting list times. This is a brutal option, but is there really any alternative?

I know that you have written about our disproportionate tax-base and multinational tax havens as an alternative to bridging the deficit. But really. In a recession, can we really countenance a hiking of corporation tax in an attempt to balance the books? The source of Ireland's indigenous wealth (bankers and developers) are bankrupt. That leaves only flagging multinational profits that we can try and wrest some revenue out of.

How long would they hang about if we tried to make them pay their fair share?

WorldbyStorm

coc, what does a 20% pay cut do in the real economy? What does it do to those who have mortgages, who spend in local businesses, who take out loans and so forth? I couldn't imagine a more dangerous way to proceed at this point. And even then what would the actual impact on the public finances and in particular the deficit be? As it stands the ESRI has gamed a 5% decrease and found that it would deliver a reduction of around 0.9 % of the deficit. Imagine your 20% cut. Would that deliver perhaps 3%? Most likely not since other effects would kick in. Well, all that pain to achieve so little?

Same goes for your point Carrigaline. Precisely how do you quantify the effects of increasing waiting times and class sizes. The first one incidentally will... without fail... generate deaths from people who are unable to get access to medical care quickly enough. And that will be overwhelmingly be those who cannot afford private health care. Perhaps you're sanguine about such matters. I'm less so. I had a precautionary colonoscopy earlier this year which I waited over a year to get publicly. I was fortunate that it was so relatively quick and that it was negative, others haven't been. I don't consider that an ethical way to proceed. It's certainly brutal though.

Tipster

COC: A reverse benchmarking exercise is crucial.

It has happened, although not at the 20% level you proposed. It was called a pension levy, but since it did nothing to the level of or entitlement to a pension, its name is a fig leaf. (And the future acquisition of a defined-benefit pension was stated to have been factored into salary levels being set at below levels for equivalent posts in the private sector during that there benchmarking process.)

Mack

WorldByStorm -

During the boom we borrowed huge amounts of money from abroad much of which wound it's way into government coffers via property tax revenues (and others). The government increased public sector salaries on the basis that these tax revenues were stable.

In truth they were dependent on a private sector credit bubble that has now burst.

The government could attempt to continue to borrow to fund those salaries until the economy grows to such a level that they can be paid out of earnings (rather than borrowings). This assumes that foreign creditors will trust that we can do this without our debt to GDP ratio spiraling out of control. Also I think, with the banking crises, we are reliant on European goodwill at the moment, and I guess such borrowing is fundamentally anathema to them too.

The other alternative - raising taxes, has exactly the same impact you describe. It reduces the net salary of all workers, it means they have less money to spend in local businesses and more problems paying their mortgages. You may feel Irish taxes are low, which may well be true (much like many feel public sector salaries are high). The problem is changing it now is deflationary and lands eople in the crapper either way.

Question is - Is it fairer to raise taxes on less well paid workers so that public sector workers can enjoy salaries significantly above average?

Michael Taft

There are difficult issues when it comes to achieving fiscal consolidation. I have put the emphasis on stimulating growth through investment in our physical and social infrastructure, job retention and boosting, where possible, low incomes. But this doesn't exclude other sources - such as taxation and public expenditure reform.

But WBS's point is well taken with regard to the An Bord Snip report - the lack of quantifying the upside and downside of particualr proposals (even though it was wholly open to them). Without such impact assessments we won't know which proposals are productive or not, or even if they would produce perverse results. That is why, again, I have highlighted the ESRI's simulations.

As to public sector wages (on which I have done a new post today) the argument that cutting the payroll will bring benefit is highly contestable. For instance, to cut public sector wages by 20 percent would in the first year drive down consumer spending by over 3% minimum. With the recent drop in the retail sales index following on from the April levy hikes, how many businesses reliant upon domestic demand would close, how much would this drive up unemployment, how longer would this lengthen the recession? And the benefit? The ESRI suggests (pre-April budget, so current situation would be less) that the deficit might fall from 12.2% to 11% - and that is if it doesn't have the cumulative effects on our already fragile domestic sectors. Not much of a gain - but a hell of a lot of pain.

That being said - is there anything we can do with wages - public and private? Yes. The fundamental rule in the middle of a contraction is to increase low incomes (wage increases, income suppelement) and reduce, for the purposes of tax revenue gain, the incomes of those at the top end. The former is expansionary (they spend money and their expenditure has less import-content) while the latter is less deflationary (more likely to see a reduction in savings rather than expenditure). This can be effected both through wage deals and taxation.

We have a real 'information' deficit but a surplus of commentators who aren't interested in what little information we have. That's why the debate is getting more degraded by the day (now some people want to cut the minimum wage - good grief; even Leo Vradrucker knocked that one on the head).

Also, Carrigaline, I wholly agree with you on the issue of the corporate tax rate adn have written about it on this blog (I'm a bit of a heretic on this one in progressive circles). Raising the tax rate will have little effect on tax revenue but could undermine our ability to attract FDI. It's a sad state of affairs and we should seek to address in the post-recession scenario. But only after we get out of this mess.

Carrigaline

WorldbyStorm: I can assure you, there's no sanguinity on my part about the deaths that will result of the proposed cuts. Infact, I agree with everything you've wrote in relation to this topic.

The issue I have is not just the mistaken belief of the right; that there are billions of Euro of public sector savings that can be made without reducing services. I also take issue with the belief that we can simply tax and borrow our way out of recession. With GDP collapsing, we have to increase taxation significantly just to maintain the services we already have! When you throw in unemployment, the contraction of credit, a global recession; it seems as if we almost have a perfect storm of calamity. By the time we emerge from this crisis, you can rest assured that you'll get your wish of increased taxation. The problem is, you'll also see brutal cuts in public spending.

It seems the penny simply hasn't dropped for Sindo commentators, or the unions. No amount of public sector cuts or taxes on the rich is going to return us to our 2007 way of living. All we can do for the moment is to try and carve up the shrinking pie, so that the pain can be distributed equally.

A finaly point, for me, the white elephant in the room is neither the civil service, nor multinationals. NAMA won't differentiate between public sector, private sector, and unemployed people. This €90 billion millstone will hang over our necks for the next decade, hoovering up cash that formerly went towards services to the economy. With this money now being shoveled into a hole (which we don't know how deep), people will face immense suffering and yes, some will even die. This hair-brained plan comes from the same people who said "no one saw the crisis coming".

Do we really want to mortgage our future to people who have got everything so hopelessly wrong?

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