If there is any backing off from budgetary measures, it would ruin Ireland's credibility, writes GARRET FITZGERALD
WHATEVER ROLE our parliamentary system may in the past have played in economic and social policymaking – and it was never very significant – after 1987, the Oireachtas was effectively displaced by new social partnership arrangements.
During the 1990s, the range of economic and social issues discussed in this forum was gradually extended so it covered almost every aspect of national life. It could be said that in those years, we moved from a normal democratic parliamentary system to a corporatist one.
It can be argued that during the late 1980s and the 1990s, this was worthwhile to secure a succession of moderate pay agreements as a quid pro quo for a steady reduction in the high level of income tax. As a result of this negotiation process, one-half of increases in the purchasing power of workers’ pay in the 1990s came from tax cuts and only one-half from pay increases.
Up to the end of the 1990s, the gain from the stimulation of growth by this series of moderate pay agreements may have outweighed the negative aspects. However, by 2000, tax had been reduced to as low a level as the economy could safely afford.
Unfortunately, throughout the first half of the last decade, the Government persisted with irresponsible reductions in income tax. By 2008, we had reached a point where – as shown in this column on November 7th last – one-half of our working population were paying no income tax whatever, with over half of the remainder paying only a fraction – between one-quarter and one-half – of the level of taxation that is paid on equivalent incomes in the rest of western Europe and in the United States.
Consequently, our revenue from income tax is now about €4 billion short of what it would be if western European or US tax rates applied. After 2007, the bursting of the housing bubble cause the exceptional level of taxation derived from property transactions to disappear, with the result that our economy was in dire straits.
This was not due to high spending – which last year was slightly below the level predicted by the Government in late 2006 – but simply because of the collapse in State revenue, which in 2009 was almost €15 billion, or one-quarter, lower than the level forecast in late 2006. Recognising this reality, in last April’s budget the Government proposed that half the required fiscal adjustment in the current year should come from increased taxation – to restore at least a small part of the revenue loss.
The dramatic reversal of that decision by the Government four months later, through a decision that the whole of the gap in the 2010 budget instead be met by expenditure cuts, was never explained and understandably, was disconcerting for the unions.
Co-operation by the unions with a major fiscal adjustment would never have been easy to secure. But in the event this was made much more difficult not merely by the policy reversal of last August, but also by the absence of a united Government stance in the negotiations.
For, at a crucial moment in that negotiation, two different arms of the Government seem to have chosen to negotiate separately with the trade union movement – always a disastrous tactic. While the Department of Finance took a clear-cut position about the need to cut public spending, including public service pay, discussions elsewhere appear to have led the unions to believe that a soft option may have been available, involving a temporary short-time working process.
A revolt within the Fianna Fáil parliamentary party against this soft-option proposal led to its withdrawal from the agenda. As the union leadership had encouraged members to believe that this soft option would be adopted, this left those concerned high and dry vis-a-vis their membership and the process collapsed in disarray and bitterness.
On this issue, the Government has no choice but to stand firm, and the unions’ stance on making the abandonment of the public service pay cuts an agenda item for further negotiations to end the present disruption was inherently untenable, as the Minister of Finance made clear.
In an interview a week ago, he said: “It is a fact that the State is not in the position to pay the salaries as they were last year. The decisions have been made by parliament and we made it very clear to the union side that there is no scope for restoring the reductions that have already been made. Subject to that, we’re prepared to engage with the staff side to see if industrial peace can be secured.”
Our success in re-establishing our credibility with the European Commission, the European Central Bank and with the financial interests from which we need to borrow billions to even pay the reduced salaries of public servants, would be at risk if the Government backed off from this or from any other significant part of the December budget.
Yesterday, it was announced that a formula had been found to enable fresh talks to start with the aid of facilitators from the Labour Relations Commission. These talks are to be about “the development of a comprehensive agenda for the transformation of public services and on a framework for public service pay determination”.
While Peter McLoone, chairman of Ictu’s public service committee, commented that “both sides were satisfied that their ambitions could be dealt with in the talks,” these terms of reference carefully avoid mention of a timeframe for recovering money lost due to pay cuts.