INSIDE POLITICS:The Taoiseach's welcome ability to lift spirits took a hit with the pension levy and Morgan Kelly's warning
ENDA KENNY’s most important achievement since taking office just over two months ago has been to bring a glimmer of hope to a despondent electorate that his Government has the ability to chart a way out of the most severe economic crisis in the nation’s history.
The Taoiseach’s sunny disposition has come as a welcome relief to a public traumatised by a diet of bad news for the past 2½ years and his infectious optimism has provided a marked contrast to the gloomy appearance of his predecessor.
In the past week, though, the first cold winds of political reality began to bite as private sector workers digested the implications of the pension levy Bill as the price of the jobs initiative. The latest pronouncement from prophet of doom, Morgan Kelly, also put a damper on the general mood.
It was ironic to watch Fine Gael and Labour politicians, who had used Kelly as a stick with which to flay their predecessors in office, finding themselves aghast at the potential of his latest missive to upset their tentative recovery strategy. One politician whose mind hasn’t been changed by the switch from Opposition to Government is Labour TD Tommy Broughan who described Kelly’s analysis as “powerful and accurate”.
Broughan’s intervention was the first indication of the potential for political trouble in the Coalition ranks, particularly with really tough decisions looming in the autumn.
The most effective challenge to Kelly’s argument came from former taoiseach John Bruton who pointed to the appalling risks involved in unilaterally defaulting on our debts and walking away from our EU obligations. In the real world it is simply not an option for whichever set of politicians is in power because the consequences are so potentially dangerous for the people of the country and for future generations.
One of the unspoken problems is that fears of default fanned by “celebrity economists” have encouraged a run on the banks for the past year or more which has in turn made us even more dependent on the European Central Bank. People from all walks of life have been panicked into moving their money out of the State and there have been rumours in the political world that some people earning substantial sums from the public purse have been leading the charge.
Persuading people that it is safe to deposit their money in Irish banks is one of the crucial confidence building steps required to restore health to the banking system and ultimately to the economy. Only when money starts flowing back into the system will it be possible to wean the banks off the ECB and back to normal borrowing on commercial markets.
The decision to put a 0.6 per cent levy on pension funds to finance the jobs initiative has not exactly helped on this front. It has sparked speculation that the next move will be to start taxing ordinary savings and that is likely to cause further outflows of money from banks.
Minister for Finance Michael Noonan needs to hit the speculation on the head by giving a very firm commitment that there is no question of taxing deposits. He has emphasised the pension levy is a temporary measure that will only last four years but that needs to be restated again and again.
He has also given a strong indication that as a quid pro quo for the levy he will shelve the plan to reduce tax relief on pension contributions from the higher to the standard rate, if agreement can be reached with the EU-IMF team. The retention of tax relief at the higher rate, with a ceiling on the qualifying amount, would probably more than offset the negative effects for most pension contributors in the long term.
While there is clearly inequity involved in imposing a levy on the pension funds of private sector workers, whose entitlements are generally much smaller than those paid out in public service pensions on equivalent salaries, the Government had to find the money somewhere to fund its jobs initiative.
Social solidarity in the face of the crisis is the key to a solution and that means private sector pensioners have to take their share of the pain, even if most of them are by no means in the most privileged sector of society.
It is probably inevitable that down the road public service pay and pensions as well as social welfare payments will all have to be cut again because the Croke Park agreement does not have the capacity to deliver the savings required.
One of the reasons the EU-IMF team are taking a hard line with this country is they know that pay and pensions in the public sector are considerably higher than those in the private sector and are also higher than the rates prevailing in most other EU countries.
One of the things that has been lacking so far in the response to the economic crisis has been a sense that the common good requires sacrifices of all. In particular the older generations have a duty to ensure that the young have a future in this country.
The jobs initiative was a modest start but it was a move in the right direction. The targeted reduction in VAT, spending on roads and schools and the creation of 21,000 training and internship places should provide some opportunities for the young to get a foot on the employment ladder.
Much bigger decisions on burden sharing across society are required to generate a sustainable recovery and they will be taken in the budget for next year. Despite the return of some gloom in the past week the prevailing mood is still one of cautious hope that the Government will have the courage to do the job, whatever it takes.