OPINION:Instead of delivering a net reduction in public spending, the measures contained in the Ictu plan may lead to an increase in expenditure, writes CATHAL O'LOGHLIN
THE IRISH Congress of Trade Unions' 10-point plan, There is a Better, Fairer Way, is its response to the Government's effort to resolve the emerging huge budget imbalance. But cutting through the verbiage, the plan is all about overturning the decision to charge public servants an extra €1.4 billion gross (about €900 million net of tax relief) towards the cost of fairly gilt-edged pensions.
Although a former civil servant who feels that public servants generally are as conscientious and hardworking as their private-sector counterparts, no demonstration for me. Why? The Ictu plan simply does not add up to a strategy for resolving current economic and budget problems equitably.
It has some admirable content. Short-term reprioritising within the public capital programme, focused on preference for the more employment-intensive elements of necessary public investment, would seem sensible. There is already significant integration with welfare programmes to upskill and retrain those unfortunate enough to lose a job; enhancing this also make sense.
The call to abolish tax shelters without proven economic worth is apt – and courageous, given there is no serious economic case for income tax relief in respect of trade union subscriptions.
One can strongly support some other of the Ictu’s objectives, also, while being a little cool towards the associated specific policy approaches. For example, there should be some safety net to protect members of properly funded, but unexpectedly failing, private-sector pension schemes, but not by way of dumping problem cases into the taxpayer’s lap.
Unfortunately, there is much else in (and omitted from) the 10-point plan which raises serious questions about whether the Ictu’s way really is “a better way”.
A first critical omission is any logic-based case against the intended public pension charges. These are non-trivial. The pension levy will cost the average public servant close enough to 7 per cent of present take-home pay – 8 per cent-plus for some. Either is a significant cut in living standard. One can understand the associated unhappiness.
The key issue is whether this is a fair strike at public service incomes, relative to what is happening, and likely to happen, in the private sector. The Ictu is silent on this crucial question. Nor does it have any comment on another relevant factor. It has long been said that, allowing appropriately for differences in job mix etc, public service pay rates (pension rights included) are rather more generous than private sector arrangements.
The Economic and Social Research Institute, reporting last December, found “a 23.5 per cent public-private sector wage gap in Ireland in 2006, with senior public service workers earning approximately 10 per cent more than their private sector counterparts, and those in lower-level grades earning between 24 and 32 per cent more”.
If true, then the case for a unilateral reduction in public service remuneration is clear. If false, where’s the Ictu rebuttal?
A second critical omission concerns the balance to be struck in repairing our damaged budget between raising taxes and cutting public outlays. The Ictu agreed, in January, “on the necessity to progressively reduce the level of exchequer borrowing over . . . the next five years . . . through an appropriate combination of expenditure and taxation adjustments”. Note that expenditure compression is included!
Which of the Ictu’s 10 points will deliver a net reduction in public spending? Indeed, their list seems to me to add up to net extra public outlays. As to tax proposals, they talk a lot of hitting high earners – those above €100,000 a year. The budget needs “repair” to the extent of €15 billion or so over the next few years. If the Revenue were to confiscate every cent of every euro of above €100,000 earnings, the net yield might reach €3 billion.
Have we a basis for judging whether the Ictu is showing us a better, fairer way on taxes? Frankly, no. I greatly doubt that the Ictu would even consider opting for sustained high levels of borrowing. So they must envisage higher taxes making a major contribution to budget consolidation. But they’re staying mum about the nature of most such imposts.
Third, there is a problem about objecting to a public service pension charge on the basis that the announced expenditure measures amount to “tackling the public finances without charging the wealthy a cent”. What problem?
January's Framework for a Pact for Stabilisation, Social Solidarity and Economic Renewalstates that "given the urgency of the situation and the role that taxation will have to play in bringing stability back to the public finances, the Government is asking the Commission on Taxation to . . . identify options and . . . report by September 2009".
In effect therefore, the Ictu agreed to have tax proposals worked out for decision in the autumn – not immediately.
Finally, given the vociferous characterisation of the Government’s proposals as “part of a strategy to drive down wages across the economy”, these wrap-up comments are merited.
- Irish prices are at least 15 per cent above the average across the pre-enlargement European Union 15 – perhaps closer to 20 per cent higher today, given prevailing sterling weakness;
- Eurostat data shows our labour costs in 2007 as fourth highest among the EU15. Official OECD data for 2006 shows Irish labour costs third highest in the euro zone;
- There is an unavoidable link between the two. Irish prices are well above EU averages in large part (but not solely) because of wage-driven inflation. Think that wage changes do not affect prices? €10,000 out of the average household's total spend in 2007 was required just to compensate for the effects on prices and taxes of the various wage increases implemented since 2001;
- Our high relative wages and prices are losing us jobs and building our dole queues.
Cathal O’Loghlin is a former assistant secretary of the Department of Finance and director of the International Monetary Fund