Irish Labour: hold taxes and raid pension reserves…

Michael Taft can see a dim light from the end of the tunnel. Well not from the government, but he applauds Eamon Gilmore for setting a few things straight on the relationship between the economic reality and public expenditure:

‘The problem we have in the public finances is as a result of the fact that the economy is in a recession . . . we have a problem in the economy which has created difficulties in the public finances. It’s not the other way around.’

Hmmmm… do you think he’s maybe been reading you somewhere Michael, or what…? Labour’s denouncement of Pat Rabbitte’s promised 2% cut in the standard tax band is welcome he says, but not enough:

The fiscal issue goes beyond capital borrowing or using Pension fund for capital projects – it is about borrowing over the length of the downside business cycle for both current and capital expenditure; a necessary breathing space while other policies are put in place to get us on the right path.

Sound familiar? This precisely what’s happening across the developed world. As I note in my Brassneck piece this morning all normal rules no longer apply. Anatole Kaletski in the London Times yesterday, likened it to a patient who’d been suffering cancer suddenly taking a heart attack:

Credit will have to be controlled in the long run through better regulation and tougher capital requirements; saving will have to be encouraged, especially in America and Britain, by higher interest rates; and consumption will have to be restrained with higher taxes. These higher taxes, in turn, will eventually narrow the government deficits that must be temporarily swollen to offset the post-Lehman slump.

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  • Mack

    ‘The problem we have in the public finances is as a result of the fact that the economy is in a recession . . . we have a problem in the economy which has created difficulties in the public finances. It’s not the other way around.’

    Oh dear. Really, I’m almost speechless. The public finances throughout the last 6 or 7 years were temporarily boosted due to massive increases in property & construction related revenues (Stamp Duty, VAT, Income Taxes, Capital gains). Our present government made the mistake of thinking this was sustainable – it looks like Eamon Gilmore is making the same mistake.

    The problem is not that we’re in reccession, what went before was a bubble and it’s never coming back!.

    The big problem we have now, is that public sector wages were boosted massively on the assumption that the good times would last forever.

    Average public sector salary – €48k
    Average private sector salary – €34k
    (approx figures)

    Public sector pensions are expensive defined benefit pensions that are linked to pay increases rather than inflation.

    Not only were wages increased via benchmarking, but the government expanded employment in the public sector on an unprecedented scale.

    When the economy, eventually, stops contracting, the tax take is not naturally going to support current expenditure (at least not without high inflation erroding current expenditure). The only options are much higher taxes, or much reduced spending.

  • Mack

    Mick – the big difference between Ireland’s predictment and the UK’s is that Ireland is in the Euro. The head of the Irish Central Bank earns more than the head of the ECB, and they’re both paid in the same currency. We can’t correct excesses in salaries (and other expenses) in Ireland by devaluing our currency relative to our European peers. We have to either take pay cuts (most likely in the aggregate, via job losses) or hope the others catch up fast with us (European growth or inflation). Germany has just been through this kind of recession.

    We have no control over monetary policy, and hence we can’t (alone) decide to reflate (running inflation above target for a period to prevent deflation) the economy like the British can with a Keynesian response.

    One swallow doesn’t make a summer, but CSO stats showed CPI deflation of 0.2% in October.

    http://www.thepropertypin.com/viewtopic.php?f=19&t=15509&p=157038&hilit=inflation#p157038

  • Alan

    We also need to keep our eyes above the level of the nation. The approaching summit will tell a fine story of how competing nations can trim their economies for the benefit of their populations.

    At least the EU has some outline of what it expects from the summit.

    http://www.finfacts.ie/irishfinancenews/article_1015207.shtml

    Interesting too, that despite Obama’s determination that there is only one President at a time, the timescale suggested by the EU effectively neuters George Bush and the appalling Paullson.

  • Paddy Matthews

    Labour’s re-announcement of a 2% decrease in the standard tax band is welcome he says, but not enough

    Eh?

    Gilmore actually said that the notion of another 2% off the standard rate – proposed by Rabbitte at the last election at a time when it was obvious to anyone with eyes to see that the wheels were coming off the economic wagon – was being renounced.

  • Mick Fealty

    Thanbks for that Paddy. Will amend directly.

  • skibbereen eagle

    The Irish State has an enormous portfolio of assets, prime real estate in Dublin, New York, London etc together with many billions worth of state companies. For the ordinary punter apart from the theoritical pleasure of ownership they confer no practical advantage.

    Perhaps an appropriate time for a review of options to see if these assets can confer a positive advantage…ie to sell or mortgare to fund capital spending