An Bord Snip reports, now for the hard part

Colm McCarthy’s Special Group on Public Service Numbers and Expenditure Programmes (An Bord Snip, Nua) report was released yesterday, just in time for the Dail recess. It proposes €5.3bn worth of cuts in public spending, the government is sure to face stiff resistance in attempting to implement them, with RTE reporting that Union IMPACT are threatening widespread industrial action.

Framing the debate

The need for spending cuts and tax rises due to the collapse in Ireland’s bubble boosted tax revenues over the last two years. Bubble-era tax revenues allowed government to greatly increase public spending, hiring more workers, paying much higher wages and improving benefits. The downturn not only caused tax revenues to collapse, it has also put great pressure on social welfare spending as unemployment has rocketed. Ireland’s current expenditure is in the region of €50-€60bn, while tax revenues are in the region of €30bn. The government can attempt to borrow the difference (the deficit) for a while, but the problem is further compounded by the banking collapse. The government has issued a blanket guarantee on all bank liabilities (deposits, bonds), this in turn has spooked the bond market – hugely increasing the spread the government must pay on all government debt it issues, over and above that paid by other Eurozone members (normally benchmarked against the prudent Germans).

The deficit will be in the region of €20-€30bn, some of that is cyclical, some structural. The cyclical part of the deficit includes increased welfare payments for unemployed workers, many of whom will return to employment when the economy rebounds. Other parts of the deficit are structural. Bubble era property tax revenues have collapsed and are never coming back, bubble era benchmarking based pay rises for public servants are permanent (unless the government reverses them). A recent CSO report showed that public sector employees earnt on average 48% more than private sector employees and that public sector employees with a degree earnt on average 43.8% more than private sector degree holders (the age structure in the public sector seems to be much older than in the private sector for some reason, perhaps because turnover is very low and redundancies are unheard of). At some point the cyclical deficit should correct itself, but the structural deficit will have to be dealt with by the government sometime.

Dealing with the structural deficit now, whether by spending cuts or tax rises will deepen the recession, as money which would otherwise be borrowed by the government from abroad and spent locally will not be introduced into the economy. External money introduced into an economy can have an economic impact well beyond it’s nominal value (e.g. velocity of money, Keynesian multipliers, fractional reserve banking). The government has already attempted three times in the last 12 months to reduce the deficit by raising taxes and the McCarthy report represents the start of a concerted attempt to make significant spending cuts. Given that we are in a severe recession, and that Nobel prize winning economist Paul Krugman reckons that deficit spending has spared the world from a massive depression – why is the government attempting to reduce rather than increase it’s fiscal deficit now? Surely we would be better borrowing what we need to see us through the recesssion and then pay down the new debt after the economy has rebounded? The answer is probably that, as we must borrow money from creditors on the bond market – and with Ireland’s credit rating already having been downgraded, the government must feel that they would not be able to sell enough bonds with a low enough yeild to nurse Ireland through the global downturn. In short, we would be dependent on the kindness of strangers in taking that approach and the consensus is that we have run out of options. (With notable exceptions)

Details and analyses beneath the foldThe report

The report is available in two parts :-

Volume 1
Volume 2

The Irish Times give a bullet point overview of what is in the report

It includes – cutting 17,300 staff with the largest cuts in Education and Health, merging rural schools and Garda stations. Cutting salaries in the Justice department while social welfare rates to cut by 5%.

A member has also posted his (more detailed) synopsis on Askaboutmoney.com.

Analsyis of the report

It’s still very early days in terms of getting a detailed reaction from the blogosphere, but some bloggers are beginning to dissect and interpret the report.

Michael Taft was one of the first out of the blocks with a more detailed analysis, at Notes on the front he articulates the view that the cuts will damage economy, he argues –

That The Report’s proposals, if implemented, will lengthen and deepen the recession, will cause further job losses, will further reduce consumption and spending.

Constantin Grudgiev argues that Ireland is still overspending on civil service wages and benefits

The state has paid billions in wages and perks to an army of civil servants who produce illiterate, embarrassingly childish policies and waste resources, obstructing change and reforms.

An Bord Snip Nua report says this much, yet still leaves them all in their jobs, until they choose to retire and saddles us, taxpayers with the charge of paying their grotesquely disproportionate (by any measure of their competence and/or international comparisons) wages.

Ronan Lyons points out that although the cuts in health and education are the greatest in absolute terms, relative to the size of their budget other departments are hurting more.

There is a discussion of the report over at irisheconomy.ie, Michael Hennigan of finfacts.com says

This cry of class war is the tack taken by Republicans in the US in defence of tax cuts for high earners.

The value of the report is that it starkly sets out the conspiracy of the insiders against the public interest.

Pension costs estimated at 30% of earnings; judges appointed from the private sector in their 50s and then given full-service pensions at 65; Gardaí free to retire on full earnings indexed pensions at the age of 50 and so on.

“The Group notes the large number of allowances paid to members of the Gardaí and that the majority of these allowances are pay-related and pensionable. Many of the allowances appear to have limited rational justification. The Group consider that the current system of Garda allowances on top of pay, and high levels of overtime, should be reviewed to realise savings.”

Hardly a crime to tackle such issues?

As for change in the 1898 vinatge system of local government, it would surely be progress.

Other relics of the Victorian era are unlikely to change in conservative Ireland: e.g full public spending transparency

It would also be optimistic to expect any big changes in the buck stops nowhere system.

Other discussions –

askaboutmoney.com have devoted an entire forum to the issue – http://www.askaboutmoney.com/forumdisplay.php?f=71

thepropertypin.com, not to be out done, also have a thread – http://www.thepropertypin.com/viewtopic.php?f=19&t=16040&start=90

  • kensei

    Mack

    I read soemwhere about Ireland basically giving away oil and gas rights but I can’t find the link. Do you know much about it, and is that not prime for a hit?

  • jone

    You may have seen Nomura Economist Richard Koo on Newsnight last night making his well worn point that this is chiefly a ‘balance sheet’ recession and that for a government to embark on a deficit reduction under such conditions is madness.

    His basic thesis is that with the collapse of the value of certain assets (mainly property related) businesses and consumers concentrate on debt reduction and balance sheet rebuilding. And this means they stop spending and lending.

    In such circumstances the only driver of growth is government and if it turns to balance sheet rebuilding too soon then deflation beckons.

    Clearly for a government to indulge in deficit spending it has to be able to sell its debt – that was never a problem for Japan during its hideous recession.

    However the calculation in Dublin seems to be that the bond markets are much more sceptical of Ireland’s position, particularly since the bid to cover ratio on Irish bonds in April was only 1.1 (though things have improved since then.)

    Koo’s slides here

    http://csis.org/files/media/csis/events/081029_japan_koo.pdf

  • Mack

    Kensei –

    I know very little about it. I did find this though –

    http://archives.tcm.ie/breakingnews/2007/10/07/story331071.asp

    It looks like the state sells exploration licenses for an upfront fee – private firms assume the risk that there is no retrievable energy resources (they can do this profitably by exploring in diversified regions across the world). The state then takes 40% of any revenues generated. That looks like quite a good deal from the states point of view.

    But possibly they did worse deals in the past. Reneging on any past days would presumably worsen the terms of any future deals as private companies would reassess the risk levels involved. So we’d need to be sure it was profitable to the state to do so (although we could always just renegotiate any such deals).

  • kensei

    Mack

    Aha.

    http://www.irishtimes.com/newspaper/opinion/2009/0619/1224249118435.html

    Now, I’m not suggesting that doing some of the stuff An Bord Snip is suggesting is a bad idea, but taking a cut on that and piling it into developing broadband or renewable infrastructure looks like a sensible idea in a time where resources to do things like that are thin.

    You’d think it’s an open goal for oppositon parties?

  • bk

    I think you are referring to the Corrib gas field. The Corrib field contains about “1 trillion cubic feet”(28 billion cubic meters) of gas, Which would be worth some €5 billion at current market prices. 80 percent of this is recoverable.Assuming no gas is exported to Britain, the field should last 12 years if it were delivering 60 percent of Irelands needs.The extraction costs will run to over 3 billion. Leaving a maximum potential profit of 1 Billion Euros over 12 years. This is hardly a solution to the Republic’s finanical woes, despite what Sinn fein and other crack pots would have you believe. In 2008, the full-year government deficit was 11.5 billion euros.

  • Mack

    Potentially – They could stand on a platform of renegotiation, suggesting the original terms where too generous.

    If you take a hypothetical example. Country A has no known natural resources, but offers an exploration licence. The market takes a dim view, there are few interested parties. The probability is there are no significant resources in Country A. Eventually one big player drives a hard bargain and negotiates terms far below what countries with proven reserves would expect. If they find nothing Country A pockets the licence fee, but in turns out they find a monster field. Country A probably should try and renegotiate – the company has hit the jackpot big time. The resources will still be profitable to them if they have to pay more. Although the company will claim they took the risk and deserve the reward in it’s entirety, what we now know about the field didn’t even figure in the initial risk assessments (and future risk assessments can take into account government renegotiation in the event of a monster find, I suspect in the real world – they almost certainly already do).

    Just thinking it through, but I think it would be fair enough to attempt a renegotiation. If there was even a hint of corruption….

    Although by the sounds of it Corrib is a tiddler..

  • bk

    In international terms, the Corrib field
    is tiny: The world’s largest gas fields in
    Russia, Oman and Iran are hundreds of
    times bigger. We should be seriously considering going nuclear supplemented by renewables, if we want to save the planet, and secure our own energy requirements. Unfortunately we live on Island inhabited by irrational people.

  • Mack

    We’re way off-topic here, but this is a point by point rebuttal of that article Kensei

    http://geckkosworld.blogspot.com/2009/06/is-ireland-giving-away-its-resources.html

  • Gréagoir O Frainclín

    An Bord Snip Nua ……What a rediculous name!
    An insult to the Gaelic language. What a bunch of thieves too! Cowan & Co really has to go!

  • bk

    The term “An Bord Snip nua” is a media creation an refers to the Irish government expenditure review group charged with reducing expenditure in the public sector. Offically it known as “The Special group on Public Service Numbers and Expenditure Programmes”

  • Glencoppagagh

    “An Bord Snip Nua ……What a rediculous name”

    Don’t be so po-faced. An inventive example of Ingrish surely Gragoir.

    Ireland’s economy is too open to rely on domestic consumption. Some good news is the trade surplus and the collapse in (imported) car sales.
    Cashing in on a recovery in world trade is the only way out for Ireland. This is an unmissable opportunity to cut the public sector down to size and should be seized with all vigour.
    I only wish something similar could happen in NI.

  • The Raven

    “I only wish something similar could happen in NI.”

    Such an easy target. And yet never any thought about the process, how it should be managed, or the short to medium term implications.

  • Glencoppagagh

    Raven
    So many enjoying the patronage of the state and being more richly rewarded than those who aren’t. It’s a moral as well as an economic and political imperative.
    At the very least, the Executive should be imposing pay freezes where they have the power to do so.

  • Gréagoir O Frainclín

    Cheers bk ……good one!