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 :-
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%.
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 Reports 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
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm