Spineless or creative?

We appear to be governed by some sort of heretofore undiscovered species of jellyfish. Having previously committed itself to making €4bn in cuts, initially €1.3bn from public sector salaries & the remainder from welfare, services and capital investment, last night’s agreement with the Unions reduces the cuts from the public sector pay bill to €1bn. The difference will be made up by cuts to welfare rates, public services and capital investment programs. Cutting capital investment programs, the sector which gives the largest Keynesian multiplier per Euro of spend, will lead to greater unemployment. Cuts in public services will impact lower paid workers who need them most and those on welfare are the poorest in society. These three alternative areas will now be hit harder in the aggregate. The deal struck forces all public sector workers to take a minimum of 12 days unpaid leave instead of cuts in their hourly rate or a combination of measures. By reducing manpower across the board, public services will suffer a double whammy. The Unions and government appear to have agreed to divy up the pain amongst societies weakest while ensuring that the burden of adjustment falls lightest on some of the best paid workers (those at the higher end of the public pay scales), with the safest jobs in the country.

Let’s be clear – this agreement protects the best paid public servants at the expense of less well paid public servants. It is a regressive measure that will reduce net incomes more severely for lower rate tax payers than for those on the higher rate. Of course this benefits the state in some ways as less tax revenue is lost per reduced spend, but it would appear to be the most deflationary cut possible that will cause further job losses in the private sector. My guess is that having secured at least something of a quid pro quo in return for lower annual incomes, Union leaders must be hoping those on lower rungs don’t notice that they are bearing the brunt of the adjustment. It’s important to realise that taking unpaid leave is not the same as taking a pay cut – hourly rates in the public sector will remain high, much higher than in the private sector. Fixing the structural deficit requires permanent fiscal changes, this in turn means that the requirement to take unpaid leave must persist beyond 2010. Moreover with Fianna Fáil having committed to making another €4bn in cuts next year, it likely will be built upon.

What do you guys think? Does forcing an equal amount of unpaid leave unto all workers force the pain of the adjustment onto the lowest earners or do we all need more leisure time?

On the plus side, this may keep morale higher than pay cuts – it does give workers a quid pro quo for their drop in income. Will this compensate for the cut in total hours worked or will service provision levels be impacted?

Adds: This appears to be a one off adjustment i.e. for 2010 only. Because the structural deficit is permanent, there is very little point in a non-cumulative adjustment.
If we can’t make cuts right, should we be making them at all? Would it be better to do nothing and chance our arm in the markets and hope we never have to call the IMF?

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