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Unions try to delay the evil hour
08 November 2009 By Niamh Connolly, Political Correspondent
The country’s public servants took to the streets in towns across the country last Friday to show their anger at the government’s planned cuts to their pay and pensions.
But, despite all the rallying calls and demands for retribution against the banks, the reality of a €26 billion deficit in day-to-day public spending still looms large for all sides.
Union leaders will still be under pressure ahead of next month’s budget to find a range of alternatives to basic pay cuts that could begin to make inroads into a €19 billion public sector pay and pensions bill.
As a curtain-raiser to last Friday’s day of action, David Begg, secretary general of the Irish Congress of Trade Unions (Ictu), launched its reheated ‘10 Point Plan for a Better Fairer Way’ as an alternative to the government’s cost-cutting strategy.
One of the unions’ key demands in this document is for the government to extend the time for fiscal adjustments for a further four years, from 2013 to 2017, instead of introducing a ‘sharp shock’ that would risk further deflating the economy.
Even if the government has already agreed the timeframe with the European Commission and the European Central Bank, ‘‘there is no iron rule which says that the adjustment has to be completed by 2013’’, Ictu insisted.
However, international markets certainly abide by the iron rule of credit ratings, with Fitch Ratings cutting Ireland by two notches, from AA+ to AA- last week. Fitch said gross government debt would more than quadruple to 110 per cent of gross domestic product by the end of 2010, from 25 per cent in 2007.
Furthermore, interest rates would rise on new borrowings. Figures obtained by this newspaper indicate that extending repayments to 2017 would drive national debt levels from €136 billion in 2013 to €204 billion in 2017. This would translate into a national debt of €99,727 for every worker in the state.
The yearly cost of servicing the debt would rise from €6.8 billion to €9.4 billion by 2013.
Few economists reject Ictu’s contention that taking money out of workers’ pay packets will have a deflationary effect. But the alternative is seen as far more risky. If the government doesn’t get this budget right, then neither the markets nor taxpayers will be convinced that the worst is over.
Furthermore, lingering fears among workers of more pay cuts to come would spark a sustained falloff in consumer spending, they believe.
‘‘If you don’t do this in the short term, this could become a lot worse in the long run," said Economic and Social Research Institute (ESRI) economist Dr Alan Barrett.
The quid pro quo for unions in taking decisive action on pay cuts in December’s budget could be an assurance that they would not return to that particular ‘well’ again next year. ‘‘There is an argument to do it [cut pay] reasonably deeply while saying you won’t have to do this again," said Barrett.
‘‘If there is a sense that the government is getting on top of this, it will address public confidence, but if doubt keeps going up and up, there will still be a reluctance to spend."
Minister for Finance Brian Lenihan last week told the Dáil that tax revenue this year was back to 2003 levels, but exchequer expenditure had increased by about 70 per cent since 2003.
‘‘Delaying the necessary action is not an option and would require harsher measures to be taken later," he said. ‘‘It would also result in ever increasing amounts of scarce government resources being used to service the mounting debt."
A higher tax to avoid pay cuts
Begg has urged the government to adopt a new 54 per cent top tax rate in the budget, but there are hidden problems in the proposals for Ictu’s middle-income members.
The higher rate would hit middle income married couples who are jointly assessed by Revenue. It would put a garda and a nurse earning €60,000 each, into this new higher 54 per cent rate, and would amount to marginal income tax rate of 62 per cent.
The public sector unions have asked the government to take money from one sector of society to pay for those who are in protected employment ‘‘but who won’t make the necessary change’’; that was how Ibec director Pat Delaney described the public sector unions’ taxation policy.
An Organisation for Economic Cooperation and Development (OECD) report published last week noted that an unusually high rate of all earners - 50 per cent - paid no tax at all. Successive budget and partnership deals over the last decade took the bulk of lower income earners out of the tax net.
Yet, at the other end of the scale, figures showed that 4 per cent of the country’s highest income earners payed up to 48 per cent of the tax revenues.
Last week, Lenihan revealed that income earners paying the top rate of tax had dropped from21 per cent to 10 per cent, partly due to taxation measures taken in the last two budgets.
In the wake of last week’s OECD report, some figures in the Green Party said that the two extremes of the taxation system must be reconciled, and that somewhere in between lay a more equitable and sustainable tax regime.
This could mean bringing more lower-income earners into the tax net, while also ensuring that a change of tax bands, tax credits and reliefs distributes the burden of the fiscal adjustment towards higher income brackets.
If property taxi s now seen as a political non-runner, the government’s scope for raising revenues is seriously reduced.
The clock ticks on payroll talks
Lengthy negotiations on voluntary redundancy packages are simply not an option for a government in need of a ‘quick fix’ to restore the public finances. Any alternatives to pay cuts proposed by the unions in the talks must take effect from January 1 for the government to make full-year savings.
The Bord Snip report did not examine public sector pay, but it recommended 17,000 fewer public servants. This reduction was envisaged over a period of time through ‘natural wastage’.
Hence the government’s proposal last week of a phased approach that plans reforms over a three to five year period, but with immediate ‘bridging measures’ for savings ahead of December’s budget.
Furthermore, a letter to members from Impact general secretary Peter McLoone outlined the likelihood of substantial job cuts if pay reductions were to be avoided.
A market economy
More public sector strikes loom, even as the latest unemployment figures of 412,407 show the private sector is bearing the overwhelming burden of the recession.
‘‘We’re in a market economy, we have to export 84 per cent of everything we produce, every day of the week into very unforgiving markets," said Ibec director Pat Delaney.
‘‘But the sheltered sector of the economy is effectively asking us to buy their services at a price that their customers simply cannot afford."
Workers who lose their jobs go off the radar and they are also unprotected by the trade unions’ lobbying machine, whose primary duty is to their active members.
Delaney claimed that the government’s failure to invest €1 billion in an enterprise and jobs stimulus package to support workers in employment had resulted in a net €3 billion loss to the exchequer. The increase in numbers on the dole will cost an extra €4.5 billion in social welfare payments.
A ‘growth dividend’ when the economy returns to sustained growth could be offered to public servants in return for pay cuts now, said Barrett.
But any pay-off for future growth would need to be balanced against the government’s underlying aim of reform and restructuring of the public sector, while also bringing overall wage rates down to boost competition.
The economy needs a rationalised and more productive public sector to ensure that future public spending does not become a major drag on economic recovery.
‘‘We have to be careful in that it could also be argued that public servants are already overpaid in relation to the private sector," said Barrett. ‘‘There has to be a correction, rather than simply giving it back next year."
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