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We must recognise public finance crisis
Sunday, October 19, 2008
The scale of the economic challenge facing us is becoming clear.

The combination of the banking crisis and the emerging hole in the public finances creates an extraordinary and urgent challenge for the government.

In delivering its budget last week, the government took some steps to try to stabilise the public finances, but postponed dealing in any detail with the crucial issue of public sector reform.

We are promised another announcement on this in November. We can only hope that it recognises the gravity of the situation. The public finances will not be fixed until the cost base of the public sector is dramatically reformed.

Next year, the government plans to borrow not far off €5 billion to fund day-today expenditure, which equates to about 10 per cent of all the money it spends running the country. This is before we consider the need for further substantial borrowing to fund investment.

Borrowing to fund investment is sustainable, provided the projects yield an economic return, but doing so to pay for day-to-day spending is not. Given that the economic situation next year and in 2010 could well be worse than envisaged on Budget Day, urgent action is needed to address this.

The government has taken some essential steps in the budget to control spending and raise revenue. However the post-budget controversy regarding the over-70s medical cards has led to one essential fact to be ignored: we are facing a crisis in our public finances. Understandably, the Fianna Fáil-led coalition would prefer us not to dwell on how we got here.

The truth is that vast sums were wasted: the €1.3 billion annual cost of the first public pay benchmarking round was surely the most egregious. It was the clearest illustration of the fact that, not only did we overspend, but also that the taxpayer did not get anything like a commensurate return for the money spent.

The government can count itself unlucky to be simultaneously facing into a nasty financial crisis and threatened world recession. But the problems in the public finances are largely of its own making. The introduction of the over-70s medical card before the 2002 election is an appropriate example of poor policymaking for political ends.

By rushing out the promise of cards for all, the government left itself exposed when it came to negotiating a deal with doctors. Costings for the scheme ballooned. There is a case now, in tighter times, to focus resources where they are needed, but the government has caused much unnecessary worry by its ham-fisted handling of this issue.

There is a serious danger that we will face a further deterioration in the public finances, necessitating more tax rises and crude cutbacks.

To its credit, the government is maintaining spending on investment programmes, though it remains to be seen whether the necessary rigorous assessment will be done.

However, we are still waiting for what must be a central part of its programme: how it will deliver an acceptable standard of public services at a time when available resources are shrinking.

We have no wish to engage in public sector bashing. More than ever, there is a need for our country to be run well by its public servants. The failures of the banking sector emphasise the need for strong and smart regulation by the state. That needs well-paid and incentivised public servants working effectively on our behalf.

However, a huge gap is opening between the private sector, now under enormous pressure and shedding jobs, and the public sector, where figures last week show numbers and salaries continuing to rise. The cull of the quangos announced in the budget is only the start of what needs to be done.

Some steps in the required agenda are clear enough. The first is a realisation that the pay increase for the public service, negotiated as part of the pay deal still to be voted on by unions and employers, is simply unaffordable.

The government needs to plead inability to pay. If this means the end of social partnership, then so be it. Partnership is meant to be a process where we all pull together to get through problems. The current partnership process, on the contrary, now appears a block to public sector reform, a device for people looking after their own interests, rather than taking the wider economic view.

It’s not a coincidence that the partnership system has always identified the public interest with the interests of the public sector.

Then some other obvious decisions need to be taken. The decentralisation process should be scrapped, rather than continuing the nonsense that some of it will go ahead and some of it will be reviewed in three years’ time. It was an expensive and badly-planned mistake.

Remaining restrictions on promotion, hiring and transfer in the public service must be lifted. Public sector pensions must be reformed.

It’s an untouchable truth of our public life that public jobs cannot be lost. That needs to change. The redundancy programme planned for the administrative sections of the Health Service Executive needs to be extended to other areas of over-manning.

This is not to impose pain for the sake of it; it is to ensure that we can deliver decent levels of public service with fewer resources.

The budget shows some realisation of these challenges. The allocation for public sector pay does not include enough cash to pay all the increases due to all public servants next year.

So some form of embargo or redundancy plan is on the cards.

Our concern is that, if the government aims to progress this through the normal ‘partnership’ channels, it will disappear into the sands.

The mess over the medical cards aside, the budget showed some willingness to take the steps necessary to fix the public finances. But that can’t happen unless the public sector shares the pain being experienced by everyone else.

Making business and the private sector bear all the costs of the economic slowdown isn’t just unfair - it will slow any future recovery, which will be generated, after all, by the productive, wealth-creating sectors of the economy.

After ten years in which the public sector pay rises and pension benefits have outpaced those of their private sector colleagues, surely a little equality is not too much to ask for.

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