IPPN

Published: 09 February 2009

Source : Sunday Business Post

By: Pat Leahy

It was one of those things that wasn't a surprise, but it still was a shock. After months of prevarication and seemingly endless promises to take ill-defined ''tough decisions'', Taoiseach Brian Cowen finally unveiled his plan to reduce the country's spiralling current budget deficit last week, with a series of cuts to public spending which are to be implemented immediately.

By far the most significant - and politically combustible - part of the package was the pension levy on public servants, under which they will be levied between 3 and 9.6 per cent of their salaries towards the cost of the future pensions in gross terms.

It was significant because it signals that the government's sense of crisis is now so acute that it is prepared to slash public sector pay previously an untouchable sacred cow of partnership Ireland. To economists, it is overdue. To some, it's too little, and maybe too late. To politicians, it's an earthquake. Privately, government ministers have been saying for months that the scale of the emerging economic crisis was worse than anyone realised.

Asked why they were not taking action of the scale required, most replied that the public would not tolerate it. So much for leadership but this is just how politicians think. The country's finances have imploded under the pressure of the international recession and plummeting domestic property values. The combination of these has left the country facing an economic abyss.

Last week, eight months after he spoke about his willingness to take tough decisions from the back of a lorry in Offaly, Cowen's embattled administration began its attempt to bring the country back from the brink of that abyss.

Cutting public service pay - and because public service pensions are paid from current expenditure, that is what the levy amounts to is a brave and psychologically important step, for the government, for the public service and for the country as a whole. But the savings made will not be enough to stabilise the public finances if the economy continues to deteriorate. Last week, two important numbers became public, illustrating how economics is running ahead of policymaking.

The tax take for January was €900 million lower than last year, and the unemployment figures for the same month came in at record levels -m ore than 36,500 jobs were lost during the month, though not all of these were full-time positions.

If that grim process continues throughout the rest of the year, the government's efforts to close the gap between what it spends and what it raises in taxation will be hampered by the rising costs of social welfare and the falling tax take.

If this gap currently at a whopping €18 billion this year, in an overall budget of €55 billion -is not closed significantly this year and next, the government will experience growing difficulty in borrowing on international markets to make up that gap.

It is depressing, though not terribly difficult, to map out the road from here, said one senior source familiar with the territory. If the government cannot borrow, it won't be able to pay its ongoing bills teachers' salaries, old age pensions etc. That is to say, the country will be insolvent. Its best course then would be to turn to the European Central Bank (ECB).

In return for emergency funding, the ECB would insist on structural reforms cuts in public sector pay and numbers, tax increases towards European norms and the end of Ireland's low corporation tax.

It would be the end of the country's fiscal independence. That -o r something like it - is the future if the government cannot close the gap between what it raises in taxation and what it spends on public services, public pay and social welfare.

Against this prospect, the government is likely to face a campaign of industrial action by the unions over last week's measures. Many in government are bullish about this.

''Bring it on," said one source. ''Let's see how much support there is for public sector strikes when the private sector is haemorrhaging jobs."

Union leaders know that the government can't let them win a long industrial relations war -no government could. It would be the end of whatever authority they have. But they also know that there is a seething anger among their members, because they feel they are being made pay for the failures of the government and the banking system, and for an economic crisis that they didn't create.

Most of the pronouncements from union leaders centred on the unfairness of the application of the pay cut, rather than the principal of it. David Begg, the most senior union leader in the country, gave an insight into the calculations of the union leadership when he simply said that he would have a revolution on his hands if he agreed to the plan. Not that it was, in substance, wrong or unnecessary -in fact, union leaders know well that something like this had to be done to public sector pay. His objection was that his members wouldn't wear it, and he wasn't going to try to convince them. Leadership is for someone else.

The political and managerial failures of the government are all too apparent, in the fact that Ireland faced the world recession from a singularly disadvantaged starting point. But the unions' decision to walk away last week demonstrated that the system of social partnership is inadequate to deal with the current crisis.

Cowen and his government will now face the future alone, deprived of the comfort blanket of union assent. The political costs to him and his party are likely to be enormous. Despite the efforts to prepare them, the country's 350,000 public servants and their families were jolted by the news that their monthly incomes were going to be reduced substantially from March onwards. Nothing like this has happened in recent memory. The mechanics of the partnership system in recent years were largely a means for distributing the tax revenues of a property boom through the public sector -as recently as last autumn, incredibly. That process has come to a shuddering halt.

There are patent inequities in the plan. Fine Gael finance spokesman Richard Bruton pointed out in the Dáil debate that people in a lower income group will pay proportionately more for their pension than secretaries general, whose pensions will exceed €150,000 a year. It is among the great swathe of middle-income earners in the public sector -gardaí, nurses, teachers where the anger is most intense. People earning €50,000 (close to the average pay in the public sector) are being told to hand over €125 a month or so, from a take-home pay of about €3,200, depending on their circumstances.

It may not be an insupportable burden, but it is not an insubstantial one either. In the cases of couples who are both in the public sector, the impact will be doubled.

The arguments used to justify the cut -the extraordinary pension arrangements of public servants, the job security and the comparatively generous salaries -won't placate the hundreds of thousands of families who will see a real and immediate cut to their incomes. They, too, will have to pay any increased taxes and suffer reductions in services that are coming next.

Yet, in the cold light of day, it's difficult to argue that some sort of special public sector levy is unjustified by the threatening economic circumstances that Ireland now finds itself in. It is certainly the case that public servants did not cause the current economic problems, but the statistics show that their incomes have grown faster than their counterparts in the private sector during the years of the boom.

In fact, Ireland's public servants have, in the main, enjoyed benefits in recent years which outstripped not just comparable posts in the private sector here, but also those of their colleagues in other countries. There is voluminous material available comparing public and private salaries in Ireland, all of which shows the public sector with a significant advantage. The Central Statistics Office's (CSO) National Employment Survey in 2006 shows public sector premium of nearly 50 per cent, though this did not adjust for a greater level of qualifications in the public sector.

But when those are adjusted for, public sector pay is still strongly ahead. Other CSO figures for the latest available comparison (released in 2006) show that average earnings in both education and the civil service were higher than in banking and insurance -t he current favourite target for accusations of not paying their share. They were also vastly higher for gardaí. Research by various economists and academics have confirmed the trend. The public sector premium is beyond serious question at this point.

Compared with Britain, Irish public servants also enjoy a significant premium and this applies to gardaí, nurses and teachers. According to the OECD, an average primary school teacher in Ireland earned €61,000 after 15 years' service and including various allowances available; their counterparts in Britain earned €54,000. The cost of living is higher here, but the level of taxation is lower.

A low-ranking officer in the Irish civil service earned €28,000 as of January 2008; their counterpart in Britain earned €20,000. Excluding special allowances and overtime, the average pay of a garda in 2008 was €44,000; the British counterpart earned €35,000.But including those allowances and overtimes, the average garda earns nearly €1,200 a week -o r more than €62,000 a year.

Some of the most valid opposition objections -articulated forcefully by former Labour leader Pat Rabbitte last Thursday morning -centred on the fact that lower-paid workers in the public service would be subject to the levy.

That may be so, but the typical public servant is not low-paid.

None of these facts will make the annoyance of lower and middle-ranking public servants any less intense, or the political consequences of last week's actions for the government any less serious. Nor will the obvious observation that, at a time when more than 1,000 people are losing their jobs every day, paying for a bigger slice of your own pension is hardly victimisation. The political costs for the government are likely to be severe.

Last weekend's Red C/ Sunday Business Post tracking poll showed that Fianna Fáil support was now habitually below 30 per cent. While some party sources proclaimed themselves relieved that the two-point fall since the end of November wasn't much higher, they know that the engine for this unpopularity is the economic situation -they also know that it's going to get worse, not better.

There are 350,000 public servants in the country. One per cent of the total poll in 2007 was about 20,000 voters; the government has just cut the pay of about 17 per cent of voters -and their families.

Last week's levies were needed to avoid cuts in services, according to Cowen. But will those cuts come soon enough? We are only beginning on this road.