Public service pay cuts are test of capacity for reform

INSIDE POLITICS:The Coalition is currently engaged in a battle on two fronts, the outcome of which will have a vital bearing on the country’s fortunes as well as its own long-term prospects.

Most of the political and media focus has been on the interminable negotiations designed to reduce the burden of the bank debt but the talks on reducing the public service pay bill to a sustainable level could be an even more difficult challenge.

Going on his comments in the Dáil during the week Michael Noonan appears sanguine about the prospects of a deal on the promissory notes by the end of next month although a deal is clearly not yet in the bag.

The Government has staked its reputation on getting a significant reduction in the burden. Ministers from the Taoiseach down have been expressing confidence in a positive outcome so failure would put a severe dent in their credibility.

Of course whatever the shape of the deal it will inevitably be condemned as worthless by Sinn Féin and the usual assortment of right-wing and left-wing critics in the Dáil.

Noonan anticipated that by suggesting they were simply “positioning themselves so that any deal, good, bad or indifferent” could be rejected by them.

The Minister also had a swipe at some of the country’s more vocal economists, saying the predictions most of them had made over the past two years had turned out to be wrong. The corollary of that is that he had better be right.

Default not an option

Noonan, though, has one unanswerable point. The only alternative put forward by his strongest opponents is default and that is simply not an option and never was. He cited the example of Argentina as to what happens to a country when it defaults and to that his critics have no answer.

Some point instead to Iceland as an example of how a state can take an aggressive stance with foreign creditors and get away with it. What they fail to say is that real incomes in Iceland have fallen by more than 50 per cent through a combination of inflation and devaluation.

While that country is now back on the road to economic recovery, the hardship suffered by the bulk of the population has been far greater than anything experienced by most people here to date.

For instance last year there were 1.2 million Irish visitors to Spain. Per head of population we are Spain’s biggest tourist market. That is hardly a sign of a country suffering extreme privation.

The Iceland experience makes the concessions currently being sought by the Government from the public sector unions look very mild. The Coalition needs to get an extra €1 billion of savings from the pay bill to avoid inflicting hardship on more vulnerable sectors.

The difficulties involved in that process have been highlighted by the controversy over the reduction in the number of Garda stations and reaction of the unions representing gardaí to proposed cuts in their allowances.