Troika concern over focus on debt deal

Mon, Jan 28, 2013, 00:00

The troika has expressed concern that the Government’s focus on dealing with bank debt may have led to a slowdown in reforms aimed at dramatically reducing public spending.

Analysis based on the latest staff reports from the European Commission and the IMF, as well as from well-placed sources, has shown there is concern that promised radical reform has flagged in recent months.

Sources say the Government has portrayed a deal on the promissory note as a “panacea” for all the State’s problems, resulting in a slowing of the reform moment.

The sources have pointed to the separate fiscal crisis and the collapse of 30 per cent in tax earnings since 2008, which has posed a huge challenge to public finances. Permanent increases in spending were financed by transitory tax revenues.

“Even if your fairy godmother arrives and in one stroke all the bank debt is gone, there is still a huge amount of austerity to get through [on the fiscal side],” one source said.

Staff from the IMF and the European Commission have indicated in their respective reports (following the last quarterly review) that the public sector pay bill remains inflated in comparison to the private sector and also compared to public services elsewhere in the EU.

Over-runs

They argue that not enough has been done to tackle the growing problem of long-term unemployment, and measures to address over-runs, especially in health, have been inadequate.

The net outcome, it is argued, is that the Government will not be in a position to hit the magical 3 per cent of national debt target by 2015 if it continues to pursue current policies.

Its own figures are €1.2 billion more optimistic than that of the troika. In its staff paper, the commission notes that the current plans “may not be sufficient to reach the [3 per cent] deficit target”.

Other unpublished figures showed that Ireland had the largest increase in the public wage bill of all EU countries between numbers and wages since 2000 but that public sector pay cuts since then have been markedly smaller than other programme countries such as Portugal and Spain.

“We express doubt that Ireland will get to under 3 per cent before 2015 with the triple lock (the Croke Park agreement protecting pay; no cuts in basic social welfare; no increases in income taxes).”

“That is why Croke Park Two has to be more ambitious . . . The political point is it’s very hard to say to other countries you should help Ireland if there is evidence that Ireland is not doing enough,” said one source, who spoke on condition of anonymity. “A deal on debt sustainability is not the solution to all Ireland’s problems.”

That said, the IMF and commission staff reports underlined the importance of a deal on bank debt, pointing out that otherwise the fall in spreads on Irish debt could be reversed.

Both reports suggest expectations were raised too quickly after the June 2012 summit that a deal could be struck.

Public sector pay

Troika staff have focused on the public sector pay bill in recent months. The core argument is that cutting numbers is not enough. The commission noted that Irish medical consultants were the highest paid in the EU for their public work, being paid twice the rate in the UK.

This quarterly review, the ninth since the November 2010 bailout, will conclude in early February.