Public service pay cuts are test of capacity for reform

Sat, Feb 2, 2013, 00:00

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.

The spurious link made between the horrific murder of Det Garda Adrian Donohoe and the cuts applying to gardaí demonstrates how difficult it is for any government to make savings and introduce overdue reform.

Some Ministers have expressed frustration that the media, which has been loud in its condemnation of the Croke Park agreement, has immediately sprung into action to campaign against every saving now being proposed. It was the same with the property tax and will be repeated again with the water charges when they come along.

The British politician Enoch Powell once remarked that the politician who complains about the media is like the ship who complains about the sea. The Coalition has no option but to stick it out and hope for calmer seas by the time of the next election.

While there is no arguing with the fact that almost everybody has suffered some drop in living standards since the onset of the crisis in 2008, many people have been cushioned from its worst effects. Pensions and welfare payments have been protected and public service workers are still significantly better paid than those in the private sector. However, the problem remains that the State simply has to find new ways of cutting its total spending to bring it into line with tax revenue.

The unremitting focus on the bank debt may be obscuring the necessity for continued action on the domestic front and that could ultimately be as damaging as a bad deal on debt. The troika has on a number of occasions expressed frustration at the failure of the Government to cut costs in medical and legal professions and open both up to genuine competition and it has repeatedly pointed to the high salaries right across the public service.

The other two countries in bailout programmes, Greece and Portugal, have reduced their public service pay bill by a much greater proportion than Ireland yet their pay levels were considerably lower than ours to begin with.

Reducing the pay bill is certainly not easy, as the current talks show, but it is something that will have to be achieved if the country’s finances are to be put on a sustainable basis. Tax revenue came down by a third in 2008 and it has stabilised only after a substantial increase in tax.

The bailout has given us time and space to get government spending and revenue into line. The moment of truth on this issue is close at hand as it will have to be done by diktat if it cannot be done by agreement. That will be a real test not just of Government but of Irish society’s capacity to accept reform.

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