One suspects an enormous fudge in the notion of unpaid leave

 

ECONOMICS:Given the recent history of public service reform in Ireland, new promises of reform sound hollow, writes JIM O'LEARY

IT IS, regrettably, a time for repetition. Four weeks ago, in this column, I wrote that the most important feature of the current fiscal crisis is that the greater part of the Government’s budget deficit, amounting to at least €10 billion and perhaps as much as €16 billion, is structural.

I pointed out that this is the component of the deficit that will not be diminished, much less eliminated, by the resumption of economic growth, and went on to suggest that the persistent nature of a structural deficit has some clear implications for the kind of measures required to eliminate it.

The clearest of these implications is that the measures must be permanent in their effect: temporary measures will not cut the mustard.

This is the first and most obvious criterion to apply to the latest set of proposals to reduce next year’s public sector pay bill that have emerged from the talks between Government and unions.

The basic idea is that public servants will be obliged to take 12 days’ unpaid leave in 2010.

Quite how much this will save the Exchequer is hotly contested, with estimates ranging from €300 million (Department of Finance) to €875 million (union sources). The breadth of this range, together with the fact that even the highest estimate is well short of the €1.3 billion that the Government has been targeting for some time now, is enough to make one suspect that an enormous fudge is in the making.

But one’s reasons for concern do not stop there.

Requiring public servants to take unpaid leave next year is a temporary measure (and poses obvious risks to the quality of public services). All other things being equal, it would generate savings only in 2010; the public service pay bill would rebound fully in 2011, and the structural deficit would be unchanged.

In fairness to those who are running with the unpaid leave proposal, this seems to be recognised. Hence the other strand in the current negotiations, which relates to public service reform.

The thinking here, as I read it, is to come up with a set of reforms that will boost productivity by enough to achieve recurring annual savings from 2011 onwards of an equivalent magnitude to the once-off savings from unpaid leave in 2010.

Viewed this way, the unpaid leave mechanism becomes a (temporary) bridge to a permanent solution.

There is reason to be sceptical about all of this. There has been a great deal of talk about public service reform over the past decade and more. Successive social partnership agreements have contained long and, at times, inspirational passages about reform and its transformational potential. The unions have signed up to myriad commitments to co-operate with modernisation and change programmes. Indeed, if everything promised in the past on the reform agenda by government and unions had been delivered, we would now have a public service operating at the frontiers of efficiency, having exhausted the potential for productivity enhancement.

The point is that, given the recent history of public service reform in Ireland, promises of reform at this stage sound hollow.

Still, let us take a leap of faith and assume that a programme of productivity-enhancing reforms is agreed and put in place and is sufficient to generate permanent savings of the same magnitude as the once-off savings from unpaid leave. How precisely will these savings materialise?

The answer, of course, is by a reduction in the number of public servants employed. At the end of the day the arithmetic of the public sector pay bill is straightforward – it is the product of average pay and the number employed – and the requirement to reduce the overall bill can only be met by some combination of reducing average pay and reducing the number employed.

If trade union aversion to the former is to set the limits of policy, which seems now to be the case, the burden of adjustment will inevitably be borne by the latter. This is not the way to go in an economy suffering from a 12.5 per cent unemployment rate.

Another point I made in my column of four weeks ago, and that bears repeating before the budget, is that the necessity for the measures deployed to reduce the structural budget deficit to be permanent requires the choice and design of such measures to be anchored in a medium- to long-term framework.

In other words, the measures that are announced next Wednesday need to be consistent with a view about what drives the economy in the medium to long-term; what size of public sector is consistent with international competitiveness, and so on. This is a particularly useful perspective to bring to bear on the tax side of the budgetary equation.

In this context, there have been many calls to introduce higher rates of income tax on top earners, to reintroduce a wealth tax and such like. Such calls are understandable, given popular notions of what is fair. However, those advocating such measures need to answer a few questions.

First, is it their intention that these measures be permanent and, if so, how can they be reconciled with the objective of improving Ireland’s international competitiveness and maintaining it over the longer term?

Second, if it is not their intention that such tax measures be permanent, what do they envisage replacing them with when they’ve run their course?

Myopia played a major part in getting us into the mess we’re in. It has no place in getting us out again.

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