ECONOMICS:Social partnership, for all its faults, can offer stability in difficult times but many more hard decisions lie ahead, writes JIM O'LEARY.

REGULAR READERS of this column will know that I am not a fan of the Irish social partnership model. In distilled form, my view is that it has unduly enhanced the bargaining power of public sector trade unions, thereby bolstering their ability to resist much-needed public sector reform and extract higher pay for their members.

The worst tendencies of the process crystallised in the first round of benchmarking, the financial cost of which is a recurring €1.2 billion per annum and the political cost of which is its enduring contribution to the polarisation of public and private sector workers.

Despite all of that, I felt some dismay when I first heard about the collapse of the talks between the social partners on Tuesday morning. Our need for social cohesion is greater now than it has ever been and partnership, for all its faults, is an obvious institution to look to for achieving that solidarity. It is self-evident that the more people the Government can carry with it in the very painful decisions it has to make, the better. It is in nobody’s interests that attempts to sort out the mess we’re in disintegrate in the face of serious social unrest.

On reflection though, the collapse of the talks was not surprising. It was a bit fanciful to expect trade union leaders to sign up to significant cuts in disposable income for their members. Their primary role, after all, is to protect and improve the pay and conditions of workers.

Viewed from this perspective, the surprise is that, knowing that significant cuts in public sector pay in some shape or form would be a key element of the final package, union leaders stayed at the talks for as long as they did. Perhaps we should afford them the benefit of assuming that they did so out of a genuine desire to serve the national interest. If so, the possibility that social partnership will operate as an agent of social cohesion in the grim times ahead remains.

And grim times they will be. There are an awful lot more really tough decisions to be made, including ones that might currently be regarded as unthinkable.

Let there be no illusions about the scale of the problem. Consider, for example, the juxtaposition of news items last Tuesday. On the one hand, the Government unveiled its grandiloquently titled Decision on the Implementation of the Framework of Stabilisation, Social Solidarity and Economic Renewal, which set out its measures to reduce State spending; on the other hand, the Department of Finance published the exchequer statement for January which showed a further drop in tax receipts relative to target. It's worth taking a moment to consider the significance of each.

Prospective savings from the measures announced by Government are estimated at €2.1 billion in a full year, or €1.8 billion in 2009. These are gross figures in the sense that they do not allow for the negative impact of the measures on tax revenue.

The most obvious case in point here is the new pension-related levy which is designed to yield €1.4 billion gross in a full year (€1.16 billion in 2009), but I estimate that it will cost the Exchequer about €400 million (€350 million in 2009) in income tax receipts foregone because it will effectively be tax-deductible.

Moreover, since it and the other measures announced involve taking money out of the economy, there will be an additional depressing effect on expenditure tax receipts.

All told, my reckoning is that the net effect of the measures on the budget deficit will be a bit more than €1 billion this year and about €1.2 billion in 2010. This is some distance from the €2 billion figure that’s been bruited about by the Government and, given how long the package was in gestation, suggests an extremely high effort-to-output ratio.

In the meantime, tax receipts continue to fall sharply and at a rate far faster than envisaged in the last set of official forecasts, the Stability Programme Update, published in early January. That projected a 9 per cent decline in tax revenue this year to €37 billion.

Tuesday’s Exchequer statement showed tax receipts in January down 19 per cent on the corresponding month of last year and, while it would be wrong to extrapolate one month’s data, there are reasons to fear that the decline for the year as a whole will be of this order of magnitude.

If that is the case, the tax shortfall for 2009 will be €3 billion-€4 billion. So the savings accruing from the much-vaunted, long-awaited and tortuously arrived at framework package will be hugely outweighed by the latest tax leakage. In other words, a month’s effort on the spending front has been more than undone by a month’s increment of information on the revenue front.

And that’s before taking account of the effect of Wednesday’s appalling Live Register numbers.

I remember back in the 1980s Patrick Honohan used to describe government efforts to restore order to the public finances, at a time of high interest rates and slow growth, as akin to ascending a down-escalator. This is not like that. What we’re faced with now is more like trying to climb a vertical cliff face. It can be done, of course, but it requires huge willpower, mighty effort and the right equipment. The alternative is to surrender to the incoming tide.

• Jim O'Leary is a senior fellow of the department of economics, finance and accounting at NUI Maynooth.