OPINION:We need even more urgent change to get our public finances back on a sustainable footing, writes IAN TALBOT
AS AUTUMN beckons, policy options for Budget 2013 must focus resolutely on supporting jobs and employment. The Government has to set its mind to continuing to create the right environment for job growth, yet increasingly we are seeing “kites” sent out to test the mood for raising taxes on employment.
In addition, too much of our attention is being distracted away from the core issues by continual references to the bank debt and the implication that this is the cause of all our woes; past, present and future.
The bank debt clearly remains a significant burden for the future, but the reality is that it makes little difference to our current budget dynamics.
The real problem remains the deficit in current spending, and the fact that it takes over €1 billion more every month than is collected in taxes to run the Government.
Even if the bank debt was wiped out overnight, this underlying structural imbalance would be there. This is unsustainable.
All economic evidence tells us that spending cuts rather than tax increases do the least amount of damage to the economy.
This is why further significant and meaningful savings from the Croke Park agreement on public service pay and conditions must be delivered urgently to secure our economic future.
As events at the Department of Health over the weekend have shown, there is very little room for further cuts from non-pay areas. More than 70 per cent of that department’s budget goes on pay. If Croke Park cannot deliver really significant savings now, in health in particular, then ordinary people will suffer as frontline services are cut further.
Any analysis of the agreement would note that it has delivered industrial peace at a time of great change in Ireland. It has also “locked in” previously implemented cost savings such as the pensions levy.
It has delivered enhanced flexibility across the public service in terms of shift timings and locations of employment. These positives should not be underestimated.
The problem is that we need even more urgent change to get our public finances back on a sustainable footing.
While much Government commentary about Croke Park focuses on the real savings achieved since 2008, these numbers do not reflect current economic activity levels, with wealth and tax receipts now at levels last seen in the early 2000s.
We shouldn’t be benchmarking ourselves against the boom-time figures of 2008, but rather against the period before we ended up living well beyond our means, which we clearly were by that year.
Between 2001 and 2008 the public sector pay and pensions bill rose from €10.4 billion to €19.3 billion due to a significant increase in staff numbers and average pay increases of 61 per cent.
If these year-on-year increases had been limited to a more sustainable but still generous 3 per cent compounded during the same period, then the bill would have risen instead to €12.8 billion; that’s a saving of €6.6 billion or over half a billion a month.
That would have been a much better starting point as we faced into the crisis. We should be benchmarking against say 2002, not 2008.
One example of change needed now is a pause in public service increments for at least three years. Some 63 per cent of all civil servants qualify for increments. In 2011 increments increased the public sector pay bill by €250 million.
There is no justification for ongoing increases in the pay bill, which further raise our public debt by the same amount.
We cannot afford this at the moment, and it continues to drive a greater wedge between the wages of public and private sector employees in similar roles.
The sort of argument that “it’s not fair to penalise nurses” is spurious in our current climate; we’re talking about deferring increases in pay, not reducing pay.
It is not fair that the burden of the huge rise in unemployment has been borne exclusively by private sector employees now out of a job, getting no pay. Reversing that jobs crisis is where our State resources need to be focused.
Pensions are also a significant and ever-increasing burden on the public purse. Public service pensions are essentially unfunded defined-benefit schemes, with a future obligation to pay a percentage of final salary.
The Government is funding public service pensions through current taxes raised and in the absence of cost savings or reform it will remain thus and demand ever-increasing taxation on the productive sector to pay for it.
Rightly the Government is focused on ensuring that employers fund their pension schemes adequately but the Government is not holding itself to the same standards. Increasingly employers are finding that the future commitments in such schemes are not sustainable and are driving alternative approaches.
The Government could play its part by moving quickly towards Career Average Revalued Earnings schemes; not just for new entrants into the public service, as recent legislation provides for, but also for existing staff.
Evidence from the commercial semi-State sector shows this can be done with union agreement, resulting in considerable medium-term savings and also assisting the sustainability of pension schemes for future recipients.
Another area where further savings can be delivered is in outsourcing non-core activities such as passport processing and other backroom services. This would allow the public service to concentrate on its core functions while saving considerable money and further reducing the number of public sector employees.
We are not calling for layoffs here. What we are proposing is the transfer of staff to organisations with specialist skills that can optimise outputs and deliver enhanced savings and improved service for both the taxpayer and the customer.
This could save the Government up to €1 billion over 10 years. Private sector companies have the skills and the expertise to perform certain tasks more efficiently and at less cost to the taxpayer. While the concept is mentioned in the Government’s Action Plan for Jobs, very little detail is provided. The Government must actively seek this kind of change.
We need a target for services and employee numbers to be transferred via outsourcing following models already successfully employed by a number of commercial semi-State companies.
The crisis Ireland faces is not unique. Transformative change has been attempted and succeeded elsewhere. In the 1980s New Zealand found itself in a similar financial position to Ireland in 2008. With radical policy changes the financial position of that state was secured. Crisis forced reform and innovation; it has to do the same in Ireland.
The Croke Park agreement has produced some successes in terms of implementing cost savings and enhancing flexibility; however, further change is needed to reduce costs and contribute to Ireland’s recovery.
Everything must be on the table if sustainable change is to be achieved.
As we approach Budget 2013, and begin to consider any new agreement post-2013, these decisions cannot be put off.
The failed playbook of the 1980s marked by ever-increasing taxes and levies delivered a stagnant economy with catastrophic levels of emigration and unemployment.
The Government must avoid this template and embrace cost-cutting measures that secure our competitiveness and support the job-creating domestic economy in the short and the medium term.
The Croke Park process needs to urgently deliver even more on this agenda. If it does not then others will do it for us.
Ian Talbot is chief executive of Chambers Ireland