Loss of competitiveness remains most serious issue

 

The future of our economy depends on the extent to which we tackle excessive pay, writes Garret Fitzgerald

UNDERSTANDABLY, AT this stage the Government’s most immediate concern is with the exchequer finances. And it is indeed vitally important that it succeed in achieving the €2 billion cut in 2009 borrowing to which it publicly committed itself several weeks ago. Its capacity to borrow further substantial sums in the next couple of years depends upon its success in delivering on this commitment, which the Taoiseach clearly believes is now within the Government’s grasp.

Simultaneously, the Government is seeking to resolve our banking crisis – and the housing boom collapse is yet another crucial problem.

However, these multiple aspects of our crisis have distracted attention away from what I believe may ultimately prove to be the most serious element of what has been happening: the undermining of our competitiveness by budgetary policy between 1997 and 2003.

What happened in this short period was that a doubling of current public spending sparked off a severe bout of inflation, causing prices here to rise two-and-a-half times faster than in the rest of the euro zone, ie by 30 per cent, as against 12 per cent in the economies of our EU partners. That 16 per cent deterioration in our competitiveness relative to our European partners totally halted the growth of Irish goods exports, losing us an important share of world markets.

That disastrous development, although repeatedly highlighted in this column, attracted little notice elsewhere, and even today receives much less attention than it deserves. Yet the whole future of our economy, after we emerge from our present multiple difficulties, will depend upon the extent to which we now take this opportunity to tackle effectively the excess of our pay levels above those of our EU competitors.

At the present time, workers in the private sector are accepting a wide range of pay cuts, including reductions in working hours, because they judge this to be preferable to losing their jobs. We don’t yet know the overall scale of these private sector pay adjustments, so we cannot judge the extent to which these developments may help to restore our competitiveness.

However, the business group Dublin Chambers has claimed that nine out of 10 of their members are freezing or reducing their pay levels – but if we are to become competitive again, this process will need to be extended beyond the business areas to such groups as lawyers, doctors, accountants and other professions. I don’t think the penny has dropped yet on this broader issue.

A significant divergence between current pay trends in the public service and the private sector would be impossible to defend, so there is now a strong case for those in secure public service employment, where in recent years pay has risen rapidly (including those who, like myself, have public service pensions), to accept some reduction in their incomes.

If such adjustments are not made, the impending fall in consumer prices – estimated at between 3 per cent and 5 per cent this year – would have the perverse effect of increasing the living standards of public service workers significantly in the middle of a national crisis. And at a time when very many private sector workers are finding their living standards reduced, in some cases quite sharply, this would clearly introduce a new and unacceptable form of social inequity.

Part of the reason why there has been resistance to public sector pay cuts is that the concept of an actual fall in the cost of living is so unfamiliar that nobody has yet taken it seriously. Unfortunately almost no one alive today has any memory of an actual fall in the cost of living. Instead, for the whole of the last three-quarters of a century we have experienced an unremitting and unbroken rise in the cost of living, which has raised prices to a level 64 times those of 1933.

What almost everyone is unaware of is the fact that throughout the years between 1924 and 1933 consumer prices had fallen equally unremittingly, dropping in that period by almost one-quarter. As a result, in 1933, 10.5 old pence (5.5 cent today) would have bought you a pound of sirloin beef, a dozen eggs or a pound of strawberry jam!

There are signs that the trade unions may find it easier to accept a public service pay cut if it were to be expressed as an increase in the current very small contributions made by public servants to their very generous inflation-proofed pensions – a system from which former politicians like myself, as well as teachers, guards, health workers and civil servants, benefit.

Of course, unlike most private sector pensions, those in the public sector are not the product of funded schemes, built up by investing pension contributions – for good or ill – in stocks and shares. Instead, these small pension contributions form part of the State’s current revenue, and the pensions paid also come out of each year’s tax revenue.

Consequently if these contributions were to be increased, the effect would be to increase the flow of public revenues, reducing the net annual cost of the public service.

At this stage it is not possible to assess whether this would reduce the cost of the public service sufficiently to match the cuts taking place in private sector pay, either through pay cuts or by short-time working.

Nor is it clear to what extent this will reduce significantly the disastrous decline in our national competitiveness that was inflicted by the irresponsible budgets of the 1997-2003 period. By doubling current public sending from under £19 billion to almost £40 billion in a period when our State was both arriving at full employment and joining the euro, those budgets boosted Irish inflation to two-and-a-half times the euro zone level.

Personally I doubt whether the cuts the Government is seeking will prove sufficient to correct our fundamental problem of loss of competitiveness, but they represent a first step along that road.

Next week I shall turn to the issue of tax increases, in respect of which the Minister for Finance is now asserting in relation to next year’s further €4 billion adjustment that “a proportion of it must come from tax”.