Labour-cost problems created by reckless public spending still remain to be solved
TWICE RECENTLY I’ve tripped on a couple of steps at home, banging my head on the same wall each time!
I feel that this is a metaphor for the fact that since early 2004 I have been banging my head against a wall of political and media indifference to the disastrous national loss of our cost competitiveness.
Checking back on my contributions to this column I find that in the period of five years from early 2004 to the end of last year 2008 I raised this issue here no less than 16 times.
The point I was making is a simple one: by the spring of 2001 we had reached full employment, which, of course, brings severe inflationary pressures, as employers compete with each other for workers. In such a situation the first duty of a government is to seek to ensure that full employment is not undermined through an excessive growth of current public spending – for that would overheat the economy.
In the early years of this decade, prudent public spending became an absolute economic imperative – because at that very moment, for good reasons, we were about to lock ourselves into the euro. This eliminated any possibility of offsetting a higher inflation rate than that of our euro zone partners by means of a currency devaluation.
The maintenance of moderate spending growth should not have been politically difficult, for it would merely have involved continuing the prudent policy of preceding governments, which, throughout the previous five years, from 1992 to 1997, had held the growth of current spending to a modest 7 per cent a year.
Unhappily, at the very start of the new decade, our then minister for finance, Charlie McCreevy, instead chose to reverse the prudent spending practices of his predecessors, boosting the growth rate of current public spending to 11 per cent in 2000, to 12 per cent in 2001 and then, in 2002, to a phenomenal 14 per cent. Because of that spending spree, by the end of 2002 our annual current spending was (and has since remained) more than €8 billion above what it would have been had the current expenditure growth rate of the period 1992 to 1997 been maintained.
While it was McCreevy who initiated this dangerously inflationary policy, then taoiseach Bertie Ahern and the cabinet of that period (five of which, including Brian Cowen, are members of Government) share collective responsibility for its immediate consequences.
These consequences were that in the first half of this decade our prices and pay rates rose twice as fast as in other euro zone countries, and by 2005 were – and still are – 15 to 20 per cent above those of our European competitors.
On what was that extra €8 billion a year spent? A fair share of it went on two benchmarking exercises to boost the pay of public servants, whose pay was already higher than that of equivalent private sector workers. And more of it went on increasing the actual numbers of civil servants – which today are higher by 22 per cent than in 1999 – and of local government employees, up by 27 per cent.
Moreover, the number of workers in the health service has since then increased by over half! This includes an additional 1,900 administrators, on top of the surplus of such workers that the HSE had inherited from the over-staffed health boards.
Largely because our pay costs rose so far above such costs elsewhere in western Europe, after 2002 the remarkable export boom of the Celtic Tiger years came to a sudden end. Since then, the annual growth rate of the volume of goods exports has been reduced by nine-tenths, and 30,000 jobs have been lost in manufacturing. When combined with a drop in export prices, the virtual stagnation in the volume of Irish goods exports consequent on our loss of competitiveness has reduced our export earnings from this source by 10 per cent.
Let’s be quite clear about it: all this happened well before the housing bubble burst, and well before the credit crunch. And before the 2007 general election. Yet in that election, the fact that reckless government budgetary policies had pushed our prices and pay costs up far beyond those of our European competitors was almost totally ignored by all the political parties, as well as by most of the media, then and since.
This competitiveness crisis was effectively swept under the carpet by all concerned, despite the fact that it left our economy hugely vulnerable to the housing bubble, which we might otherwise have been able to survive without too much damage. Even if the housing crisis resolves itself – as it will eventually – and even if we also survive the banking crisis, the fundamental labour-cost problem created by indefensible budgetary policies remains to be dealt with.
Unfortunately, while the housing bubble and the banking crisis are the subject of endless debate, there is little or no discussion of the competitiveness crisis, the resolution of which is possible only by pay adjustments that have begun in the private sector. We will not know until later this year how large these adjustments are likely to be.
In these circumstances there must be serious concern about what Jim O’Leary in yesterday’s Irish Times described as “rash and foolish” guarantees reported to be on offer by the Government to the public sector unions, “handcuffing pay and pensions” in that sector. Depending on the scale of the current reductions in private sector pay rates, this could have the undesirable effect of opening a fresh gulf between pay levels in these two sectors.
PS: I would like to repeat a suggestion I made some time ago on radio. Now that Ministers have accepted a cut in their salaries, why is a similar cut not being imposed on the pensions of former ministers, like myself?
In the past, every time that ministers’ pay has gone up, my pension has been increased correspondingly. Surely the same principle should apply when ministers’ pay is cut.