With interest groups in collective denial about the crisis, Government must deliver on its budget commitments, writes GARRET FITZGERALD
THE PRESENT crisis has raised serious issues about the adequacy and effectiveness of our political system.
First of all, the earlier years of this decade saw a total failure on the part of the government to accept the consequences of the decision to join the euro, which involved the removal of the option of devaluation as a solution to the inflation that the government then chose to create through gross over-spending in a period of full employment.
The fact that this crucial policy failure was not challenged by the opposition and was colluded in by the social partners, as well as by the vast majority of our media, demonstrated a massive collective national refusal to face the realities of participation in a single currency. That refusal has now left us with a situation in which we can be saved from ourselves only by exceptional leadership on the part of our entire political class.
It must be said that our politicians have emerged from the publication of the McCarthy report with much greater credibility than our multifarious interest groups, all of whom – including the trade unions – seem to be in collective denial about our crisis. In particular, the Opposition parties have accepted the reality that the scale of the Government’s programme is necessary.
It is now crucially important that the Government secure sufficient Dáil support in the December budget to deliver on its 2010/2011 commitment to reduce current and capital spending by €3 billion and €1.75 billion respectively, as well as to raise tax revenue by €4.6 billion. Failure to secure this support would gravely damage our financial credibility.
Of course, the need for this Government to carry such a budget in the Dáil next December would not exclude a subsequent change of government. Part of the case in favour of such a change is the difficulty the Government faces in trying to convince the public of the need for drastic remedial action to extract us from the current mess because its members clearly feel unable to address the fact that it was their blunders that created this crisis. Instead, they try to explain away our present difficulties as being attributable almost exclusively to the global credit crunch. By so doing they hugely weaken the whole case for much more drastic measures being required here than anywhere else in western Europe.
It can, therefore, be argued that after the budget a new government free from that disability – and also, more generally, free from the Government’s unpopularity – would be better placed to complete the process that will have been initiated by the budget.
Let me turn now to the McCarthy programme of €5.3 billion of possible cuts. This programme offers a menu from which the Government can draw in order to find current spending cuts of €3 billion. There should be no illusions on what these €3 billion spending cuts involve – in particular the fact that the three major cuts proposed in social welfare, education, and health account for €3.8 billion of the total. All the remaining proposed cuts add up to only €1.5 billion.
Thus, arithmetically, there are only two ways in which we could eliminate the need for at least €1.5 billion of cuts in education, health and/or social benefits: either by increasing taxation by more than the €4.6 billion proposed in the Government’s programme, (which does not seem feasible), or else by means of further cuts in public service pay – a process that would run in parallel with the current cuts being made in private sector pay.
The blunt truth is that, unless union leaders are prepared to advocate specific tax increases beyond the Government’s proposed €4.6 billion, then to the extent that they succeed in blocking further efforts to re-align public service pay towards the level to which private sector pay is being reduced, they will share responsibility for cuts in social welfare, education, and/or health. It would be interesting to hear union advocates like Paul Sweeney address this issue in concrete terms.
Two points need to be made about social welfare. First of all, pending the Government deciding between taxing or means-testing Child Benefit (a choice that will be influenced by the impending Report of the Taxation Commission), the McCarthy report has suggested a cut of over €500 million, or about 20 per cent, in Child Benefit. Such a straight cut would clearly be socially regressive – whereas neither taxation nor means testing of Child Benefit would be open to that criticism – and could save a substantial sum.
Second, it is important to be clear that, because of the emerging financial crisis, the Government decided in last October’s budget to increase the purchasing power of social benefits by less than 1 per cent this year – by raising the level of payments by 3.2 per cent in the face of an expected 2.3 per cent increase in the cost of living. However, the cost of living is now expected instead to fall this year by just over 1.5 per cent. As a result, at a time when all public sector workers and something like half of private sector workers appear to be experiencing pay cuts, social welfare beneficiaries are currently receiving an unintended increase of almost 5 per cent in their purchasing power. This is the justification for the McCarthy proposal to cut payments by between 3 per cent and 5 per cent, which would save between €510 million and €850 million in 2010. While I am certainly not happy about that proposal, the alternative of up to €2 billion in cuts in the total cost of health and education means that I cannot rationally reject the need to take some action in relation to social welfare. Finally, I support Colm McCarthy’s proposal that the Government “should consider how best to secure an appropriate contribution from . . . those people currently in receipt of public service pensions” – such as myself.
In yesterday’s paper Paul Sweeney contests points about pay trends made in my article last week, although my comparisons between Ireland and the rest of the euro zone were all based on Eurostat data. He is right that competitiveness is a function of a combination of productivity and pay – but, as the most recent ESRI data shows, our national productivity has fallen by 5 per cent between 2007 and 2009, which makes pay reductions more, rather than less, necessary.