Michael Taft: It Begins

at

From top: Tanaiste and Minister for Foreign Affairs Simon Coveney (left) and Minister for Finance Paschal Donohoe give an update on Brexit earlier this week at government buildings: Michael Taft

It was only a matter of time. Finance Minister Paschal Donohoe brought a new report to Cabinet last week containing estimates of the damage a no-deal Brexit could do to the Irish economy.

These new estimates paint an even more pessimistic picture than previous reports. The upshot, according to last week’s Sunday Business Post (paywall):

‘The results of the report will feed into Donohoe’s growth forecasts for the annual stability programme update next month, which could reduce the spending available for the next budget.’

‘Could’ is one of those softening-up words. The Government will have the advantage that any reduction in public spending that appears in the Stability Programme Update will be buried in rows of numbers in the annex. By the time analysts unearth the trends, the 24/7 news cycle will have moved on.

Even if a no-deal Brexit is avoided, anything that leads Britain out of the customs union and the single market will have a negative impact on the Irish economy.

The concern is that any reduction in public spending will be on top of current Government projections that already show depressed public expenditure growth. For instance, the projections from the last budget show the following increases up to 2023:

Social Protection: 3.8 percent

Public Services: 0.9 percent

Investment: 20.1 percent

Total Primary Spending (excluding interest payments): 4.0 percent

These categories – which make up approximately 90 percent of total spending – are all in the positive zone though still tight, especially the marginal increase in public services.

However, by 2023 there will be more people and higher prices. When we factor these in, the situation changes dramatically. And not for the better.

When inflation and population growth are factored in, we see that the major categories in public spending are all being cut, with the exception of public investment. Total primary spending will fall by nearly 7 percent in real terms per capita.

Social protection is being cut. Pensions make up nearly 40 percent of all social protection expenditure and this proportion will rise over the years. Ireland has the fastest growing elderly demographic in the EU.

This will have to be catered for, so what about the rest of the programmes? Falling unemployment won’t help because according to Government projections, it has nearly bottomed out.

Public services will really be hit. With costs rising (again, the additional costs owing to a rising elderly demographic), what services will be squeezed? Implementing Slaintecare will require upfront investment. And we lag behind our EU peer group in education spending.

One can argue for greater efficiencies – but what efficiencies can drive quality while recouping nearly one-in-ten Euros in productivity gains? We’re just as likely to be doing less with less.

There are a couple of important caveats. First, the Government has allowed itself an unallocated sum of €3.6 billion in 2023. This will give some manoeuvrability. However, the inclusion of this still means total primary spending will fall in real per capita terms (approximately three percent).

Second, the Government might have some leeway over the surplus it intends to run by 2023: 1.4 percent. This surplus exceeds what the Fiscal Rules require. However, will the fiscal hawks relent, even in a downturn?

We are experiencing the legacy of austerity – the embedding of austerity into our fiscal foundations. This doesn’t mean actual cuts; it means ‘below-the-radar’ cuts – in real terms lagging population growth.

The failure to estimate the amount of pent-up demand on spending stored up during the recession, combined with increasing demand from a growing population, could help explain the Irish Fiscal Advisory Council’s observation that

‘ . . . the [Government’s] medium-term budgetary plans are not credible . . . ‘

Progressives will have to work hard to gain traction in this debate, to come up with a credible alternative to creeping deflation. We can’t rely on some pot of Euros at the end of the tax rainbow (though additional taxation on unproductive capital and passive income wouldn’t go amiss).

Instead, we need to think outside the fiscal box to help put our fiscal house in order.
A good starting point would be to promote the wages of low and average income earners through a radical extension of collective bargaining.

This would generate greater tax revenue for the state and more activity for domestic businesses (more sales), while reducing subsidies to low-wage employers.

And if we combined that with greater worker involvement in workplace decisions which boosts productivity at the firm and economy-wide level (higher output for relatively lower input), we could further increase the gains from collective bargaining.

Taxation and expenditure are not the only ways to address fiscal problems, though of course they play a vital role. The issue is ultimately an economic one. And the productive economy starts with the producers of goods and services; that is, the workers.

This won’t fully protect us from a no-deal or poor-deal Brexit but it will certainly help.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Thursday.

Rollingnews

7 thoughts on “Michael Taft: It Begins

  1. curmudgeon

    Last weeks piece was absolutely spot on and awareness of the issue needed to be raised. This week however I feel you’ve pointed out the obvious consequnces without mentioning the very expensive elephant in the room. public sector pay and pensions are sucking up all the taxes that ae supposed to go to these services.

    The state as an employer is far, far too big. Dumping uncosted pension liabilities onto current expenditure is a reckless and frankly disgraceful policy and the inability to cut the fat with regard to workers that are unfit for duty or have been outmoded by technology just means the private sector PAYE worker is being unfairly fleeced to pay for this largesse.

    When brexit hits I expect even more stealth taxes, under guises of public safety/envirmonetal carbon tax etc. and of course more borrowing on the international markets further deepening our countries soverign debt. All because state and semi state workers can live in comfort and retire early and the rest of us can pay for it or emmigrate.

    1. Clampers Outside!

      Retire early? …but they don’t get pension until the pensionable age yeah? …or am I missing something….

      1. curmudgeon

        An example – Gardai can retire at 55 and have a mandatory retirement age of 60, they are massively overpensioned and receive a lump sum on retirement. The pension was linked to current pay so every time the Gards get a pay hike the pensioned ones get an increase too. You sure as sh*t wont get that in the private sector but its that way across most pensioned PS workers (including the nurses).

        Irish Army can also retire at 50 – again defined benefit so theyll get paid a pension until they die – theyll earn way more from it than they ever “paid in”.

        Civil servant (pre 2004) retiremnt age is 65, its 66 in the private sector right now but is expected to rise.

        If you are a PAYE private sector worker your state pension is a whim of government of the day and whatever saving or private pension you paid into, the PS worker has this baked into their contract.

        Important to note the PS workers dont pay into a pension – the money is simply not given to them as part of monthly pay – There is no pension fund for it (but there bloody well should be).

  2. Michael Taft

    curmudgeon – in 2008 public sector/pensions made up 32 percent of Government revenue; in 2011 – the year revenue bottomed out, it made up 34 percent (public sector pay/pensions bill was actually falling but revenue was falling faster). In 2018, the public sector/pensions made up 27 percent of Government revenue. If anything, public sector pay/pensions are making up less of tax revenue.

    Further, semi-state employees (commercial public enterprises like ESB, Bord na Mona, etc.) are not on the public sector payroll.

    1. curmudgeon

      There is no PS pension fund – it is taken out of current taxation – that is utterly reckless and essentially cooking the books. Measuring the spend on Pay and pensions as a % of GNP is disengenous since brexit will utterly destroy our annual tax take, lets put it in real terms PS pensopns are increasing at 7% per year ince 2010 – thats scary.

      This on top of the 40% differential in pay between public and private sector pay is galling
      https://www.irishtimes.com/business/economy/report-says-public-staff-earn-40-above-those-in-private-sector-1.3025373

      Semi state bodies are robbing us blind (stealth taxes) – We have the highest electricity costs in europe – why must we pay taxes to support that? Gardai have been checking cars to motor tax and are known to let people off for no insurance/NCT because the motor tax is used directly to pay them! RTE another example the parasitic semi state, just because they are not on te PS payroll doesn’t mean we arent effectively paying them an undeserving fortune just with some of it coming from bills instead of taxes.

    2. curmudgeon

      I might add that in your remark about 2011 when austerity was really hitting home for many, this happened: “Bord Gais retirees to get €440,000 package despite price hikes”

      https://www.independent.ie/irish-news/bord-gais-retirees-to-get-440000-package-despite-price-hikes-26764656.html

      So claiming that they are not on the public payroll is not exactly true, the public was forced to pay for their very comfortable retirement..the alternative was to freeze…Or I switch provider and pay another semi state body to heat your home ESB/Bord na Mona etc.

  3. Jake38

    When SIPTU mouthpieces talk of investing in public services what they generally mean is forking out more taxpayers money to their union members in the public services, not an actual improvement in the service itself.

Comments are closed.