Monday, March 29, 2010

Economics 29/03/2010: PS productivity deal will cost us all

Per latest reports on the talks with the Unions, it now appears that the Government will yield on the Budget 2010 pay cuts and accept a premise that our vast structural deficit can be corrected through a long-term change in work practices in the public sector.

This position represents a drastic reversal of the attempted correction of the structural deficit and has the following long-run implications for Ireland:
  1. Since productivity gains do not address the issue of reducing actual spend in the public sector, the entire burden of correcting the structural deficit can be expected to fall on the shoulders of the taxpayers;
  2. If the deal commits the Government to no future cuts in public spending in Budgets 2011-2013, the deal will mean that the entire €13-14 billion in Budget adjustments needed before 2014 will have to be carried by the Irish taxpayers. This means taxes will have to rise by a massive €13,000 per annum per current tax payer - a move that would trigger a meltdown in the economy;
  3. Since higher earning taxpayers are already paying more than half of the income tax bill, the new taxes will have to disproportionately impact lower middle classes, thus in effect inflicting pain on the very workers whom the unions are allegedly aiming to protect;
  4. Since the structural deficit will remain unaddressed, Ireland will not reach 3% deficit target by 2014, or for that matter by 2020, implying that we will be facing excruciatingly high cost of borrowing through the next 10 years or so, a cost, once again to be carried by our middle and lower-middle classes.
Using a simple prisoners' dilemma game, one can easily show that the Government currently has all the incentives to run the economy deeper into depression. Such a move will ensure that the poisoned chalice the current Government passes to the opposition will be even more toxic, thus giving Fianna Fail stronger chances of election victory in the next 5 years.

In other words, if the Government does indeed sign up to the unions'-conjured 'plan' for 'efficiency'-exit from the deficit, it will be implicitly acting to derail any hope of a fiscal and economic recovery, while optimising its own political objectives.

PS: For all those who are keen on accusing me of being anti-Fianna Fail: nothing I write is designed to attack any political party in general or its members in totality. There are plenty of very good people in FF, and some of my friends are members of the party. There some competent, well-meaning and experienced members of the Government. Sometimes I disagree with them on policies, sometimes on ideologies, sometimes we agree. I express these views in public and privately. I always prefer an open debate.

The collective actions of the current Government, in my view, deserve very severe criticism. And that criticism I tend to provide: not behind the back, but in the open, publicly accessible fora.


Irish-Techie said...

Another excellent post Dr. Gurdgiev. If the government continues down this road then a lot of workers who do have jobs will end up migrating anyway. That €13,000 number is frightening!

Anonymous said...

I dont hate Fianna Failers! Some of my best friends are Fianna Failers. Lol.

The obvious solution to this problem is to adjust the pay cuts so that higher paid civil servants take bigger cuts and lower paid ones are given a break. Granted, the higher paid civil servants are paying more tax but they would still be better off then the COs earning under 35k a year.

Is there any reason why this is not the obvious solution?

The Galway Tent said...

Eighty billion in "bad Bank" property loans is close to €80,000 per private sector worker.

Robert said...

Dr. Gurdgiev,

"Since productivity gains do not address the issue of reducing actual spend in the public sector" . . . . .

The so-called Transformation Agenda will lead to major job cuts within the PS. Indeed last night Harney announced that there will be 6000 job cuts within the Health Service alone next year. it is estimated that within this agenda 20000 PS workers will lose their jobs.

This deal does not necessarily commit to further pay cuts as there is a 'force majeure' clause for the Govt to enact.

The reality is that FF are leaving the next Govt to clean up their mess. The cuts are coming - No doubt about that.

Anonymous said...

Sadly, the mess Irl is not unique. To acknowledge the exposure of European banks, mainly German, to the Irish and other peripheral economies illustrates why Ireland will continue to stumble from pillar to post. A dramatic solution to burgeoning public debt can only come from their willingness to stop buying and arguably sell Irish and other PIIGS assets, driving a much deeper deflationary contraction and real adjustment in asset prices. A buyers strike - the corollary of a borrowers default. To date, government bond markets remain open, providing a necessary lifeline of credit to otherwise credit starved economies. Hence, buyers remain albeit it at more favourable terms to them. If the euro surplus countries stop buying these government bonds, rendering the entire debt stock illiquid, the entire euro bloc will collapse as will the domestic banking systems of the creditor countries, not to mention the economic catastrophe that would strike the PIIGS. Germany and the ECB will not let that happen. I therefore commend efforts to boost productivity across all sectors of the economy.

Brian O' Hanlon said...

Had a listen to newstalk radio today at lunchtime with Eamon Keane. The idea of the Nordic model and outsourcing.

The short little paper by Albert A. Foer might shed a little light on your ideas on the public service re-structuring in Ireland.

I haven't read Jeremy Rifkin's, The Age of Access, but I notice it referenced at the end of Albert A. Foer's paper.