Stalemate
Following disastrous election results, agreement among the Government parties is even less likely, making a general election around the turn of the year inevitable.
Print8 July 2009
Ever since the economic crisis first erupted last summer the government’s strategy has consisted of hunkering down and hoping that the global economy will have recovered by the time the next Irish general election must be held in June 2012.
However, the increasing political strains being generated by the twin banking and fiscal crises always made it unlikely that this government would be able hang on until the summer of 2012.
Since July 2008 the government has made four attempts to ‘fix’ the public finances. Unfortunately none of these exercises has engaged in a meaningful way with the underlying problem: that public spending is running almost €25 billion ahead of tax revenues. Instead the burden of whatever fiscal adjustment there has been has fallen almost exclusively on the tax side with the government increasing the annual tax take by something like €5.6 billion.
In an economy which is already predicted to contract by over 9% this year, these tax increases have made a bad situation even worse. Consumer confidence has collapsed, driving down retail sales, the rapidly contracting economy is pushing even more workers onto the dole and pushing up social welfare spending, while the soaring cost of bailing out our bankrupt banks (instead of simply closing the worst offenders such as Anglo Irish and Irish Nationwide) is creating a vicious downward spiral.
Even where the government has announced spending cuts it is clear that it has gone for the easiest option. Taoiseach Brian Cowen stated explicitly that the public sector pension levy was introduced so that the government wouldn’t have to cut public sector pay which, at an average of over €50,000 per head, is more than 30% higher than average private sector pay.
It is a similar story with many of the other cuts; across-the-board cuts in every department and programme rather than targeting the worst offenders and scrapping them completely. What on earth is Eamon O’Cuiv’s grandly-titled Department of Community, Rural and Gaeltacht Affairs, which will cost €443 million to run this year, for? In a country which is now home to more Moslems than native Irish speakers, what is the point of spending €34 million a year on TG4? What function does a separate Department of Agriculture (annual cost €2 billion) serve when there are now a mere 45,000 full-time, commercial farmers?
Government hands tied on public sector
It should now be as clear as daylight that the 2002 benchmarking report, which increased average public sector pay by 9%, was a complete waste of taxpayers money. Will the government announce that it is rescinding the increases granted under this exercise, thus saving €1.8 billion per year? Will it what?
The government has been equally lackadaisical in addressing the explosion in public sector numbers. When the impact of the 1999 Eircom and the 2006 Aer Lingus privatisations are taken into account, underlying public sector numbers have risen by 35% to 373,000 since this government first came to power in 1997. Is this country 35% better governed? You decide.
Will the government begin to rein in public sector pensions? Time was when public sector pensions were merely inflation-linked. Not any more. Now the pensions of retired public sector workers are directly tied to the salary scales of the grade which they held before retiring.
The ever-deepening recession, in reality a depression, is also putting both the minimum wage and social welfare rates under enormous pressure. At €8.65 per hour the Irish minimum wage is the second-highest in Europe. While this was neither here nor there when we had full employment it is a very different story now that the numbers on the live register have passed the 400,000 mark.
However, any attempt to reduce the minimum wage in isolation immediately has knock-on effects for the social welfare system. The basic social welfare payment for a single person now stands at €204 per week. That works out at more than €5 per hour for a 40-hour week. And that doesn’t include such add-ons as rent allowance and free medical cards. For a couple the basic social welfare payment is €338 per week or the equivalent of €8.45 per hour, for a couple where one only one partner is working.
Where the money is
Across the border in Northern Ireland a single person qualifies for a basic social security payment of just £64 per week, while for a couple the weekly payment is £100. Even after the recent strengthening of sterling against the euro this means that Irish social welfare rates are almost three times as high as those in the UK, our nearest neighbour and main economic competitor.
Any serious attempt to rein in public spending has to target public sector pay and numbers and social welfare. The reason for this is because, as the American bank robber Willie Sutton once famously replied when asked why he persisted in robbing banks, “that’s where the money is.”
Of the more than €64 billion which the government plans to spend this year, €21 billion has been allocated to social welfare and a further €20 billion for public sector pay and pensions. That’s €41 billion or almost two-thirds of total public spending.
In other words, any plan to cut public spending that doesn’t include major reductions in social welfare as well as public sector pay and numbers, isn’t worthy of the name. Unfortunately that’s what taxpayers have had to endure for the past 12 months.
Gloves come off after Lisbon round two
With the ECB now effectively bankrolling the Irish government by buying its bonds that’s going to change, most likely after the second Lisbon referendum in October. Regardless of the referendum outcome the ECB will stop treating us with kid gloves as soon as the votes are counted.
This tough love from Frankfurt will come just as Fianna Fáil and the Greens are attempting to put together the 2010 budget. With all of the easy options having been exhausted and with the ECB on its case, it will no longer be possible for the government put off dealing with the key issues.
This would be difficult enough even for a single-party government. For such a mismatched coalition as Fianna Fáil and the Greens, it will most likely prove fatal. Even if Fianna Fáil give the Greens just about everything they want, carbon tax, abolition of rezoning, no incineration, banning of corporate donations etc, it won’t be enough.
The local and European election results have made it clear that the Greens face extinction if they remain in government. After losing virtually all of their councillors, the party’s TDs face a similar fate if they cannot extricate themselves from government.
What this means is that even if the two parties can somehow agree on a budget the chances of getting it through the Dail are slim to none. Far more likely is that the Greens will find a convenient excuse to press the ejector button before Brian Lenihan’s budget speech next December. Stand by for a general election sometime between next November and February.
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