Stop talking, start governing

Public sector unions are now threatening actions "on a dramatic scale" to force the government to reverse its decision on pension levies
Public sector unions are now threatening actions "on a dramatic scale" to force the government to reverse its decision on pension levies

The failure of the government and trade unions to reach agreement on €2bn of public spending cuts must surely bring the curtain down on “social partnership”. If the two sides can’t agree on such relatively tiny cuts then the government should stop talking and start governing

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11 February 2009 | 0

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After weeks of pulling and dragging the tripartite talks between the government, trade unions and employers finally broke down in the early hours of Tuesday, 3 February. And about time too.

As the government indulged the unions by attempting to sugar coat the bitter pill of public spending reductions and wage cuts, the economy was going to hell in a hand basket. While the Biffo dawdled, the economy burned.

When it unveiled its budget last October the government was aiming to spend €58bn of our money in 2009. Against that it only expected to rake in €42bn of tax revenue. That’s a €16bn gap, or, to put it another way, the government was proposing to spend almost €1.40 for every €1 of taxation.

That was last October. Since then things have got worse, an awful lot worse. The economic collapse has accelerated and tax revenues have fallen even further. No-one now expects the government to collect more than €38bn in revenue. This means that the gap between taxation and revenue has now widened to €20bn. And the government and the trade unions failed to agree on a package to reduce public spending by a paltry €2bn.

Ireland suffering shrinkage

The most recent economic forecasts are now predicting that the Irish economy will contract by close to 5% this year. Coming on top of a near 3% contraction last year, this means that the economy will have shrunk by almost 8% in just two years.

This economic contraction is rapidly feeding through into money supply and bank lending. The years of 30% credit growth are now but a distant memory, with bank lending shrinking by 2.2% in the month of December; an annualised rate of close to 20%, while money supply was down by 1.3% for the month.

The deteriorating economic and fiscal outlook is rapidly reducing Irish government debt to junk bond status. Already ratings agencies Standard & Poors and Moodys have announced that they are considering cutting Ireland’s credit rating. This will make it even more expensive for the Irish government to borrow money on the international bond markets, which of course assumes that anyone will want to lend us money in the first place.

Meanwhile the market for credit default swaps, where bond holders insure themselves against the risk of bond issuers defaulting, reckons that Irish government bonds are now the riskiest in the eurozone. Yes, folks, that’s right we have achieved the apparently impossible feat of overtaking Greece to become the worst credit risk in the single currency area. Step forward and take a bow Messrs Cowen and Lenihan.

The silver lining

While the collapse of the talks may be a cause of regret in government and trade union circles the rest of us should celebrate. As we face into the worst economic downturn for 80 years it is vital that the tough decisions that need to be made are made by the democratically-elected government rather than by a self-appointed clique of trade union leaders and IBEC bosses.

The failure of  "social partnership" to deliver agreement on €2bn of public spending cuts, not much more than a tenth of those that are needed, illustrates the bankruptcy of the current model of centralised wage bargaining.

Whatever benefits it may have delivered in the late 1980s and early 1980s, it is now clear that "social partnership" has long since outlived its usefulness and should be discarded forthwith.

ICTU’s David Begg, SIPTU’s Jack O’Connor and IMPACT’s Peter McLoone were never shy about claiming the credit for their successes in the good times. Now that there is a need for sacrifice they weren’t able to deliver. With the trade union leaders having demonstrated their fundamental uselessness, the government should exclude them from any input to economic policymaking in future.

Instead the government should do what those of us who cast our votes and pay our taxes expect of it. Govern.

No gain without pain

With public sector pay running at almost €20bn a year, over one-third of total government spending and two-fifths of current spending, the only way to achieve meaningful public spending cuts is to first slash the number of public sector workers, up by almost 100,000 since 1997 when privatizations are taken into account, and then cut the wages of those remaining on the payroll to private  sector levels. This would entail a cut in public sector pay rates of at least 20%.

Only a combination of reduced public sector numbers and pay will deliver the sort of savings that are necessary to help the government stop the gap between taxation and revenue swelling to completely unsustainable levels.

If we don’t make the hard decisions, the others will make them for us. When the Irish government borrowed €6bn on the international bonds markets last month it was forced to pay a premium of more than 1.5% over German government bond yields.

Since then, as the tripartite talks on public spending cuts descended to the level of farce and the government was forced to nationalise Anglo Irish Bank, the gap has widened even further to about 2.5%.

Just how much more will the government be forced to pay when it goes back to the bond markets next April or May for another tranche of cash if it hasn’t convincingly demonstrated its willingness to tackle our public spending crisis in the meantime?

Time to take look in the mirror?

As the government continues to prevaricate, the comparisons between Ireland and Iceland, which were once considered highly fanciful, suddenly start to look uncomfortably real.

After they stopped being raping and pillaging Vikings about 900 years ago, the Icelandics morphed into model citizens, with the world’s oldest-functioning democracy and extremely high living standards. Then came the credit crunch and with it the collapse of both the Icelandic banking system and currency.

Last month the unthinkable happened. There were street riots in the Icelandic capital of Reykjavic as the Icelandic public, who hadn’t said boo to a goose for almost a millennium, finally decided it had had enough and turfed the elected government out of office.

Brians Cowen and Lenihan please take note. If they don’t find the courage to take necessary corrective action quickly they may learn the hard way that the cost of doing nothing may soon exceed the price of doing something, no matter how painful.

 

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