Response to Dept of Taoiseach request for feedback from the Social Partners concerning the Irish stabillity update.
Feasta; Foundation for the Economics of Sustainability
19 January 2009
Feasta believes that the government’s proposed spending cuts will make matters considerably worse. Money gets into the Irish economy because someone, somewhere, has borrowed it. At the moment, the private sector is taking out so few new loans that the money supply is contracting at a rate of about 4% a month. This is constricting the amount of business that can be carried on, reducing business profits, and making it more and more difficult for borrowers to gather together the money to service their loans. As a result, tax revenue is decreasing, unemployment is growing and the banks’ bad debts, for which the government is now pledged to underwrite, are increasing.
If the private sector is not borrowing and spending the proceeds into the economy, the state has to do so instead. If it fails to do so in sufficient quantities, it will undermine its own position and its revenues fall and its social welfare and payments to the banking sector increase. Feasta’s strong advice is therefore that the €2 billion cuts should not be made.
However we recognise that we are at a considerable disadvantage as regards information about the public accounts and the external financial pressures on the government. Our comments which follow are predicated on the bona fides of the government’s case i.e. that there an immediate emergency and no other option to cuts.
In a crisis, social cohesion has to be preserved above all else – over efficiency and certainly, over political popularity. This requires that no one sector be singled out for particular pain and that the message of cuts is quite as important as the impact. The unfortunate political reality is that as many citizens as possible need to be impacted by the cuts while the least politically active and defended, the barely coping, are protected.
- Cutting jobs or services cannot be considered an appropriate crisis response. People must be assured that their basic income and their other basic supports are broadly secure.
- Non basic remuneration should considered for cuts first, such as the high level of expense remuneration related to travel. Encouraging travel is, in any case, undesirable for environmental reasons. Automatic salary increments should also be put on hold while the emergency persists.
- Public sector pensions should be reviewed, not to reflect the melt-down in private schemes but in the light of their future affordability. Public pensions are predicated on a shorter lifespan than is currently enjoyed and the delusion that compound growth can be regained to deliver indexed-link, benchmark-linked pensions. Public sector retirement ages should reflect better health in the contemporary older cohort and the permanently larger share that retirees will make up in a stablised population. Consideration should also be given to adjusting benefits on an agreed scale, perhaps linked to government revenues averaged over a period of time, that is the same for new and old recruits (for inter-generational solidarity). The private sector is likely to have to make similar changes to its pensions as market conditions will make them much less generous for any given level of contributions.
- Public sector and semi state pay should not be frozen or cut without other protected or relatively privileged sectors taking commensurate cuts particularly in the financial sector and in certain parts of the legal and medical sectors; even if in relative terms, the savings are modest.
- Further to point 3 the government should aggressively renegotiate contracts for goods and services from the private sector that have diverged from the European norm in recognition of the fiscal emergency. Finally,
- On no account should public assets be sold in current conditions.
All of the above actions must be subject to reassessment by the end of the year when a much wider palate of options, particularly those of tax and monetary reform as well as more considered organisational and programme reform can be brought into play. We trust that Feasta and the environmental pillar will fully participate in devising and commenting on these more permanent measures as we believe we can bring a new perspective within which lasting solutions can be framed.
