Getting Ireland's economny back on track

There was a major reality check here last week when the opposition parties emerged after private briefings in the Department of Finance on the state of the economy.

These briefings were part of the government’s attempt to form a national consensus on the measures necessary to reduce the enormous budget deficits that are threatening to bankrupt the country. The cuts in spending and increases in taxation are so huge that they need all party support if they are to be accepted by the country at large.

The opposition had been saying that they needed to see for themselves just how bad things are. They wanted to be shown the evidence directly by the civil service. Then they would make up their minds on how to react to the budget in a few weeks.

So the government took them up on the demand. They invited them into Department of Finance last week and let the civil servants open the books.

When the opposition people emerged after these briefings they were visibly shocked. Things were much worse than they had imagined, they said. The problem was potentially twice as big as the government had been saying.

Instead of cuts and tax increases over the next three years worth €7 billion or €8 billion, the target figure may now be between €10 billion and €15 billion.

The main reason for this is that the government had been hoping that some growth in the economy would boost tax revenue. But that is not happening and the outlook is not good.

If we have to make an adjustment on that scale, the budget in a few weeks will no longer be aimed at cutting the deficit by €3 billion. It could be double that, or even more.

That is why the opposition was looking shell-shocked when they emerged after the briefings. Clearly what is facing us in a few weeks is the budget from hell.

On Monday and Tuesday of this week the government has been meeting in a forum to hammer out exactly where the cuts are to be made and the tax hikes applied. All kinds of rumors are swirling around, including predictions of major cuts in welfare, health and education, the areas that take most state spending.

People are genuinely scared. And their fears are being magnified by union leaders warning that cuts on this level will destroy the economy and plunge the country into a decade or two of deep recession.

But the reality is we don’t have a choice. If we want to be able to borrow the billions to keep going, we have to stick with the plan of getting our budget deficit down to 3% of national income by 2014.

That’s the plan we have agreed with Europe, and if we don’t stick to it the money markets will stop lending to us because they will be afraid we will never be able to pay back our debt. Then we will have the IMF and/or the EU in to sort out the mess, and we will lose our economic sovereignty for a decade.

To avoid that nightmare scenario (think Argentina, Greece) we have to make the cuts and hike up taxes. And most of the adjustment has to be cuts in spending because it is spending that has gone way off the chart.

There is a sense of dread, even panic here at the moment, because people think cuts on the scale required cannot be implemented without some kind of Armageddon.

But that is nonsense. Deep cuts can be made. Some tax hikes are possible. And this column is here to explain how it can be done without anyone having a nervous breakdown.

The first thing is to ignore all the predictions of doom from the union leaders. They represent some of the most overpaid state workers on the planet and defending them is their main concern, no matter how much they talk about protecting people on welfare.

The annual gap between state spending and tax revenue is now around €20 billion euro -- we spend over €50 billion and get in over €30 billion. That’s the size of the problem we are financing by borrowing at the moment, and the faster we can tackle that, the less we will have to pay back in the future.

So where do we start? Well, we could introduce a property tax and a water tax and a few other taxes. But the first thing we have to do is drastically cut back state spending.

During the boom years, state spending here went through the roof. Spending on health, for example, doubled in the decade since 2000. Many other areas of state spending went up almost as much.

Most of this vast increase in state spending went on big pay increases for people on the state payroll, not on improvements in state services. The pay of state workers zoomed upwards, and the number of them increased dramatically as well.

Result? A huge cost increase for the state with not a lot to show for it in terms of better services for the public
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We’re stuck with this situation now and we can’t afford it anymore. Cutting €3 billion to €6 billion from state spending in the budget in a few weeks will be very painful, we are told. Cutting €15 to €20 billion within the next four years will wreck our society, we are told.

Well actually, it won’t. For example, if we were to immediately cut the pay levels of state workers in the south of Ireland to the same levels as those of state workers in Northern Ireland, we would save €15 billion.

Northern Ireland, you may remember, is the place we’re supposed to be joining up with eventually, so equalizing rates for workers on the state payrolls north and south would be a good idea, yes? And at a stroke, it would save us €15 billion.

Not only that, but if we were to reduce our welfare benefits in the south to the level of welfare in the North we would save €8 billion a year.

And that would be that! Problem solved! Budget deficit wiped out! No need to wait until 2014!
And if you don’t believe me, well, these figures come from Dr. Ed Walsh, the founder of Limerick University, who has crunched the numbers.

The cries that such cuts would cause enormous hardship have to be seen in this context. There’s not that much difference in prices and living standards between the south and the north. If they can manage on lower welfare and state pay levels, we can as well.

Our problem is that we let the state sector here mushroom to ridiculous levels in pay and numbers during the boom. If you think you have a problem with big government in the U.S., come to Ireland where the state sector would put the old socialist countries to shame.

We have a vast army of people on the state payroll, earning far too much and all with guaranteed pensions. According to Walsh, everyone in the state sector in Ireland is paid too much.

On average, workers in the state sector are now getting 20% more than the workers in the private sector whose taxes are supposed to pay for everything. Which is ridiculous.

Yet any attempt to cut the state pay bill is met with ferocious opposition with, for example, nurses and teachers on the streets calling on people to defend services against cutbacks.

What they don’t say is that pay eats up almost all the spending in health and education, two big spending areas.

You get teachers organizing demonstrations against rotten school buildings. But you don’t hear the teachers -- who are paid on average 20% more than teachers in the North -- saying that €5.5 billion of the annual €6 billion education budget goes on teacher pay.

The teachers are just one example. Workers across the state sector are overpaid and inefficient.

Yet in an agreement made with the state sector unions earlier this year, the government accepted there would be no forced job losses and no further pay cuts for state workers between now and 2014. Plus their generous pensions would be protected.

This was done at a time when so many workers in the private sector have lost their jobs, and many more have seen their pay and pensions sharply reduced.

The excess in pay and pensions and the lack of efficiency in the state sector here have to be tackled. If it were, we could do our budget correction in one year, not four. But the government here, so far, has not shown the courage to do so because it will mean strikes and service shutdowns.

The cutbacks just announced in Britain mean that around 30,000 state workers in the North will lose their jobs. Here, not a single state worker is to lose a job or any pay, and given the problems we face that can’t be right.

Sorting out our financial crisis does not have to wreck our society or the economy. The government has to change its policy. It must sharply reduce the size and cost of the state sector, and it must take the state burden off the backs of private companies.

Apart from cutting the budget deficit, this change has to come because we need a much bigger and stronger private sector workforce, and a much smaller state sector workforce so we can become an efficient, productive, exporting country again. That’s where balanced budgets -- and prosperity -- come from.