Permanent snips needed: McCarthy

PERMANENT measures are needed in next week’s budget, not temporary band aid solutions such as the civil service 12-day unpaid leave deal proposal.

Prof Colm McCarthy, UCD economist and chairman of An Bord Snip Nua, said the budget needs to implement permanent pay cuts to impact meaningfully on the structural deficits facing the state, which various economists estimate at between 9%-15% of GNP this year, with a similar deficit likely in 2010.

“News reports suggesting that a portion of the public payroll adjustment is to be achieved through a change involving unpaid leave for public servants, which would achieve a cash saving in 2010,” Prof McCarthy said. “Twenty days out of around 220, if that is the formula, would yield a big cut, perhaps most of the entire €1.3 billion being sought from this expenditure heading. But to qualify as a contribution to eliminating the GNP structural deficit, it would need to be forever. And if it is compulsory, and forever, it is a pay cut. Awkward... to implement and monitor, and entailing a commensurate reduction in employee time input, to which there must be output costs.

“It is not implementable. I work in UCD, where people don’t have to be in the workplace every day. Are they going to implement electronic tagging to know if people have come in or not? If it is compulsory, but only for 2010, it is of no value in the context of fiscal consolidation. The government might as well place a temporary surcharge for a year on some item of tax revenue, and it all has to be done again, from scratch, the following year. We need real measures to get our debt down by developing our exports.”

In a pre-budget lunch briefing at Cork International Airport yesterday, Prof McCarthy cited the need for next week’s budget to deliver the first step in a multi-year recovery strategy. He welcomed the Government’s decision to defer many of its capital spending projects, but called for equal decisiveness in dealing with the public sector wage bill, as well as social welfare, health and education costs.

The UCD professor said the current National Development Plan was based on predictions of GDP growth of 4% or more per annum between now and 2013. Any new plan would need to reflect revised revenue realities. The second runway at Dublin Airport should be deferred, as should “daft” plans to build railway lines in parts of the country where there was no traffic.

“Ireland’s bubble mentality is reflected in our National Development Plan,” Prof McCarthy said. “In the last three years, all of the soccer and rugby internationals were successfully played in Croke Park. The redevelopment of Lansdowne Road, which was grant-aided by the Exchequer, is almost complete.

“Yet, we had plans to spend €1 billion on the Bertie Bowl in Abbotstown, and more money on another stadium for the FAI. We could have had four stadiums, where two or even one would have been plenty.”

Prof McCarthy also advised against any budgetary tinkering with the symmetry between funded and unfunded pensions. Any attempt to impose a double taxation on pensions would severely erode the industry, and could lead to the reemergence of private sector unfunded schemes as a tax avoidance measure.

Prof McCarthy said next week’s budget needs to deliver permanent solutions, not temporary stop-gap measures. They would be the first building blocks in the road to recovery.

“We need to get our budget deficit down to 2%-3% of GDP. If we don’t, the IMF will come in and do it for us.”